Barriers to Entry – Tour Operators

Firms wishing to set up as travel agents and tour operators face a number of legal and financial obstacles. These obstacles may reduce competition the number of firms trying to enter the market. A firm wishing to set up as tour operator offering package holidays is required to be licensed by ATOL. ATOL –  is short for “Air Travel Organisers’ Licensing” . The licensing scheme was set up in order to protect the public. The scheme is designed to ensure that holidaymakers do not lose money and that they are not left stranded abroad because they travel company that they have booked with goes into liquidation. The scheme was first introduced in 1972 and currently provides protection for 28 million travellers who book flights or air package holidays. Tour operators applying for a license must pay into a bond scheme which will compensate travellers who are affected by the failure of a tour operator.

Small independent tour operators may join AITO (the Association of Independent Tour Operators). There are approximately 160 members of AITO, most are owner managed with a stated objective of providing choice, quality and service. Typically they focus on niche market holidays offering trips to particular regions or areas. Alternatively they may focus on a particular type of holiday (safari, adventure etc.). In order to compete with the major operators these companies must offer better service, better advice or some other element of the holiday which will provide added value or a source of competitive advantage. The success of AITO members is reflected in their continuing presence in the consumer-voted travel awards.

Travel Agents are able to join the Association of British Travel Agents (ABTA). ABTA is a trade association for tour operators and travel agents. Eight hundred tour operators and six thousand seven hundred travel agency offices are members of ABTA. ABTA members account for 80% of all UK sold holidays. A key element of the ABTA scheme is that holidaymakers are protected if their travel agent or tour operator fails. They are also covered if problems occur which affect their enjoyment of their holiday.

Membership of these trade associations ensure that consumers are protected. These protections do come at a cost and members must pay into these schemes. These contributions may represent a barrier to entry. This was the conclusion that the Competition Commission came to when it investigated the overseas holiday market. The commission believed that the cost of insurance might represent unrecoverable costs. Tour operators entering the market must also promote their products. Inevitably this means producing brochures arranging marketing and promotion. Dealing with customer queries and bookings represents a further cost for firms entering the market.

The costs of entering the holiday market a matter of some debate. One leading tour operator  suggested that the cost of setting up as a tour operator handling 200,000 travellers would require an insurance bond of  £6 million and net assets of £9 million. In addition, a company entering the market might expect to be loss-making for the first three years of trading.

Branding is a potential barrier to entry. Customers might be expected to have a preference for a particular holiday company. In practice this is not the case. Surveys amongst holidaymakers reveals that the name of the holiday company was one of the least influential factors affecting consumers buying preferences.

When the Competition Commission investigated the holiday, leading tour operators wrote to the Commission to explain how easy it was to set up a new tour operation and win market share. Their judgement was that it was possible to win a 1 or 2% market share in the first season of operation and that within three years a firm might be able to seize a 10% market share. Reports also concluded that the minimum efficient scale was not large. Tour operators were able to give examples of new firms which had entered the market in recent years as evidence of the ease of entry. This list included companies which had been formed by the acquisition of two established travel firms.

The degree of market concentration exercised by the four main holiday companies presents a potential barrier to entry for independent travel agents.