Foreign package holidays: A report on the supply in the UK of tour operators' services and travel agents' services in relation to foreign package holidays

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We have been asked to investi-gate the supply in the UK of travel agents' and tour operators' services in relation to foreign package holidays. When making this reference to us the Director General of Fair Trading (DGFT) expressed concern about develop-ments concerning vertically integrated groups. He also referred to the practice among travel agents of linking travel insurance with holiday discounts. Our terms of reference are set out in Appendix 1.1.

A foreign package holiday is defined in our terms of reference as meaning in essence a package involving transport between the UK and a foreign destination and accommodation outside the UK. Around 12 million foreign package holidays were taken in 1996, costing consumers some £5 billion. Although there is some limited competition between foreign package holidays and other sorts of holiday-for example, domestic holidays-the distinguish-ing characteristics of foreign package holidays are such that we regard them as a separate market for the purpose of analyzing competitive behaviour.

The largest tour operator is Thomson Tour Operations Limited (Thomson), a subsidiary of Thomson Travel Group Limited (TTG), with some 24.6 per cent of foreign package holiday sales in 1996. Airtours plc (Airtours) had 15.9 per cent; First Choice Holidays & Flights Limited (First Choice), a subsidiary of First Choice Holidays PLC (First Choice Holidays), 10.1 per cent; Sunworld Limited (Sunworld), a recently purchased subsidiary of The Thomas Cook Group Limited (Thomas Cook Group) and Thomas Cook Holidays (TCH), a division of Thomas Cook Group, together had 4.2 per cent; and Inspirations East Limited (Inspira-tions), a subsidiary of Inspirations plc, now part of Carlson Leisure Group (UK) Limited (Carlson), 2.3 per cent. The remainder of the market is shared among approximately 1,000 smaller tour operators; the exact number is not known.

As to travel agents, Lunn Poly Limited (Lunn Poly), a subsidiary of TTG, accounted for 23 per cent of sales of foreign package holidays booked through visits to travel agents in 1996. Going Places Leisure Travel Limited (Going Places), a subsidiary of Airtours, had a 16 per cent share; Thomas Cook Retail (Thomas Cook, the travel agent division of Thomas Cook Group), 12 per cent; and A T Mays Limited (A T Mays), a subsidiary of Carlson, 6 per cent. Around 2,000 smaller travel agents make up the balance, but again precise numbers are unavailable.

Each of the five groups mentioned in paragraph 1.3 runs a charter airline, which it regards as a natural extension of its tour operator business.

The travel trade has been far from static over the last ten years and the picture continues to change, with a trend towards more vertical integration. Of the major participants who featured in our 1986 investigation into foreign package holidays, only Thomson has retained a prominent position. We have received a great deal of evidence to the effect that competition in the trade is strong and we broadly agree with this view. While concentration has increased over the past five years, it is not at a particularly high level. Profits are not excessive taken year on year. Players come and go. There are no signifi-cant barriers to entering either the tour operator or travel agent market. Most of the large, vertically integrated groups contend that consumers are well served in this competitive environment. On the other hand many indepen-dent participants in the travel trade, both tour operators and travel agents, argue that increasing vertical integration is bringing about various anti-competi-tive practices which will eventually squeeze them out of the market, leading to higher prices and less choice for consumers.

We identify a number of practices in the trade which distort competition. These give rise to two complex monopoly situations within the meaning of the Fair Trading Act 1973 (the Act), one concerning tour operators and the other travel agents. There are three practices which we find to be against the public interest: the tying of travel insurance to the purchase of discounted holidays; so-called `most favoured customer' clauses, meaning provisions in an agreement between a tour operator and a travel agent which effectively require the travel agent to offer the same discounts on that tour operator's foreign package holidays as it does on other tour operators' holidays; and failure to take sufficient steps to ensure that consumers are made aware of the ownership links between vertically integrated tour operators and travel agents. The first of these practices is widespread throughout the trade. The second and third practices concern certain of the players within the vertically integrated groups.

The insurance-discount tie enables travel agents to inflate the advertised discount on the foreign package holiday by reason of the sometimes large margins made on the sale of insurance. The adverse effect is that consumers are misled by the discounted offer into thinking they are receiving a greater discount on the holiday they are purchasing than in fact they are, with the result that they shop around less and obtain less value for money than they otherwise would. `Most favoured customer' clauses lead to some travel agents not offering discounts which they would otherwise be prepared to offer, the adverse effect of which is higher prices for consumers. Lack of transpar-ency of ownership links means that consumers shop around for foreign package holidays less than they otherwise would. The conse-quential adverse effect is that there is less competitive pressure on travel agents, and consumers are likely to be getting less value for money.

Another practice of some concern to us has been `directional selling', which we define as the sale or attempted sale by a vertically integrated travel agent of the foreign package holidays of its linked tour operator in preference to the holidays of other tour operators. The practice is facilitated by the lack of transparency of ownership links. We have found that the practice exists and that it distorts shares in the tour operator market. But we have been unable to identify any evidence that it has resulted in less value for money for consumers, and therefore do not find it to be against the public interest.

We have considered carefully the arguments that vertical integration in the travel trade is inimical to sustained competition. We accept that vertical integration can give rise to both pro- and anti-competitive effects. The anti-competitive effects are more likely to predominate in highly concentrated markets. At current levels of concentration in the tour operator and travel agent markets, we believe that the anti-competitive effects of vertical integration are slight. It should be noted that we have received very little complaint from consumers about the value for money of foreign package holidays or other evidence of consumer dissatisfac-tion. Accordingly, we have not found that there are sufficient grounds for condemning vertical integration as a whole in the travel trade.

Given our views on vertical integration, we believe that it would be unjustified and inappropriate to address any of the adverse effects we have identified with drastic structural remedies such as divestment. We recommend that the insurance tie and `most favoured customer' clauses should be prohibited. As regards the lack of transpar-ency of ownership links, we recommend a package of measures intended to ensure that the ownership links between the major high street travel agents and the principal tour operators are made clear to customers.

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