Tourism / Transport Relationships (2) Lecture 3

1. Tourism / Transport Relationships (2) Lecture 3

2. DEMAND AND SUPPLY What is the process by which people decide to travel on a certain mode or type of transport as tourists? • The answer to this requires examination of transport demand and supply. • A number of elements or variables effectively govern the extent to which modes of transport are selected. These can include:

3. 1. Family structure: • The role of family structures (which is associated with other lifestyle variables) in the selection of destinations is paramount (main), but it also raises the issue of the particular life-course of individuals utilizing various transport services. • For example, adults-only travel parties (groups) spent more time sightseeing by car or coach than travel parties that included children.

4. 2. Social and behavioral considerations: • These govern the ability to undertake travel. • Visitors to national parks in Britain, who tend to utilize their own vehicle for transport purposes may be persuaded to use public transport in order to keep pace with sustainable management of the parks system (which is growing) and, in theory, enhance the value of the experience.

5. 3. The total cost of the trip: • The selection of a mode of transport needs to be considered in the wider context of the availability of the total trip budget. • Thus, transport is one element within a series of variables that can include activities, accommodation and other expenditures.

6. The demand for transport can be expressed as follows: • Where; • E, is the total holiday expenditure for destination • D, is the discretionary (optional) spending • A, is the accommodation costs • T ,is the transport access costs

7. DEMAND FOR TRANSPORT • Transport cost model (Figure 2.2) not only neatly (carefully) outlines how expenditure on transport cost is affected by the function of distance,but it also highlights how other variables are also considered when selecting a destination. • Prideaux’s model, suggests that trade-offs become necessary as an individual considers vacation destinations (H,G,F) further away from their point of origin (A). • What is important to consider is the maximum personal holiday budget (CC1) and the access cost for each destination depending on the mode of transport.

9. For example, accessing destination “H” using transport mode/type T1, is clearly within budget (given AD is accommodation cost, DE is discretionary spending and EC is the transport access cost). • In fact, travel using mode “T” is also within budget. • However, travel using mode T2 is not within personal holiday budget.

10. As destination “G” is further away from the point of origin, the model suggests that the cost of “T” and T1 modes of transport will be higher. • Selecting “G” as the destination will still be within budget, although note that selection mode “T” for destination “G” will result in maximizing the total amount of money reserved for the entire trip.

11. A few issues with respect to how this model can be operationalised deserve consideration: • What appears as fixed costs for both accommodation (AD) and discretionary spending (DE) are, in reality, anything but fixed. • Travelers may, for example, opt to forfeit the cost of accommodation in favor of more expensive transport costs because of perceived value or comfort. • Similarly, discretionary spending may also be adjusted in favor of the variable transport access cost for similar reasons.

12. Transport economists recognize that the cost of transport & its time, are not the main variables to consider in the demand for transport. • There are numerous additional variables that have some bearing on the demand for a particular mode of transport. A few of the more obvious examples might include: 1. The cost of transport to and from the modal transport point 2. The amount of time necessary for transport from a place of residence or an office to the node. 3. The level of service provided by a particular mode of transport. (For example; some travelers may be members of frequent flyer programs that provide access to lounges and/or preferred check-in procedures).

13. Elasticity of demand • Elasticity of demand (or price elasticity) refers to the degree to which customers or users respond to shifts in prices. • As a ratio, it is the ‘percent change in quantity demanded to percent change in price’. • As formula, elasticity is expressed as follows:

14. Understanding elasticity in relation to transport and tourism is important for two reasons: 1. It is not clear in all cases whether the price of transport in relation to tourism is elastic or inelastic. • Economists have recognized that the cost of petrol at service stations is relatively inelastic, because most consumers need their personal cars/vehicle. Thus, over the long term, the price of petrol tends to be rather inelastic as shifts in consumption of other goods may be affected in the first instance.

15. 2. Where price is not a discriminating factor in either the selection of a particular mode or type of transport or where competition exists to the point where price differentiation is negligible, then elasticity of service becomes important. • Competition between two modes of transport serving a particular route may, for example, result in very little difference in price. As a result, the competition for increased market share becomes based on levels of service.

16. Assuming no price changes, the modal or specific carrier demand is much more sensitive to changes in service levels provided. • Many air passengers monitor the ‘on-time’ service levels of the various air carriers and, when possible, will select the air carrier that provides the best ‘on-time’ service. • Transport providers need to carefully consider the nature of the market when making pricing. Leisure travel, for example, maybe perceived as more elastic than business travel. • A market that is elastic may respond to a fare decrease with stronger demand, resulting in more people traveling, and thus higher revenues despite the fare decrease. • Conversely, a market that is inelastic may respond to a fare increase with less demand, and the increase in fare in this case may not be enough to cover the drop in demand.

17. ISSUES OF SUPPLY IN TOURISM AND TRANSPORT • The supply side of transport in relation to tourism is generally concerned with the ability of firms to provide adequate levels of service to support nodes and affiliated networks. • Supply issues can be examined from a macro perspective, where the structure of the market within which a mode of transport operates, or from a micro perspective where distribution characteristics are considered in the context of matching or meeting demand.

18. Macro determinant perspectives • The wider political environment within which transport is supplied for the purposes of tourism necessarily needs to consider issues of bilateral agreements and regulations of operations. • As discussed, regulation and deregulation are efforts on the part of governments to exert some degree of control over market structures, either directly through regulation or the removal of control through deregulation. • The shape of the macro operating environment is largely determined by the presence or absence of significant competitors.

19. Various market forms exist that determine supply chains and distribution channels, but these largely exist as either imperfect or perfect competition models. • Imperfect competition forms include pure monopolies, where a single firm is the only seller of a product. • Contestable markets were emphasized earlier in the context of deregulation, but in some cases even deregulated environments can produce unbalanced supply of services.

20. Deregulation of the air transport market has introduced competition. 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 oligopolistic market, although a few routes are served by a single carrier which may be tempted to exercise monopoly powers.

21. Understanding macro-level market structures is critical for tourism because these can form supply landscapes to which demand elements are matched. • The shape of tourism flows depends largely on the competitiveness of transport conveyance. • Market structures that promote competition benefit the traveler, but quite often such structures can come at the expense of firms unable to compete.

22. Micro determinant perspectives • Focus on the transaction levied between the transport provider and the customer or user. So the focus is on the product or service that is sold. • In recent decades there has been a marked trend towards the use of information technology to facilitate this process, and often at the expense of more traditional distribution and supply chains, such as travel agents. • Buhalis (2004) found that the airline industry utilizes information technology to improve distribution efforts while at the same time reducing costs. • Many cruise companies now feature online booking, following a trend introduced by airlines.

23. Of interest here, is what this means for the traditional distribution channels, such as the use of travel agents for ticket booking and sales. • As many airlines have, for the past few decades, explored areas in which to cut costs as a means of boosting revenue, the commission paid to travel agents came under close scrutiny. • For many, this means a fundamental re-think of the nature of the manner in which their product/service is distributed.

24. Future distribution channels (which they call e-Platforms) will take three forms: • Online (internet) sales, interactive digital television and mobile devices. • Online sales and e-ticketing are expected to be the dominant form of distribution for air travel by 2007. • Airlines are, of course, not the only mode to utilize online sales. Many railway operations and cruise companies offer the ability to book and pay for tickets online.

25. What do these new forms of distribution mean for traditional intermediaries such as travel agents? • Travel Agents ran a conference at which “Kieron Brennan”, a consultant, urged agents to develop ‘journey management’ businesses, where such intangible services such as tracking flight alerts, providing recommendation on routes, and utilizing databases on customers’ past purchases to, in the future, provide tailored options for travel.

26. The reduction in travel agent commission as a result of shifting distribution methods and new e-Platforms for generated sales is interesting for several reasons; • First, at the same time many airlines were adopting online purchasing of tickets as a means of providing a direct service to their customers. • Second, many airlines also started to establish a strong online presence with booking capabilities as a means of getting closer to their customer.

27. Text book • Duval D. (2007). Tourism and Transport: Modes, Networks and Flows. Multilingual Matters & Channel View Publications. (Chapter 2-Part Two)