CEO Interview: On The Beach’s Flexible Approach to Selling Holidays

In travel it can pay to be flexible.

The industry is beholden to the type of external forces that are easily able to bring down companies.

The price of oil, terrorism, industrial action and an erupting volcano have in recent years caused havoc for plenty of businesses.

In most cases those that have felt the most pain are the traditional players. Owning assets such as hotels or airplanes makes it much harder to pivot away from trouble.

For Simon Cooper, the founder and CEO of On the Beach, an online travel agent based in Greater Manchester, England, the ability to move fast is key to survival and prosperity.

“We have a flexible business model. We have zero commitment to product. We’re incredibly agile, which enables us to react to the challenges and the opportunities in the market,” he says.

The benefits of this ability were shown in the company’s most recent set of full-year results, issued in December. A pre-tax loss of $3.1 million (£2.5 million) in 2015 turned into a profit of $21 million (£17 million) in 2016.

Part of the turnaround can be pinned on the fact that last year’s figures don’t include shareholder interest payments following its listing on the London Stock Exchange in September 2015. Even so, the performance was still a vast improvement, an especially impressive feat given the current climate.

Wyn Ellis, a leisure analyst at stockbroker Numis, said the results showed that “the foundations are in place for continued strong profit growth”, driven in part by the “ongoing structural shift to online.”

Graham Neary, who writes at investment site Stockopedia, was similarly impressed with the results.

“I quite like the economics of the business: it has generated a very high return on equity this year, and the capital required to maintain the brand, the websites and its technology do not look particularly intensive…

“There are macro risks and the international expansion may take a long time to bear fruit but overall, I’d be more positive on this compared to the average stock.”

For established tour operators like TUI Group and Thomas Cook, with their flight schedules and hotel commitments, this presents a particular problem.

Terrorism over the past couple of years has knocked previously popular destinations such as Tunisia and Egypt out of the market. Continuing unrest in Turkey has also put plenty of people off travelling there.

All three of these locations served the value end of the market, meaning that companies were forced to look elsewhere for cheaper hotel beds.

“We are, in essence, a tech marketing engine, not a vertically integrated tour operator,” says Cooper.

“We don’t have the same kind of need for infrastructure or asset-heavy cost base. Therefore, our cost base is just incredibly slim. We can obviously afford to be more agile and more flexible and we can present a wider range of products to consumers at a more competitive price point.”

dynamically-packaged holidays

Cooper founded On the Beach in 2003 as an online retailer of low-priced short-haul beach holidays. Its main market is the UK but it recently expanded into Scandinavia with operations in Sweden and now Norway.

According to its prospectus, which was released prior to its floatation in September 2015, it had a market share in the UK of 17 percent. The UK’s Civil Aviation Authority puts it in the number five position in the UK market behind TUI, Thomas Cook, Jet2holidays and Expedia. In the year up until the end of March it is licensed to carry 1.1 million passengers, a figure that represents an increase of more than 72 percent in just three years.

As Cooper has already alluded to, On the Beach has spent a great deal of time and money honing its technology. More than $14.4 million (£11.6 million) has been spent developing an in-house platform. Up until 2011 the company had relied on a third-party solution.

This bespoke platform, dynamically powered holidays, powers On the Beach’s product. Dynamic packaging over the years has become a popular way of selling holidays. Rather than buying a traditional package offered by a tour operator, customers can select the different component parts, such as flights and hotels, and put together their own holiday. Companies can offer discounts and consumers can reap savings because the pricing on the individual components aren’t disclosed to the customer.

In this arena Cooper isn’t just competing with well-established tour operators but also with the giants of the industry: Priceline and Expedia.

These two behemoths have hoovered up customers across all sections of the industry but Cooper believes there is still space for smaller competitors to thrive, especially if they do one thing really well.

“I think it’s far, far easier to be successful when one is focused,” he says.

“That’s not to say that Expedia or Priceline don’t have a focus, it’s just that their focus is not selling beach holidays to a UK consumer. What’s Booking.com’s focus? It’s selling hotels to a global audience. They’ve done a fantastic job of it, but that means we’re not in competition with Expedia or Booking.com.”

Uncertain times

Last summer, On the Beach lost one of its biggest competitors when Lowcosttravelgroup collapsed.

Its demise led some people to question whether smaller online travel agencies could survive in a world dominated by a handful of U.S. and Chinese players.

Writing after the demise of Lowcost, Noel Josephides, chairman of Abta and tour operator Sunvil, said the costs involved were astronomical.

“You don’t need millions of dollars to compete – you need billions. Priceline, with all its brands including Booking.com, spends more than $2 billion a year on Google.”

While Cooper won’t be drawn in on criticizing the Lowcost model, he does believe there were differences in the way the two companies operated.

“I’m not here to denigrate the Lowcosttravelgroup business model, but we’ve also always operated in a profitable manner and we’ve reinvested a proportion of those profits in order to build for the longer term,” he says.

Given the various problems facing the travel industry at the moment this caution seems a sensible approach.

As with many others in the sector, Cooper says On the Beach has yet to see any significant impact from the UK’s vote to leave the European Union.

“Well, clearly, in the short-term, the pound weakened significantly against the Euro,” says Cooper.

“Most hotel products in the Western Mediterranean are generally sourced in Euros, so the hotels were getting slightly more booked than expected. That’s offset somewhat by the fact that there’s a wide range of competitively priced flight seats, so at the moment, there’s plenty of well-priced product available for summer ’17. We’re not seeing a huge increase in the price of holidays.”

Brexit might not have hit the consumer just yet, but travelers in Europe are well-aware of the threat from posed by terrorist attacks in destination popular with tourists.

The suspected bombing of a Russian charter jet led many countries to ban flights to the key tourist airport of Sharm el Sheikh in Egypt, while only the UK and Russia have maintained the ban.

Cooper said that it was “difficult to see Egypt coming back soon” and that Turkey, which has experienced a number of attacks over the past year, would “require a period of calm” before it comes back in favor.

This all puts more pressure on the supposed safe destinations of Spain and Portugal. Increased demand means that hoteliers operating in these countries could decide to jack up the prices. But so far, Cooper says, this had not happened.

“There’s no doubt that there is increased demand for beds in the Western Med, but obviously the number of sold-out periods, let’s say, even in a busy summer, are fairly slim. It takes an awful lot of demand to fill the capacity that they have in, let’s say, May-June, September-October and so on. The peak season prices might have gone up slightly, but like I said, in offset by more competitively priced flying.”

The Google conundrum

On the Beach began life more than a decade ago as a startup working out of a terraced house in the small town of Macclesfield. Having passed through the hands of two sets of private equity owners it listed on the London Stock Exchange in September 2015.

Its rise is inexorably tied up with the emergence of Google as a major advertising platform.

According to travel industry investor Steve Endacott, On the Beach and other early adopters have been able to maintain their lead.

“[T]he Google algorithm around click history, created a massive barrier to new entrants and saw companies such as Travel Republic and On the Beach, given a major early mover advantage, as their PPC [pay per click] history protected their top positions within most destination, resort and hotel search results,” he wrote in 2014.

Cooper agrees that it is getting harder for new entrants to carve out a niche.

“I think the barriers to entry increase every year, not just because of the auction dynamics, but yes, there are, in our space, few beach-focused OTAs of any size,” he says.

But as it has got more expensive to do business through Google Adwords, some online travel agencies began to explore the benefits of building a brand elsewhere. On the Beach was one of them. The company made its first foray into TV advertising in 2013 and has also spent money on outdoor advertising and radio.

The growth of the brand has led Cooper to even suggest that people don’t see On the Beach as an online travel agency.

Cooper also challenges the view that beach holidays are a commoditized products where consumers put aside any loyalty in favor of the cheapest deals.

“Clearly, we are presented as an OTA because our business model is akin to that of an OTA, but I don’t think consumers see us as an OTA,” he says.

“I think they [consumers] see us as a retailer of beach holidays first and foremost. I think it very much is possible to build a very strong brand in that space and garner a huge amount of loyalty because you’re not selling commodity product. You’re selling specialized product to a consumer at quite a high value once a year.

“Obviously, consumers are relying upon you to provide them with a high level of service to support them in the lead time up to the holiday, once they’re on holiday, when they return home and so on. I absolutely say that’s one more place where we most certainly don’t look like an OTA.”

Even with all the challenges facing the travel industry, Cooper remains incredibly upbeat about its prospects.

“We operate in a market that’s resilient. Beach has a special place in people’s hearts. Thank goodness the weather here is not that predictable,” he says.