Holidaybreak CEO Interview – Carl Michel

Since Carl Michel began as chief executive of Holidaybreak four years ago, he has overseen an expansion plan that has become the company’s saving grace in the current economic climate and a key plank to its future survival. Instead of remaining a wholly leisure travel company – Holidaybreak’s roots are in camping holidays – it…

Since Carl Michel began as chief executive of Holidaybreak four years ago, he has overseen an expansion plan that has become the company’s saving grace in the current economic climate and a key plank to its future survival.

Instead of remaining a wholly leisure travel company – Holidaybreak’s roots are in camping holidays – it broadened its net to tap into the education sector, providing holidays for UK schoolchildren for the first time. Its acquisition of market leader PGL in May 2007 has since been followed by the acquisition of NST Holdings in October 2007 and the Hertford Travel Group in June 2008.

Michel says: “When I came to the business in 2005 there was a sense that the structure of the company – there were three divisions – was not well balanced. It needed an additional leg. We liked what we saw in education. It was travel related but was more a part of people’s expenditure; they would not foresake that. With PGL we had a brand that had been going for 15 years. It was almost a byword for the sector.”

This decision is among the wisest Michel has made since being at the group’s helm. As the recession continues to hit leisure travel bookings, education travel has remained largely untouched. Critically for Holidaybreak this means it has retained a steady stream of early bookings in one of its divisions while the rest of its brands have suffered from an industry-wide downturn and late booking trend.

The figures bear this out: sales in Holidaybreak’s education division were 7% up, as of the end of February. The division has already taken around half its bookings for 2010 – something most travel companies would give their right arm for. “In the current climate that’s turned out to be an advantage,” admits Michel. “We are going to face an environment in which unemployment exceeds three million and there will be ramifications, so it gives us a light at the end of the tunnel. The economic environment has deteriorated and yet education remains sturdy.”

Hardly surprisingly, Michel is hopeful educational travel revenues will increase from around a quarter of the group’s total to more than half in five years’ time. “It will be substantially bigger in five years’ time,” he adds, hinting that further acquisitions in the sector are not out of the question.

But what does that mean for the group’s well-known leisure travel brands, which include Superbreak Mini-Holidays, Keycamp, Eurocamp, and Explore?

Camping

Camping, the group’s traditional core business, makes up 22% of group turnover and around a third of its profits. Over recent years the camping sector has suffered as holidaymakers have switched to more sophisticated types of holidays and Holidaybreak among others have been forced to up their game by introducing luxurious mobile homes, reducing the number of conventional tenting holidays and being more creative – last year it launched tree houses, for example.

Michel readily admits the group’s leisure brands could be hit by the growth of its education travel division. “If education grows then logically the other three will shrink in size. We might dispose of one division one day but we are comfortable having camping in the group. It’s a cash generative business and one we are good at,” he says.

Camping has been identified by the group as a mature market. Nevertheless, Michel reveals: “I do think there is life in the old business yet. Catching the train to France to go camping might become in vogue because of the green revolution – I don’t think you can rule it out. The new generation of kids are much more aware of the ennvironment. The reason it’s successful is because it delivers a very social experience and a low carbon footprint. There is the potential to do better than people anticipate in the medium term.”

Ironically the economic downturn has already meant camping holidays have increased in popularity as holidaymakers are attracted by more economical holidays.

He says: “Camping is having a pretty good summer. People are clearly short of money and trading down. What is encouraging is how many new customers there are. On the downside, our camping holidays are in Europe and Europe is affected by the exchange rate.”

But the fact the group sells camping holidays through its other European markets has helped ease this problem. “Luckily about a third of camping holidays in Europe are sold to European markets, which are not affected [by the exchange rates]. We have also started to roll out Eurocamp in Germany and Holland.”

The group has also reacted to demand for UK holidays by introducing camping breaks under its direct-sell Eurocamp brand in the UK this summer. Contrary to some domestic operators, Michel sees the UK only as a second-holiday market. “People will not flock to the UK for their main holiday because of the weather, but shorter second and third trips will still be in the UK and they will still take these because of aggressive hotel prices and great deals. We are seeing some fairly significant falls in room rates – prices are back to where they were in the 1980s – and that’s why I think we can convince people to take breaks in the UK.”

Interestingly, the group’s camping holiday sales through travel agents have slumped over the years, in part due to the decision by major operators such as Thomson Holidays to develop their own camping brands to sell through inhouse chains. Holidaybreak’s trade brand Keycamp now sells 15% of its product through agents and 85% comes direct. ” I think it’s difficult to sell very specialist products through the trade. We would like to have more trade sales,” says Michel.

Short breaks

Ask Michel which sector of the business has suffered most in the current downturn, and the answer is hotel breaks. In November 2008, the group reported hotel sales were 15% down, reflecting weaker demand into London and for short breaks in general.

He says: “We suffered very badly in the second half of last year. Hotels did not adjust their rates; there was a period of denial.”

Sales for the hotel breaks division remain down, but have improved considerably much to Michel’s relief, thanks to hoteliers adusting their rates. Hotel sales in February were 10% down and are now running around 6%-7% down, according to Michel.

“Hotels have become more realistic about what they want out of the leisure market. Since November and December we have had attractive rates from the hotels. Now we have got that we are seeing encouraging results, but revenues are lower because of price deflation in hotels. We are feeling a little bit more upbeat about the hotel space because we think that with the right offers and clever packaging you can lure customers.”

He cites the ‘halo effect’ of West End shows such as Oliver in boosting the London theatre break market.

But the downturn has meant some pain for the business and its staff. The group has taken around £2 million in costs out of Superbreak and its adventure tour operator Explore and made around 150 redundancies. Further cuts are possible but unlikely, says Michel.

“I think we have now got to a sensible level. I would not say we are in growth mode; if some more cuts could be made we would,” he says.

The trade has played a significant role in maintaining sales for Superbreak in particular and agent sales are outperforming web bookings, says Michel. This is in no small part due to an increase in the sale of packages – hotel and theatre bookings for example – rather than simple hotel-only bookings. In total 55% of the operator’s bookings are now packages compared to 30% two years ago. He also attributes strong trade sales to the customer type – two thirds of Superbreak’s customers are over 45.

“Trade sales have been very encouraging. We have moved product mix away from room only to package sales. Because packages are slightly more complex we think the trade is better at selling them than online. Retail sales are growing ahead of online. It may be demographics because the recession is affecting different people in different ways.”

Tapping into the right customers is critical in the current climate, he adds. “There are pockets of high disposable income; it’s making sure people spend it.”

Adventure travel

Adventure travel is another area that has suffered at the hands of the recession. Tour operator Explore makes up around 5% of business and sales in February were just 1% up, on lower volumes.

“This is a business that has suffered adversely as a result of the strength of the euro and dollar. These holidays are also big ticket items and feel a bit more of the recessionary pressure. There is a bigger risk of people deferring their trips,” says Michel.

Explore has also begun to offer UK holidays this year as a result of the trend away from expensive European destinations. He says: “It’s about affordable travel and testing out a limited UK range of holidays to see how it works.”

For next year, Explore is likely to focus on destinations where the exchange rate provides good value for money, such as Turkey, and potentially drop product in more expensive destinations.

This could hit destinations such as Croatia, which has a currency tied to the euro, or Morocco, where many of the prices are dollar based.

He adds: “One or two tours have gone up by 25% in price and we might drop some more expensive countries. Explore will have to change its programme to fit the marketplace or switch to shorter durations; we are in a much more value-led environment.”

Acquisitions

With the constraints on available capital, Holidaybreak, like other travel companies, is not planning any major acquisitions immediately.

But small bolt-on purchases – in the “single digit millions” – are possible in future, with the education travel division most likely to benefit.

Michel says: “If we do anything it will be in the education space first and foremost. It’s not the time quite yet but it might come. We are keeping our eyes and ears to the ground. There are some interesting opportunities that we would look at.

“With the current exchange rates it would be hard to make a sensible acquisition in Europe, but I would not rule it out.”

Currently the business is seasonal. He concedes that businesses that make money in the traditionally loss-making winter months would be attractive.

He says: “We lose money in the first half of the year and make it all in the second half of the year; having something to rebalance that might be useful. If I had any aspirations, it would be to get less seasonality but it would not be a reason per se [for an acquisition].”

Web

Michel is openly enthusiastic about all things web – to the extent that he regularly invites staff from around the business to discuss how the group’s brands are embracing search engine optimisation and social networking, and encourages brands to share best practice on web design.

“There is huge value in getting web and e-commerce staff around the table together to discuss what they are doing,” he says.

He also believes in giving feedback to staff working directly on the group’s individual websites. “It’s valuable when someone at a senior level goes and tells them what they think,” he says.

Almost half – 44% – of total turnover is made online, with some of the group’s overseas brands, particularly in the Netherlands, enjoying online booking levels of 75%-85%. This compares to Explore, which enjoys 25% of its bookings online.

“What that tells me very clearly is arguments that you cannot get [web bookings] above a certain amount are wrong,” says Michel.

He suggests websites can go much further by giving customers the chance to share their holiday experiences online and offering consumers private mailboxs to which all their holiday information can be sent.

“It’s making people accept the web as a natural way of connecting. The challenge is how we get Explore to that,” he says.

In three years’ time he hopes 50% of Explore’s bookings will be made online.

Currently 30% to 35% of Superbreak’s bookings are made online in the UK, but sales through travel agents and call centres remain important distribution channels.

Michel predicts the group’s camping brands are likely to see the highest levels of web bookings, but at the same time does not envisage the disappearance of the traditional brochure.

“I am not going to get rid of brochures. You have to have many ways to market and customers will decide. Obviously you can think about reducing print runs or having call centre staff rebalanced. But brochure pricing is becoming more difficult.”

Prices

European holiday prices could rise by as much as 10% next year, Michel predicts.

Most tour operators hedged prices for this summer based on a more favourable euro-sterling exchange rate.

However, if the pound continues to struggle against the euro, operators will be forced to hedge for summer 2010 brochures based on a less favourable exchange rate, pushing up brochure prices.

Already, major tour operators have delayed brochure launch dates because of pricing difficulties and the later booking trend.

Michel says Holidaybreak will be working hard to negotiate lower rates with suppliers for next year.

He says: “Most companies were hedged at about €1.25 to the pound for this year. For next year there is a lot of uncertainty. No travel company is in the game of currency forecasting.

“Essentially at the time of brochure production you have to decide on the pricing and take a view on hedging. It’s very hard to predict.

“What is certain is that next year will become more expensive for holidaymakers going into Europe. We are looking at some increases. We will negotiate very hard with campsite owners [for Keycamp and Eurocamp], but the expectation has to be some modest price increases next year.”

Next year’s market is also unlikely to see the kind of capacity reductions seen this year and last year following the mergers of the major operators, he adds, a factor that has created a more evenly matched supply of holidays in line with demand.

Michel says: “The question is how customers will react [if] overseas prices go up by between 5% and 10%.”

Conclusion

For this year, Michel is more upbeat than he was just a few months ago. Like many in the trade, he is convinced that as long as holidaymakers keep their jobs they will travel. “Holidays are a key part of people’s expenditure,” he says. “We are feeling quite stable – hotels have turned a corner and educational travel has never really been an issue, although we still have a bit of work to do on camping.”

Planning ahead for next year has to go on a backburner in the current climate as consumers continue to trade down and book later for this summer.

He adds: “It’s hard to predict the final outcome but we will all benefit from focusing on this summer.”