After appointing someone as CEO who had spent pretty much his whole working life in tour operating, it shouldn’t be a surprise to see EasyJet get deeper into the package vacation market.
Low-cost airlines across Europe have slowly woken up to the fact bundling up flight tickets with hotels and car services can be a money generator.
You only need to look at the likes of UK-based Jet2 to see the growth potential for airlines. Even Ryanair is starting to get more involved.
EasyJet has outsourced its holiday product since it launched in 2011: first through the now-defunct Lowcostbeds and currently through a subsidiary of Hotelbeds. It also uses Booking.com for its hotel offering.
And after dipping its toe in the water for a number of years, it sounds like this is all about to change.
“Based on my previous experience, I know that EasyJet has a huge opportunity in this area that we just haven’t leveraged,” CEO Johan Lundgren said on a conference call with analysts after the company’s first-half results last week.
“EasyJet entered the holiday market… some years ago but it’s approach to date has been limited. We now have all the necessary ingredients to successfully do more in this area.
“And these ingredients include: a Pan-European network with the best destinations; frequencies many times of the day, every day of the week; a well-loved, trusted and powerful brand; a cost advantage over the leading competitors; a customer base with high spending power and a scale to capture a significant share of this market.”
Before joining EasyJet last year, Lundgren had spent most of his career at TUI Group, Europe’s largest tour operator. And he obviously sees the potential for EasyJet to do a better job at selling holidays and accommodation.
EasyJet hasn’t really needed to think about holidays (or indeed any other ancillaries) until relatively recently: carrying passengers between point A and point B worked fine.
But lots of competition in the European low-cost market has kept prices low, meaning airlines have had to go searching for additional revenue streams. A lot of this has come about through the continuous unbundling of fares. Things that passengers might once have gotten for free, now have a cost. How much luggage you want to carry and where you sit, all have a price.
Then there are the extras. Airline websites routinely offer up parking, car hire and accommodation to consumers booking flights. A lot of airlines have been happy to outsource these products but increasingly they are thinking about bringing them in house. Just look at what Ryanair is doing with its Ryanair Rooms product.
In the UK, Jet2 has seen its load factor increase from 73 percent in 2007 to 91.5 percent a decade later, thanks largely to its decision to grow its in-house tour operator Jet2holidays.
(Part of the reason Jet2 has been so successful is its willingness to target sales through traditional travel agents—something easyJet is unlikely to want to do.)
While EasyJet doesn’t have problem with load factors (they’re sitting at 91.1 percent), the amount of money it makes on a per seat basis has dropped in recent years. In 2015 it made a pre-tax profit of $12.25 (£9.15) per seat, this dropped $6.31 (£4.71) last year.
Currently, only around 500,000 customers book hotels with EasyJet today and the company believes the there’s a market of 20 million people. If EasyJet can persuade more of these customers to either book a package holiday or accommodation directly, then that profit per seat is likely to go up.
“They’re making a reasonable return per seat but if you add your tour operator margin, potentially they can up that return per seat from £5 a seat to £10 a seat. My guess is that’s the logic of why they’re trying to do it,” one senior travel executive told Skift.
To facilitate this push, Lundgren has raided his old employer for Garry Wilson who becomes CEO of EasyJet Holidays. He was formerly TUI Group’s managing director for Group Product and Purchasing.
His job is to set up direct relationships with hotels in destinations across the EasyJet network, something the company doesn’t have at the moment.
Analysts at Bernstein have crunched the number and said that if EasyJet can double its hotel bookings to 1 million by 2022 that would add an extra $27 million (£20 million) in ancillary revenue, equating to an additional $24 million (£18 million) in earnings before interest and tax.
Not a game-changer then, but a nice bonus.
What it means for everyone else
EasyJet’s attempts to do better job of selling holidays will have a knock-on effect throughout the European travel industry.
At first glance it might seem like Thomas Cook and TUI Group—the two biggest tour operators on the continent—would be the ones most affected. They afterall, both sell holidays and EasyJet’s strong brand means it will offer plenty of competition.
Thomas Cook’s CEO Peter Fankhauser, however, didn’t seem too flustered when asked the question about competition.
“First of all, it’s honor for us that others are seeing the potential of our market. So that is a good sign. Second, all the airlines all over the world have a holiday program. That’s nothing new,” he told analysts on an earnings call.
Of course Thomas Cook and TUI both have their own airlines and increasingly their own hotels, which insulates them from this kind of competition (although Thomas Cook does use EasyJet for some of its package holiday flights).
Much more at risk are the online travel agencies, who act as intermediaries, either offering accommodation or package holidays. Think Expedia and Booking.com globally or On the Beach and Travel Republic in the UK.
“Effectively at the moment EasyJet is filling its flights with a mixture of people going on holiday and people just traveling between A and B. The people going on holiday are buying their flight from EasyJet and their accommodation from somewhere else. So the people who are going to suffer are the sellers from somewhere else,” the senior travel industry executive said.
To some extent how big an impact EasyJet will have depends on how seriously they take it.
One problem already identified is its unwillingness to take “risk” capacity in hotels i.e. it won’t commit to paying upfront and block booking rooms. In this scenario, EasyJet is acting more like an online travel agency than a traditional tour operator.
This might put some hoteliers off, especially those which might be accustomed to dealing with tour operators happy to take the risk.
“Whilst EasyJet indeed has rich access to peak season resort airport slots, we imagine accessing peak season hotel accommodation will be challenging, especially if EasyJet persists in not taking any accommodation on risk,” analysts at HSBC said in a note to investors.
That’s the bind EasyJet finds itself in. Improving its vacation offering is clearly important for the new CEO, he just doesn’t want it to cost that much.