Task 2B
This diagram shows the vertical integration that Thomson used to expand as an organisation.
An example of Horizontal &
Vertical Integration
Airline
Tour Operator
Travel Agent
Task 2C
Using the information you have presented for Task 2A & 2B, and explain the effects of integration on the structure of the travel and tourism industry in general.
The structure of the industry has changed due to the amount of integration. Integration has a positive and negative impact on the industry. Vertical integration is when an organisation wishes to buy another organisation on a different level of the buying chain. An example of this is shown above, Thomson brought the airline, Britannia Airways and also Lunn Poly, a travel agent. This shows how Thomson has been vertically integrated. As Thomson brought Britannia Airways it has allowed them to offer customers lower fares. This means that the tour operator is making more profit. The same is not true for travel agents, they are paid a low rate of commission, and therefore most of profit will go to the tour operator. Integration is good as it allows the organisation to control their pricing and communicate well with companies on all levels of the chain.
Horizontal integration is when an organisation buys another organisation on the same level of the buying chain. A good example of this, when “Go” a budget airline owned by British Airways was taken over by EasyJet in 2002. When the companies merged EasyJet “power branded” this means that all of the logos and names that Go had used previously where replaced by the EasyJet name and logo. This had a negative impact on customers, EasyJet has more market control, and this allows them to dictate what the prices can be. The positive side of this integration is that EasyJet now has more customers flying with them and therefore can have more market space to promote themselves.
Tour operators have an advantage over travel agents has they have a bigger market share. When a tour operator is integrated with a travel agent, the travel agent will sell the products and services of tour operator. The tour operator has control on the amount of the commission that the travel agents will receive. If the travel agent doesn’t wish to accept the offer, they may lose a lot of business, as they are not selling as many products, to cater for the customers needs.
Independent travel agents are being seriously affected by integration, big companies such as First Choice, are controlling the amount of commission travel agents receive. They are also losing commission as tour operators and airlines are selling their products and services direct on the Internet. Older customers still prefer to use high street travel agents as they may not know how to use the Internet or would like the reassurance of booking in person. Travel agents are having to change to meet the needs of the customer, and are turning to the ‘niche’ market to make commission.
Airlines have also been affected by integration, British Airways wanted to merge with American Airlines, but IATA declined their proposal, as they would be able to dominate the pricing of transatlantic flights from the UK.
Horizontal and vertical integration has reduced competition within the industry, as more organisations are buying each other out to expand due to the demand that is being received from the public for their products and services. Companies that are integrating are able to set the price, and smaller companies such as Collette Worldwide Holidays, will be unable to compete. The risk that larger companies take when integrating, is small compared to independent organisations. Larger organisations, such as Travelcare make a bigger profit and therefore it will not affect the organisation, if the merge doesn’t work. Smaller companies like Southall Travel may have their business ruined if it doesn’t work.
