Chapter 5
Analysing Supply Issues in Tourist
Transport
1
Theoretical perspectives on tourism and
transport supply issues
• Tourism supply is a complex phenomenon
because of both the nature of the product and
the process of delivery.
• Principally, it cannot be stored, cannot be
examined prior to purchase, it is necessary to
travel to consume it, and a number of
components are required, which may be
separately or jointly purchased and which are
consumed in sequence.
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tourism and transport supply issues
• It is a composite product involving transport,
accommodation, catering, natural resources,
entertainment, and other facilities and
services
• Since tourism products operate in different
markets, it is difficult to analyze supply issues.
• In fact, it proves even more complex when
seeking to separate out one element of the
tourism product
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Tourism and Transport Supply Issues
• In markets with a large number of
competitors, some airlines became more riskassertive in the way they priced products.
• The main principles outlined focus on four
market situations:
perfect competition
contestable markets
monopoly
oligopoly
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Supply Issues and Markets
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Supply Issues and Markets
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Perfect Competition
In economic models of conditions of perfect
competition, a number of assumptions exist:
• There are a substantial number of consumers
and firms, implying that neither can affect the
price of an undifferentiated product.
• There is free entry to and exit from the
market, assuming that there are no barriers.
in the real world, many economists believe that
markets are not perfectly competitive
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Contestable markets
• In this (contestable) markets, there are
insignificant entry and exit costs, so that there
are negligible entry and exit barriers.
• Owing to technology, information and supply
conditions are available to all producers and,
producers cannot change prices (price takers).
• The key principle here is that new and
established firms are able to challenge rival
businesses through pricing strategies.
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Monopoly
• This is market where a major business or firm is
able to exercise a high level of control over the
price of the product and level of output (price
makers).
• The implications are that firms operating in a
monopolistic market charge prices above the
average cost of production to generate high
profit levels.
• In many countries, domestic air and rail
networks operate under monopoly conditions.
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Monopoly
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Monopoly
• In some cases a monopoly condition may be
more beneficial than competition, as in the
case of deregulation in the transport industry.
• In such situations an influx of new entrants
following deregulation may lead to smaller
firms being taken over by larger businesses.
• Where monopoly situations exist, regulation
by the state is normally imposed to prevent
higher prices and supernormal profits.
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State Monopoly
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Oligopoly
• An oligopoly exists where a limited number of
producers dominate the transport sector.
• This is the situation in relation to tourism and
transport since 'tourism has a highly dualistic
industrial structure which is polarised
between large numbers of small firms (typically
in retailing, accommodation services) and a small
number of large companies (for example, in air
transport)'.
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Oligopoly
• In an oligopoly, each firm controls its price and
output levels and there are entry and exit
barriers.
• In an ideal world, oligopolies prefer prices to be
set at levels where the profits are maximised for
all producers in that industry sector.
• If the firms colluded (agreed) to set prices, it
could lead to a monopoly and higher profits for
producers if they restricted the supply.
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Oligopoly
• The impact of inter-airline pricing route-sharing
agreements to achieve joint profits is an
oligopolistic situation.
• In the international market some routes are
competitive, being served by many carriers.
• Most of the others are served by at least two
carriers, indicating an oligopolist market,
although a few routes are served by a single
carrier which may be tempted to exercise
monopoly powers.
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Oligopoly
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Oligopoly
• The structures of the bus, coach and rail
sectors are similar to that of air travel in
that they too experience the problems of
high capital costs, fixed capacity, peaked
demand, the need for feeder routes to
sustain profitable ones.
• Some state support and regulation
characterise these modes.
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Tourism and Transport supply issues
• It is apparent that where a large number of
small firms operate in the transport sector a
competitive market exists.
• In contrast, where a limited number of firms
operate, similiar to an oligopoly or, at the
extreme, a monopoly, different conditions
affect the supply of transport services for
tourists.
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Tourism and Transport supply issues
In any analysis of transport supply issues, a range of
criteria needs to be investigated in different market
conditions. These are;
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the number and size of firms
the extent of market concentration
entry and exit barriers
economies/diseconomies of scale
costs of capital, fixed capital and costs of operation
price discrimination and product differentiation
pricing policies (e.g. price leadership, price wars and
market-share strategies).
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Competitiveness, transport and tourism:
key relationships
• The Travel and Tourism Competitiveness Report
in 2008 constructs a Travel and Tourism
Competitiveness Index (TTCJ) for 130 countries in
terms of their competitiveness.
• The results for 2008, like 2007, ranked
Switzerland on a range of indices in a country
where its massive investment in public transport
is seen as key attribute of developing a
prosperous tourism sector.
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Competitiveness, transport and tourism:
key relationships
• What is also interesting is how these types of
competitiveness study are used by different
destinations and policy-makers to try to address
perceived weaknesses in their investment in
transport and tourism infrastructure.
• What this shows is how a report which seeks to
benchmark destination performance can be
used to highlight areas for further development
in terms of transport and accessibility.
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The state and the supply of tourist transport:
airline deregulation in the USA
Air travel provides an interesting example of how
government policy has led to different effects upon the
supply of transport services for tourists.
Two approaches identified;
1. a regulated transport system where a country
exercises sovereignty over its airspace;
2. a liberalised and unregulated system characterised
by an open-skies policy,
which is somewhat problematic for a global industry
that still has many protectionist and regulated
environments in some instances.
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Airline deregulation in the USA
The experience of domestic airline deregulation in the USA
in 1978 led to a complete re-evaluation of the supply of air
travel in terms of its organization, operation and regulation
by the state.
The case of the US domestic airline market is also
interesting because it is more highly developed and more
extensively used in the United States, in terms of;
• the effect on consumers service provision and service
quality
• the impact upon complementary infrastructure (e.g.
airports).
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The effects of deregulation on the supply of tourist
transport services
• According to the US Department of Transportation,
following deregulation the number of carriers serving the
USA increased from 36 in 1978 to 72 in 1980 and 86 in 1985,
dropping to 60 by 1990 (including air cargo carriers).
• However, a range of factors such as financial insolvency,
mergers and acquisitions reduced the number of operators to
10 carriers of regional or national scale by 1988.
• By 2002 there were 14 major airlines, 28 national carriers and
around 32 regional carriers although entry to/exit from the
market will always leave these statistics subject to variation,
with 74 carriers operating which had risen to around 90 in
2007.
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The effects of deregulation
• Thus, a 62 % increase in the number of
domestic travellers carried on US airlines
during 1978-90 was followed by a greater
degree of concentration integration in the
airline business.
• The number of enplanements (i.e. the number
of people boarding an aircraft) rose from 526
million in 1995 to 769 million 2007, two-thirds
of which were enplaned at large hubs
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The effects of deregulation
• the US airline operates in an oligopolistic
market structure ... [and] in recent years,
access for airlines new to the industry has
become more difficult due to the limited
availability of terminal space and gates, a lack
of departure and landing slots at major
airports, and price competition from the
dominant carriers.
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The spatial effects of deregulation
• From the transport geographer's perspective, a
distinctive spatial structure in air travel has
emerged in the USA, whereby the major US
airlines have developed a hub-and-spoke
structure as spatial and commercial strategies.
• This contrasts with the CAB regulation era where
inter-urban routes were often 805 km or more in
length and little attention was given to
integrating the route networks among operators.
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The spatial effects of deregulation
• However, in a deregulated environment where
cost reductions are a central element, least-cost
solutions and network maximization are a
priority to achieve efficient operations.
• In this context, a hub-and-spoke system of
provision may enable airlines to serve a large
number of people over a wide area, the hub
acting as a switching point for passengers
travelling on feeder routes along the spokes.
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The Hub and Spoke System
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•
This system enables passengers to travel from
one smaller city to another smaller city via a
hub or even two hubs
The hub-and-spoke system has two main
benefits:
• Airlines can service more cities at a lower
cost
• Airlines can maximize passenger loads
from small cities, thereby saving fuel
Hub and Spoke System
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Hub-and-Spoke System
Hub and Spoke System
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The spatial effects of deregulation
Following deregulation and the growth in new entrants to the domestic
airline market, consumer complaints increased to a peak
The most commonly reported sources of dissatisfaction in 2008 were:
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flight problems, such as cancellations and delays
baggage problems
reservations, ticketing and boarding
problems associated with refunds (paybacks)
customer service issues such as unhelpful employees, inadequate
meals and poor cabin service
incorrect or incomplete information about fares
disability issues
overselling / overooking
advertising
animals
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advantages and disadvantages of deregulation of the
US domestic airline market
Advantages
• Price drop in cost of air travel (1950-78, prices fell by 2.8
% ; 1978-93, prices dropped by 1.7 %)
• Growth in passenger traffic from 275 million
passenger enplanements in 1978 to 769 million in
2007
• Increased frequency on flights on trunk routes, as
low cost airlines introduce point to point routes to
improve accessibility and challenge oligopolistic
behavior
• Greater competition
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advantages and disadvantages of deregulation
Disadvantages
• Rise in consumer concerns over service standards,
delayed flights, mishandled baggage, involuntary
'bumping' of passengers off overbooked flights
• Concerns over the safety of an ageing fleet which led
to several airlines grounding aircraft in March 2008 to
complete safety checks
• Lack of a recognition of the business impact of the
airline industry as having special characteristics that
do not fit well with deregulation: excessive price
competition on some routes has made operations too
unprofitable even to recover the costs of operation
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Disadvantages of Deregulations
• The failure of US airlines, to reinvest in new
fleets for domestic operation due to profitability
and affecting their efficiency in terms of fuel
consumption and emissions
• Declining profitability and declining yields
greater volumes of travelers
• Major casualties across the sector with 165
airlines collapsing/merging or operating in
bankruptcy protection 1978-2008
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The supply chain in tourist transport services
• Research has focused on
established areas of tourism
and transport supply,
notably:
 descriptions of the industry
and its operation,
management and marketing
 the spatial development and
interactions that
characterize the industry at
different geographical scales
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Supply Chain Management
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The supply chain in tourist transport services
• In the context of tourism and transport
supply, the analysis of a firm or company is
characterised by certain relationships within
the organisation and with its purchasers or
consumers.
• The external process of selling a product or
service involves a transaction between two
parties following an agreement to purchase.
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The supply chain in tourist transport services
• Commercial transactions are based on agreed
conditions between the parties.
• Therefore transaction chains develop to link the
tourist with the suppliers of services in tourism
• Researches highlight the significance of the
'chain of distribution' for transport and tourism
services, which is the method of distribution of
the service from production through to its
eventual consumption by tourists.
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Transaction analysis
• The nature of the specific supply chain depends upon a
wide range of factors that are internal and external to
individual firms in the transport sector.
For example;
 what is the primary force driving the supply system?
 Is it driven by pull factors, where a tourist destination
may market a region and supply transport services on a
state-owned airline to stimulate demand for tourism?
 is it driven by push factors, where the tourist generates
the demand, and the transport and accommodation
sectors respond to this as a commercial opportunity?
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Transaction analysis
• The overall business environment, government
predisposition to tourism and planning
constraints may have a moderating influence on
the supply system.
• In addition, transaction analysis illustrates the
significance of 'agents' in the system, corporate
policy in transport provision and contractual
arrangements in the supply chain.
• It is evident that a variety of distribution systems
exist for the sale and consumption of transport
services by tourists
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Transaction analysis
• One of the critical issues in the distribution
system for the seller is access to superior
information on available services, so that these
can be sold to the consumer.
• The travel agent comprises a convenient onestop location for tourists to buy tourism services
as an inclusive package, which includes transport
and accommodation, usually marketed through
the medium of a brochure and/or catalog
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Transaction analysis
• The packaging of these products or services by
wholesalers (e.g. tour operators) reduces the
transaction costs to the tourist of purchasing
each element independently.
• Thus, a travel agent normally receives around 10
% commission on the sale of a holiday marketed
by a tour operator, but the overall cost the
consumer is markedly lower than arranging the
same components independently
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Transaction analysis
• However, in the case of air tickets, commissions
to agents are declining as airlines seek to
reduce this expense in competitive market
conditions.
• The tour operator is able to reduce the number
of transactions involved by packaging a holiday,
thereby making economies in the supply
through wholesale purchasing and by entering
into long-term contracts with the suppliers of
accommodation and transport services.
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Transaction analysis
• Not only does this have benefits for the price
charged to the purchaser, but it has more
beneficial effects for the supplier as a number
intermediaries or brokers in the chain are
eliminated by large tour operators airlines
that control a significant part of the
distribution system.
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Transaction analysis
The nature of corporations controlling the transaction
chain to:
• maximise profit by eliminating costs
• reduce the price to the consumer to boost market
share
• increase their level of concentration in the tourism
industry.
Company strategies often pursue horizontal and
vertical integration in the tourism and transport
sectors, not only to control the production process
but also to improve efficiency through economies of
scale.
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Integration in the tourism sector: implications for the
supply of tourist transport
Integration is based on the concept of common
ownership, which may involve the coordination or
control of the production process or may have no
direct effect on it.
• Horizontal integration occurs where two
enterprises with the same output combine to
increase the companies' control over output. It
can occur through mergers, acquisitions,
collaboration, franchising agreements and
more complex contractual arrangements.
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Integration in the tourism sector:
• Vertical integration occurs when an enterprise
with different interests and involvement in the
supply chain acquires or merges with companies
contributing inputs to its activities, or where
output purchasers provide a ready market for the
service.
• This has the advantage of decreasing economic
uncertainty in the supply system and the
avoidance of problems related to contract
breaking.
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Integration in the tourism sector:
• integration in tourist transport operations,
vertical ownership, may help to reduce costs.
• Transaction analysis also raises some
questions that researchers may wish to
address in relation to specific companies and
their role in tourist transport.
• it is evident that a variety of distribution
systems exist for the sale and consumption of
transport services by tourists (Figure 5.4)
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tourism supply chain management
• the concept of tourism supply chains, moving
the research agenda along in transport and
tourism research as all the goods and services
that go into the delivery of tourism products
to consumers.
• It includes all suppliers of goods and services
whether or not they are directly contracted by
tour operators or by their agents ... or
suppliers
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tourism supply chain management
• Many of these supply chains are managed by
business-to-business relationships, using what
is known as supply chain management to
improve the performance and output in the
chain.
• TSCM (tourism supply chain management) is
more specific to the management of tourism
supply since it focuses on a series of
approaches to help manage the supply chain
to meet tourist needs.
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tourism supply chain management
• Above all better coordination of the supply
chains assists in improving relationships in the
system as well as overall profitability and
competitiveness.
• In the large tour operator sector, oligopolistic
business relationships mean that TSCM can be
used to assist in profitability, quality assurance
and improvement of market share.
• This raises the issue of travel chains.
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Analysing annual reports: company accounts
• An annual report is used by companies to
provide a review of the year's activities and it
contains company accounts that are prepared
within accounting guidelines.
• Company accounts contain messages that use
specialist jargon to deal with a complex
situation.
• Once the specialist jargon is decoded by the
reader, company accounts provide an insight
into the financial performance of businesses.
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Analysing annual reports: company accounts
There are two key elements within company
accounts:
- a balance sheet;
- a profit and loss account.
Within the balance sheet, items of value (assets) are
listed and any claims against them are set out.
A claim is a liability, such as an unpaid bill.
Assets are divided into fixed assets, which are those
acquired for use within the business, and current
assets, comprising cash and other items that are to
be converted into cash.
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Analysing annual reports: company accounts
• Liabilities within the accounts are also divided
into current liabilities, where settlement will
be made within one year, and long-term
liabilities to be settled after one year.
• It should be recognised that a balance sheet
only provides a snapshot of an organisation's
activities at one point in time.
• Analysts therefore tend to consider company
accounts over a three- to five-year period to
give a more realistic assessment of an
organisation's business performance
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End of Chapter slides
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