Holiday Pricing

Debate between Julian Lewis and Damian Hinds

Monday 24th February 2014 Westminster Hall

[Damian Hinds]

The hon. Lady is correct that the rises coincide with school holidays. To some extent, the existence of those holidays creates those spikes, but the holidays themselves coincide with the high season. As I outlined earlier, the prices for holidays marketed to couples, older people, singles, groups and clubbers typically go up in late July and August because that is the most popular time of the year, particularly to visit European, sun-based resort destinations.

This debate is no place to start deconstructing the profit and loss accounts of holiday companies, but contribution to profit is a key concept. I will talk about hotels, but the same logic applies to airlines and other travel products. The direct marginal cost of someone staying in a hotel room is rather low. Globally, the figure is somewhere between $15 and $20. That is the cost of laundering towels and sheets, issuing soap and providing heat, light and power, and so on. On one level, a hotel will make a profit if it charges anything over $20. The problem is that there are other, fixed costs. For an airline or hotel, the biggest fixed cost is the building or aircraft—loan repayments do not go up and down. Taken together, the cost per night goes up from $20 to, say, $100, which is a big difference. In the off-season, a hotel room might be sold for $80, $70, $60 or $50 a night. In other words, a hotel might deliberately make a loss. Why would a hotel do that? It does it because as long as it charges more than $20 a night, which is the direct marginal cost, it is contributing to profit. If a hotel tried to charge the $100 profitable rate, it would not sell the room.

[Dr Julian Lewis]

I fully appreciate my hon. Friend’s argument that the rich seasons help airlines and the tourist industry to function during the off-seasons. What does he think would happen if some flexibility were introduced so that schools in different areas took their school holidays at different times? Would he anticipate prices remaining low during those times, or would he anticipate the travel industry increasing prices to reflect such an expansion of the season?

[Damian Hinds]

My hon. Friend makes a good point. The short answer is that such a measure would be welcomed by the travel business because it would extend the season, which would be good for capacity utilisation. There would be an effect, but the effect would not be nearly as big as many people anticipate. The season might be extended by a week or two, but those would still be shoulder periods. They would not be peak periods, so there would be a difference, but the difference would not be huge.