How are Travel Packages Priced?

Almost half of the 65 million trips taken abroad each year by UK citizens are "package holidays" - where the consumer buys a complete package of accommodation, flight and connections for a single price. It’s a highly competitive market with a small number of large tour operators wrestling hard for market share.

Package holidays were devised as a way of achieving high sales volumes and reducing unit costs by allowing tour operators to purchase the different elements of a holiday in bulk, passing some of the savings on to their customers.

Tour operators need to operate at high levels of capacity (around 95% or more in terms of holidays sold) in order to maintain profitability. Matching capacity and demand is therefore critical to profitability, especially since package holidays are perishable goods - valueless unless sold.

Tour operators’ capacity plans, and their contracts with hoteliers and airlines, are typically fixed 12-18 months ahead of the holiday season in order to obtain a sufficiently low price to attract an adequate volume of sales. The tour operator bears almost all of the risk of any contracted capacity remaining unsold.

Are Package Holidays Cheaper than DIY Travel?

We are led to believe that booking a package holiday will be cheaper than a DIY holiday. This will not ALWAYS be the case but if you are a traveller who likes the reassurance of the tour operator satisfying all your travel needs for one upfront price then this is definitely the easiest option – and usually the cheapest.

Generally speaking package holidays are best suited to those who are going away for the standard break of 7 or 14 days and to a traditional holiday destination. If you want to venture to a less visited destination or want a multi-stop holiday for a longer or shorter time period then it may be cheaper to plan the trip yourself.

One big plus for package holidays is that they are generally ATOL or ABTA protected, meaning that if your travel company goes bust, either before or during your vacation, you'll get a full refund if you haven't yet travelled or found alternative accommodation and a flight home if you're already abroad.

However, since 2012, if you book a flight plus separate hotel or car hire together (or within 24 hours) from the same travel website (not airline), you get ATOL protection, just as with a traditional package holiday.

Competition

The fundamental rigidities in the market have important consequences for competition. They make suppliers closely dependent on each other from a strategic, as well as a short-term, viewpoint.

In particular, any decision by one tour operator to try to increase market share by increasing capacity (i.e. offering more holidays for sale) will lead to a fall in prices unless competitors reduce their share by an equivalent amount by cutting capacity

Shop Around for the Best Deals

Note that about three-quarters of all package holidays are sold at or close to the brochure price.

If you have the time however, it’s best to check price comparison sites, tour operator sites and sites offering flash sales. Start by searching the major package holiday listing sites where you can filter your options and, if you can be flexible, search for dates around the one you want to see if you can get the holiday cheaper.

TravelSupermarket* covers all the big tour operators such as Thomas Cook and Tui plus sites including Expedia, Love Holidays and On the Beach.

Ice Lolly* covers some of the alternative travel firms and allows you to search holidays from up to three airports at once.

Flash-sale sites offer cheap, short-lived deals which can beat comparison sites – examples are Holiday Pirates, Travelzoo and Secret Escapes.

Some package deals with BA Holidays can work out cheaper than the flights alone, an advantage if you can be flexible on dates and destination.

It's worth checking direct as well. Thomas Cook*, Tui, First Choice*, Virgin Holidays and Olympic* can often have last-minute package deals unavailable elsewhere.

The same package holiday can be different prices at different travel agents so if you want to deal with a traditional high street travel agent then do some homework/legwork to find your holiday with the one who'll sell it to you for the least.

Deals, Deals, Deals

All-inclusive deals typically include all meals, snacks and drinks (though not always alcoholic ones), entertainment and sometimes transfers and luggage too.

Andrew Brown of Post Office Travel Money said: “

All-inclusive holidays are becoming increasingly popular with families because of the potential to control spending.” With 43% of families admitting they choose all-inclusive holidays “because it cuts the cost of kids’ meals and drinks”, they continue to be a very popular choice of holiday.

An all-inclusive resort can be significantly cheaper than going half-board or bed and breakfast if you take full advantage of all they have to offer. However, be sure to check what’s included in your all-inclusive package as some have limitations which may catch you out if you haven’t budgeted for them - bottled water, branded soft drinks, particular activities etc.

Best Time to Buy Your Package Holiday

Tour operators do offer incentives to encourage holidaymakers to book early (e.g. £100 per couple discounts, free child places, buy-one-get-one-free weeks or hotel upgrades) but generally the advice from money saving experts is to book late for the best deals, i.e. no more than 8 - 10 weeks prior to departure.

The explanation for this is that the tour operators have already chartered the planes and reserved the hotel rooms and unless they are both full to capacity they will lose money. If you leave it to the very last minute then prices drop even further.

The latter might mean that you have to be flexible about dates - and probably destinations, but if you are not too choosy then this could be the best option to get a cheap holiday.

When is The Right Time to Travel?

There has been a lot of publicity recently about how travel prices inflate during the school holidays - and much controversy about parents taking their children out of school to enjoy cheaper holidays during term time.

It's worth knowing however that prices for package holidays drop rapidly towards the end of August.

Most UK families still like to travel as soon as the schools break up in July and many don't want to be away the week before the schools are back but if you can leave your holiday until the last two weeks in August then it's likely you'll save money.

Bon Voyage!

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