Is the sun setting on cheap vacations?

Will we see the end of cheap deals?

Take off eh.comThe temptation of a week away from Canada’s national coffee chain in exchange for some creamy coladas in Cayo Coco is too hard for a Canadian to resist. And Canada’s travel industry counts on it. Literally.

This past winter, vacation bound Canadians were packing their bags in substantial numbers. But not enough to fill the enormous supply of south-bound seats. So the prices dropped. And dropped. According to Statistics Canada, travellers to the Caribbean spent 17% less (excluding airfare) in 2007 than they did in 2002. Good news for us, bad news for the tour operator’s bottom line.

Larger tour operators such as Transat Holidays and Sunwing Vacations can sustain body blows from poor margins, along with other curve balls the recession and global credit crisis have thrown in such as more restrictive credit card covenants. For smaller operators, however, there is little margin for error to accommodate the sector’s overcapacity.

So the million dollar question for those of us planning our next getaway is, will the current low price climate last? As the economy improves, demand may increase somewhat, but as noted earlier our appetite for sun vacations has remained healthy – so there isn’t much room for improvement there.

Tour operators may try to slightly nudge up package prices, but that hinges on their competitors playing nice. The only reasonable way they can influence prices is through market consolidation, whereby the available supply of tour seats is suppressed.

We saw some consolidation last April when Conquest Vacations went out of business. But in the case of Conquest, which at one point was one of the largest tour operators in Canada, the company only held an estimated five percent of the southbound market when its doors closed. It did not have a significant impact on supply-demand or pricing. And fast growing operators like Sunwing quickly moved in to fill the void.

Clearly, more substantive consolidation needs to happen before financial sanity returns to the packaged vacation sector. And according to research by AirTrav Inc., happen it will. One indicator of what is in store for us was the September 30th announcement that Sunwing Travel Group had reached an agreement with the United Kingdom’s TUI Travel PLC to merge Sunwing Vacations with TUI’s Canadian operations, Signature Vacations and SellOffVacations, with operations to continue under the Sunwing banner.

In the short run, meaning the coming 2009-2010 winter season, the Sunwing-TUI hook-up will have little impact on the market in terms of price increases as the merged entity will be busy figuring out how to harness their potential synergies. In fact, consumers may see Sunwing and its new found friends becoming more aggressive on pricing this winter to take advantage of Transat’s announcement in early September that it would be focusing less on market share.

Over the long run, less competition will mean higher prices. And more consolidation will happen. While there will not likely be another failure in the near term because the remaining players are generally strong enough or affiliated with an airline or global travel parent, there are still some weak links that may be subject to further consolidation efforts.

Are higher prices a bad thing?

Ultimately, while we consumers have benefited from lower prices, sustained poor margins cannot support a robust package tour sector. The last thing we want to hear after parking our hard earned dollars with an operator is that they have shut their doors. What every sun worshipping Canadian should want most is a quality, reasonably (read: realistically) priced vacation sold to us by an experienced and reliable tour operator that will hopefully stick around to see another day.

So grab the suntan lotion, relax, and take off eh. Aloha.

By: Robert Kokonis, President & Managing Director, AirTrav Inc.

Photo Credits: beklaus, Deejpilot

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