Budget Blues, Is Luxury The Way Forward?

Budget has been the travel buzz but when all you’ve got is  low prices, where do you go when Plan A doesn’t work?

That’s a dilemma the budget travel sector is facing right now.

Being cheap is proving to be a fatal flaw and begs the question: could investors have been looking in the wrong direction – is luxury travel the better long business model?

Think about the advantages – lots of room to move on prices, up or down, plenty of opportunity to value-add, and high barriers to competitor entry.

Add to that strong growing demand among travellers from all income brackets and backgrounds for a luxury experience.

An interesting argument, don’t you think.

Let’s pause, let’s take a step back and look at the pros and cons of  each sector.

Low Cost Carriers hit the travel industry like a slap in the face. Not just innovative – revolutionary.

Ryanair led by provocative CEO Michael O’Leary got the party started by slashing airline operating costs and airfares while expanding at breakneck speed.

It was a spark that lit a fire.

Millions of people who previously could not afford to travel due to high prices charged by the so-called legacy carriers were now able to do so.

Other airlines followed before branded budget hotels got in on the act quicker than you could say “ancillary charges”.

Budget – the travel business model of the future!

This line of thinking was further bolstered by the 2008 Global Financial Crisis.

However time has proved that budget travel businesses have severe limitations.

Exhibit one are low cost carriers.

They were once considered innovative but are now looking short of ideas, while their aspirations in terms of product delivery are low.

For example, Cebu Pacific flew into Australia for the first time this week and created some media buzz, but not in a good way.

Coverage focussed on Cebu’s main claim to fame, which is that it crams more passengers into its A330-300 aircraft than any other airline.

– 436 economy seats compared with 255 (plus 30 business) for Singapore Airlines.

To do this Cebu has reduced seat size and pitch, enabling it to stuff nine passengers abreast rather than the standard eight across configuration.

Sustainable idea – I’m not so sure.

Headlines included:

  • $99 flight for those who like to be tight (Daily Telegraph)
  • ‘Most cramped’ aircraft takes to our skies (The Australian)

Not the kind of coverage to build a long-term, sustainable business.

Interesting to note the change in how low cost carriers are covered.

Media is now focussing on the discomfort endured by passengers rather than just a low price.

The speed of change within the low cost carrier environment is hard to comprehend.

The Centre for Asia Pacific Aviation (CAPA) estimates there are 47 low cost carriers in Asia-Pacific with up to another 12 on the way.

It says low cost carriers now have 58% of the Asia-Pacific aviation market, up from 0% only a few years ago

This has created a brutal hyper-competitive operating environment where carriers like Jetstar, Tiger Airways and Air Asia X are losing money.

Of course, legacy carriers are probably doing worse – witness the recent dreadful Qantas result – but the point here is that low cost carriers were supposed to be the solution.

Instead, they have become a major part of the problem, forcing down prices to uneconomic levels for all players, at the same time operating costs for everyone are increasing.

Meanwhile, some budget hotel brands have also run into problems for many of the same reasons.

The big one of course is over-supply. As with budget carriers, there are simply too many operators in key markets.

For developers, the cost of entry is low with smaller rooms and lower operating costs, so they opt for that rather than a more upmarket brand.

Indonesia is a prime example of what’s happening now. Investors have been attracted by its large population and growing middle class.

As with aviation, the budget branded hotel sector has come from nowhere in just a few years and there are now 45 budget hotel brands in Indonesia.

Will they all last? Probably not.

Analyst Matt Gebbie from Horwath believes that there will be attrition, call it consolidation, and that those with the deepest pockets will survive.

One of the survivors will surely be Pop!, operated by Tauzia Hotels.

Irene Lin, Brand Director of Pop! Hotels, said competition has been intense, particularly in Indonesia’s major tourism market of Bali with heavy discounting from an already low base.

None of the budget operators are making money in Bali and operators have found that if price is your only selling tool there’s nowhere else to go.

Luxury, on the other hand, can go anywhere – even to the moon – and there’s no limit to either aspiration or expense.

That’s always been the case but the world was supposed to be entering a period of prolonged austerity following the GFC.

Yet that turned out to be only partly true.

Markets like China continued to pump, fuelling the never-ending Asian boom, while the rich of Europe and North America kept spending but with their heads down.

And so luxury is travel has been doing surprisingly well, proving incredibly resilient.

It’s also being propelled by a new breed of global consumer who may not be wealthy but is determined to experience the high-life.

Hang the expense, and exclusivity, all you need is money, which is leading to a redefinition (or definitions), of what luxury is in today’s world.

As Ross A. Kelin wrote on the Huffington Post, “What does luxury mean in a world where almost every other person at airport security is toting Louis Vuitton or Gucci?”

He says “accessible luxury” is the new buzzword.

“Luxury as we know it is becoming the possession of the middle classes.

“Whether it be some extra-ply loo roll, some red-soled stilettos or ostentatiously priced smart-phone, the exclusivity aspect is becoming redundant thanks to our own evolution as consumers.

“We’re moving away from conspicuous consumption towards consumption with a consciousness; and as a result the balance of power is shifting away from the luxury houses who previously dictated to us what products defined extravagance year-by-year.”

How does this apply to travel? For Singapore Airlines it means space. The carrier has just launched private Suites on some of its aircraft and by all accounts the product is doing well.

Ask an hotelier and they struggle with a straight answer, even though luxury is a defined accommodation category, and one is growing very quickly.

Accor for example plans on opening a luxury hotel in Asia-Pacific every month for the next five years.

The company has moved the headquarters of its luxury brands to Singapore and believes the region will soon become the world leader in luxury consumption.

Rick Harvey Lam, Senior Vice-President Global Marketing Luxury & Upscale Brands – Accor Group says that luxury is in the eye of the beholder.

“There is no standard definition of Luxury, as it depends on the person experiencing it,” he said.

“Ask ten people about their definition and most probably you will receive at least seven different answers, across a wide range of specifics.

“Within Accor we refer to Luxury according to the 4 E’s: Experience, Exclusive, Emotion and Engagement.”

The big one seems to be experience – something people are prepared to pay extra for.

European cruise operators for example are finding that they are selling “from the top down”, while prices for high-end properties have been hitting new highs over the past few years.

Don’t believe me? Just try booking a top hotel in an iconic tourism destination and you’ll find the price of entry starts at USD500 a night and up.

Clearly demand is outstripping supply for these luxury products while for low cost travel and accommodation the reverse is true, there are more seats and beds than customers.

Yet everyone’s still trying to get on the budget bandwagon.

It seems strange when you consider the present set of circumstances which suggests the real long-term future for travellers and industry investors is luxury.

Quality not quantity…

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