Having moved into package holidays, TUI finds it must change again

All tastes catered for

PACKAGE tourism is not dead, but “our customers are changing,” says Michael Frenzel, chief executive of TUI, Europe’s biggest tour operator. Digital media have revolutionised the way customers select destinations, share opinions, compare prices and, if they wish, build their own packages of flights, hotels and excursions from the component parts on offer.

Now, even big operators with economies of scale, like TUI, struggle to profit in a commoditised market, and thus have to create packages that are distinctive in some way. One way is to tailor them to specific groups: art-lovers, explorers or honeymooners, for example. The website of TUI Travel, the group’s tour-operating subsidiary, offers 280 differently branded holidays. Some, such as Trek America, for adventure-loving students, have dedicated web pages for customers to chat to each other, building a sense of community.

Three-quarters of TUI’s Nordic customers and two-thirds of those in Britain already buy such tailored holidays, whereas in its home country, Germany, two-thirds still buy its mass-market packages. Morgan Stanley, a bank, expects TUI to keep benefiting from its new strategy, as Thomas Cook, its biggest European rival, struggles to follow.

Besides distinctiveness, another key to higher margins, says Mr Frenzel, is hotels: TUI owns 248 of them. EasyJet, a low-cost airline, agrees: it has just teamed up with Paradores de Turismo, a Spanish state firm which offers luxury accommodation in castles and other historic buildings, hoping to boost its profit per passenger.

Mr Frenzel already has plenty of experience in transforming the company in search of growth and higher margins. When he joined it, in 1988, it was a sprawling industrial conglomerate called Preussag, which included mines, smelters, shipping, metals trading and even a maker of mobile-phone handsets. As chief executive, from 1994, he began to see steel and mining as millstones, but he viewed tourism as a growing industry.

Previously, as an executive at Westdeutsche Landesbank (WestLB), he had managed the bank’s investments, including Hapag-Lloyd, a shipping-to-tourism conglomerate. In 1997 Preussag bought Hapag- Lloyd, whose 30% stake in TUI was, for Mr Frenzel, the jewel in the crown. He quickly bought stakes in TUI from other shareholders, and in 1999 took a majority stake in Thomas Cook, which had also passed through the hands of WestLB. In the meantime Mr Frenzel was selling off Preussag’s industrial interests. That meant he missed a steel boom in the early 2000s, to the chagrin of shareholders.

Nevertheless, he pressed on with Preussag’s transformation into a tourism and transport giant, buying Thomson, Britain’s biggest tour operator, and renaming the whole group TUI. To get antitrust approval for this he had to give up the stake in Thomas Cook. The slump in travel after the September 2001 terrorist attacks, the war in Iraq, bird flu and the Pacific tsunami all conspired to make the move into tourism look a terrible choice, but Mr Frenzel was undeterred, adding tour operators from France, Belgium, the Netherlands and Scandinavia to TUI’s portfolio. Now the firm serves 30m holidaymakers a year.

In February Mr Frenzel will step down, at the age of 65. Besides working harder to make its package holidays stand out from the crowd, there is one other thing that needs to be done to complete his transformation of the firm: to sell TUI’s 22% stake in Hapag-Lloyd, which runs one of the world’s biggest container fleets. But given the current depressed state of the shipping market, that job is likely to be left to Mr Frenzel’s successor, Friedrich Joussen, now boss of Vodafone Deutschland.

Source:  The Economist, 2012, Dec 15th from the print edition