THE TOUR

OPERATOR INDUSTRY
An Analysis

Pauline J. Sheldon
University of Hawaii, USA

ABSTRACT
This paper analyzes the function and structure of the
domestic tour operator industry which represents a large
part of domestic tourism. The tour operator industry in
the United States is polarized into a few large stable and
many small less stable firms. Entry into and exit from the
industry is easy,and the paper shows that from 1978 to
1985 only 34 percent of the firms remained in the in-
dustry. The tour operator’s main functions are primarily
to reduce information and transaction costs for the con-
sumer and to reduce promotional expenditures for sup-
pliers. The second part of the paper analyzes different
types of package tours to the Hawaiian Islands and shows
that basic package tours (accommodation and transpor-
tation only) provide a bigger discount to the consumer
(15%) than do inclusive tours (-3%). Suggestions are
made as to how the industry may become more stable in
the future. Keywords: tour package, industry structure,
and tour operator.

Pauline J. Sheldon is an assistant professor of tourism at the School of Travel

Industry Management. University of Hawaii at Manoa (Honolulu, HI 96822, USA).
She has published articles on tourism forecasting, resident attitudes to tourism, and
applications of technology to the travel industry. Her doctoral degree is in economics
and management information systems.

Annalsqffour~sm Research. Vol 13. pp. 349-365. 1986 0160-7363186 53.00 + .OO
Pnnted in the USA. All rights reserved. C 1986 J. Jafari and Pergamon Journals Ltd

349
 THE TOUR OPERATOR INDUSTRY

Rl?SUMI?
L’industrie des organisateurs de voyage: une analyse. Cet
article analyse la fonction et la structure de l’industrie
des voyages organises aux Etats-Unis. Cette industrie,
qui comprend une grande part du tourisme interieur, est
polarisire entre quelques grandes compagnies stables et
beaucoup de petites compagnies moms stables. I1est fac-
ile d’entrer dans cette industrie et d’en sortir, et I’article
montre qu’entre 1978 et 1985, seulement 34 pour cent
des compagnies sont restees dans cette industrie. Les
fonctions principales de l’organisateur de voyages est de
reduire les frais de renseignements et de transport pour le
consommateur et de reduire les frais publicitaires pour le
fournisseur. La deuxieme partie de I’article anaiyse les
differentes sortes de voyages organises en Hawaii et
montre que les voyages organises simples (logement et
transport seulement) entrainent une plus grande reduc-
tion des prix au consommateur (15 %) que les tours guides
ou tout est compris (-3%). On fait quelques suggestions
pour que I’industrie devienne plus stable B l’avenir. Mots
clef: voyage organist?, structure de l’industrie, organisa-
teur de voyage.

INTRODUCTION
Package tours represent a significant portion of the domestic
tourism industry. For example, in 1982 seven million tour pack-
ages were sold in the United States (Waters 1984). and in 1978
more than 40 percent of US residents traveling overseas purchased
a package tour (Waters 1978). In 1975 package tours were respon-
sible for $4 billion in revenues from 5.2 million travelers in the
United States (Touche Ross 1975). The same study estimates that 8
percent of US tourists would not travel if package tours were un-
available. This would represent a loss to the travel industry of ap-
proximately $300 million (Touche Ross 1975). Another 42 percent
of vacation travelers would significantly change their travel plans.
Even though package tours are an important element of domestic
tourism, they represent an even greater share of overseas tourism.
Despite its size, the tour operator industry has received little
study. A study by Touche Ross (1975) surveyed 56 tour operators
and provides a descriptive profile of the industry in 1975 based on
these 56 companies. It also reports the,
results of a survey of 1,026

350 1986 ANNALS OF TOURISM RESEARCH

 PAULINE SHELDON

travelers who were interviewed about their travel preferences.

Analyses of the British package tour market have been published in
the International Tourism Quarterly (1976, 1978, 1981, 1982):
however, such analyses of the US market do not exist. Studies
which model the demand for package tours have been done by
Sheldon and Mak (1985). Askari (197 l), and Guitart (1982).
This paper will address the supply side rather than the demand
side and has two objectives. The first part of the paper briefly traces
the development of the industry and then analyzes the function and
structure of the industry. The second part analyzes the nature and
pricing structure of different types of tours to a given destination.
Data from the Hawaiian Islands are used to perform this analysis.
A tour package is defined to be the combination of components of
a vacation (such as accommodation, transportation, entertain-
ment, and meals) which are sold to the consumer as a single prod-
uct at a single price. Tour packages differ in the items that are
included. At one extreme only accommodation and transportation
are included; at the other extreme the package also includes all
meals, entertainment, ground tours, and gratuities.

DEVELOPMENT OF THE TOUR PACKAGING INDUSTRY

The first package tours were sold in 1841 by Thomas Cook in
England. These tours differed from package tours of today in that
transportation was always by railroad and acommodation was not
included. Instead the traveler received a hotel coupon to use at any
of 1,200 hotels throughout Europe, and Thomas Cook guaranteed
the payment (Wright 1972). The next major development in the
package tour industry took place in the 1920s when package
steamship tours became popular.
The growth of the industry in the first half of the twentieth cen-
tury was limited by slow modes of transportation, high transporta-
tion costs, and lack of traveler comforts. Poor communications also
limited the information flows necessary for the efficient movement
and accommodation of people. The travel market was not large
enough for tour operators to be profitable. It was not until after the
Second World War that air travel could carry large numbers of
people over long distances quickly, comfortably, and inexpensively.
This provided the volume of travelers to support the growth of the
package tour industry into the large industry that it is today.
There are currently over 1,000 tour operators in the United
States. These firms sell package tours to both domestic and foreign
destinations. The United States Tour Operators Association

1986 ANNALS OF TOURISM RESEARCH 351

 THE TOUR OPERATOR INDUSTRY

(USTOA) is a trade association for tour operators. The association

has strict ethical standards, and only 32 of the 1,000 firms in the
United States are members. To qualify for membership, many
travel companies and organizations must vouch for the firm’s reli-
ability: the prospective member must have been in business for at
least three years. The firm also must meet minimum volume re-
quirements and must carry at least $1 million of liability insurance.
Travel agents who have their reputation at stake when selling
packages favor USTOA members. In fact, travel agents sold 65
percent of their package tour volume through USTOA members
(Jamison 1984).
The package tour industry continues to grow and diversify. Many
tour operators are becoming specialized in the type of tour packages
they develop and sell. More and more tour operators are catering to
special interest groups by developing tours such as adventure
tours, gourmet tours, historic tours, and archeological tours. There
is also an increase in the number of firms on the periphery of the
tour operator industry. These firms arrange travel and vacations
for special groups. For example, incentive travel companies spe-
cialize in selling tours and travel to companies who reward their
sales staff with vacations, and other companies which specialize in
meetings, conventions, and large one-time group sales. Travel
clubs and nonprofit organizations which provide travel services for
their members are also becoming increasingly common.

FUNCTION AND STRUCTURE

A tour operator is defined to be a company which negotiates with
hotels, transportation companies, and other suppliers and com-
bines these vacation components into a package tour. This package
tour is then marketed through the travel distribution system to the
consumer. The tour operator acts as an intermediary between the
suppliers and the travel agent, or the suppliers and the consumer.
This section will begin by addressing the question of why the tour
operator industry is needed.
There are two main reasons for the existence of tour operators.
First, they increase occupancy or usage rates and reduce promo-
tional costs for suppliers. Second, they reduce the cost to travel
agents and consumers of locating information on the destination.
Transaction costs are also reduced since communications and
bookings with many different suppliers are reduced to one (i.e.,
with the tour operator). A return visitor who has more information
about the destination is less likely to \ purchase a package tour
(Sheldon and Mak 1985).
352 1986 ANNALS OF TOURISM RESEARCH
 PAULINE SHELDON

The tour operator negotiates with suppliers at the destination,

and receives a volume discount. These negotiated rates are tightly
held secrets and standard group rates are the exception rather than
the norm. Discounts, however, appear to vary from 10 percent
(minimum travel agent commission) to over 50 percent. If the dis-
counts are high and the market is competitive enough, the tour
operator may pass some of these discounts on to the consumer.
Then the reduced price of the vacation becomes an additional rea-
son to purchase a package tour.
The contact between the tour operator and the supplier can be of
two different types. The tour operator can either make block reser-
vations or block purchases with suppliers. The relative market
power of the tour operator and supplier will determine whether a
block reservation or block purchase is made.
In the case of block reservations, the tour operator reserves the
number of units expected to be used. Negotiations are usually done
for a year ahead, the period for which brochures are printed. Nego-
tiated rates depend on suppliers’ expected occupancy or usage
rates, on the expected general business and economic conditions,
and on the tour operator’s future volume estimated from utilization
rates of the previous year. For example, if 200 hotel rooms had been
block booked and only 60 percent used throughout 1985, the rates
for 1986 will reflect this under-utilization and will be discounted-
less. Financial stability of the company, and marketing plans are
also considered in estimating future volume.
This type of contract allows the tour operator to reduce financial
risk by receiving payment from clients (via travel agents) approxi-
mately 35 days in advance. Thirty days in advance the tour opera-
tor must notify the supplier of the number of units required. The
supplier is then free to resell any unused units. Elaborate cancella-
tion policies are developed by tour operators to guard against finan-
cial loss. Since deposits and payments come in before the tour date
and payment to suppliers is not due until after the tour date, the
tour operator has a large cash float and is able to earn interest on
the balance. In times of low demand, however, the tour operator
may experience cash flow problems and become insolvent.
A block purchase is a less common type of contract, but is some-
times found, especially with airlines. In this case, a tour operator
commits to purchase a certain number of airline seats or charter a
whole plane, and must pay the supplier regardless of how many
seats are sold. The tour operator has title to the product, unlike in
block reservations. The price is usually much lower than with
block reservations, reflecting the transfer of risk from the supplier
to the tour operator. This type of contract is used when the supplier
1986 ANNALS OF TOURISM RESEARCH 353
 THE TOUR OPERATOR INDUSTRY

is in a strong bargaining position and when tour operators are con-

fident of selling adequate volume.
Prior to airline deregulation in 1978. airlines gave special Group
Inclusive Tour (GIT) rates to tour operators. After deregulation this
is less common, and because airfares are constantly fluctuating,
many tour operators do not include air transportation as part of the
package price.
Once the tour operator has contracted with suppliers and created
a tour package, the next function is to market the product. This is
usually done by producing and distributing a brochure. This bro-
chure is the main selling aid, however some larger tour operators
have sales forces which call on travel agents. Advertisements in the
travel press are also used for promotional purposes. There is, how-
ever, a trend towards marketing directly to the consumer, and by-
passing the travel agent, eliminating commission payments.
Some brochures are factual listings of tours, but most are lavish
with glossy photographs and poetic descriptions of the destination.
Production costs are estimated to be between two and five percent
of the total tour price, and a conversion rate of one booking to eight
to ten brochures is accepted as the industry norm. The presenta-
tion of information in brochures has been the subject of contro-
versy, regulation, and some court cases. The Civil Aeronautics
Board (CAB), in an attempt to protect the consumer and standardize
the brochures, requires approval of any promotional material be-
fore it is distributed (Dickerson 1982).
The Organization for Economic Co-operation and Development
(OECD) has also recommended that member governments improve
the protection of tourists, and the quality of information on package
tours. It suggests that all brochures include the legal identity of the
tour operator, destination and itinerary, means of travel, total price
with services included, accommodation quality, booking proce-
dures, and cancellation policies. A traveler has the right, under the
Code of Federal Regulations, to rescind a contract and get a full
refund for any of the following reasons: if there is a 48 hour delay in
departure time, a change in origin or destination, a hotel substitu-
tion, or a price increase of more than ten percent (14 Code of Federal
Regulations #380-33).
In the short term there are economic incentives for the tour opera-
tor to over represent the quality of the product in the brochure.
Repeat business, however, will be severely limited if deception is
used and the long-term success of the firm will be jeopardized.
Klein and Leffler (1981) discuss the types of industries in which
“deception” is likely to occur. Industries with nonsalvageable capi-
\

354 1986 ANNALS OF TOURISM RESEARCH

 PAULINE SHELDON

tal have incentives to provide the quality which is expected. This is

because if they do not and they are not successful in attracting
repeat business, their exit from the industry has costs associated
with it. These costs are the costs of capital which they are unable to
salvage. The tour operator industry has almost no nonsalvageable
capital, and so this may lead to deception of the consumer for short-
run profits. A tour operator may, however, have one type of nonsal-
vageable capital in the form of goodwill from advertising. If the firm
has made substantial investments in advertising, goodwill is ex-
pected to produce a future stream of income. Therefore, if there
have been large investments in advertising, exit from the industry
will not be costless and the company will be less likely to mislead
the consumer.
Klein and Leffler (198 1) also state that quality cheating problems
are more prevalent when the quality of the good cannot be exam-
ined by the consumer before purchase. Since the package tour va-
cation cannot be “sampled” before purchase, this may be an addi-
tional explanation for brochure over representation.

OTHER ECONOMIC EXPLANATIONS

Two other economic explanations for the phenomenon of pack-
age tours are to increase monopoly profits and to evade price regula-
tion. Tour packages are just one example of goods and services
being sold in packages or bundles rather than individually. The
economic terms for this practice are tie-in sales, full-line forcing or
bundling. Producers who have monopoly power in one product
market and wish to extend it to other product markets may engage
in this practice. This is done by “tying” other goods to the monop-
oly good, and increasing the monopolist’s profits (Bowman 1957;
Burstein 1960). In the tour packaging industry in the United States,
there is little monopoly power in any of the product markets even
though vertical integration is common. There is evidence in the
industry of both backward and forward vertical integration. Hotels
and airlines develop their own tour companies and tour operators
frequently purchase supplier companies such as hotels.
Monopoly power exists in the tour industry in some countries
such as the People’s Republic of China. All package tours to China
must be purchased through the government agency. Other in-
stances of monopoly power exist when package tours include a
specific event such as the Olympics, the Oberrammagau Passion
Plays, or the Rose Bowl. In these cases, the sellers of the event
tickets have some monopoly power because of the limited supply of

1986 ANNALS OF TOURISM RESEARCH 355

 THE TOUR OPERATOR INDUSTRY

tickets. For example, tickets to the Oberrammagau Passion Plays

are not available to US tourists without the tour tie-in. Because the
supply of tickets is limited, ticket purchasers may be tempted to
resell at a higher price (scalping). The tying of an event ticket to a
tour package allows the seller to disguise the higher ticket price in
the tour price, thereby evading the scalping laws and increasing
profits.
Another rationale for tyinggoods together is to evade price regula-
tion (Bowman 1957). A consumer buying two or more tied goods is
only concerned with the price of the total package. Therefore, if the
price of the tying good is regulated, the price of the tied good can be
increased, thereby increasing the price of the package and allowing
the supplier to evade price regulation.

Bundling of air transport and ground services has been used by

airlines not only as a marketing tooLbut occasionally as a means
for differential pricing practices that were otherwise barred by
regulation or cartelization (Kinberg and Sudit 1979).

An example of this is the case of Budget Rent-a-Car and Aloha

Airlines in Hawaii selling a package consisting of airline and car
rental. Since airline prices were then regulated, Aloha could not
reduce its fare. It, therefore, came to an agreement with the car
rental company who offered its product at a reduced rate. Allegedly,
then, Aloha transferred some of the money to Budget disguised as
advertising expenses (Anonymous 1979).

ANALYSIS OF THE US TOUR OPERATOR INDUSTRY

Beginning operation as a tour operator is relatively easy and in-
expensive compared to other industries. All that is required initially
is some knowledge of the destinations, a means of communication,
marketing skills, and the ability to negotiate. No capital outlay is
necessary. Therefore, one would expect there to be frequent entry of
new firms into the market. An analysis of firms in the US industry
from 1978 to 1985 demonstrates this characteristic. The annual
listing of tour operators in the World Travel Dictionary was used as
a source for this analysis.
Table 1 shows that between 1978 and 1982 (4 years) 415 new
firms entered the market (an average of 104 new firms per year),
and from 1982 to 1985 (3 years), 593 new firms entered the market
(an average of 197 new firms per year). One might attribute this
growth in new firms to the growth of the.
travel industry in general.

356 1986 ANNALS OF TOURISM RESEARCH

 PAULINE SHELDON

Table 1
Entry and Exit into the U.S. Tour Operator Industry
\
Firms 1978- 1982 1982- 1985
Number of firms entering the market 415 593
Number of firms exiting the market 316 279
Number (and percentage) of firms that were 272 408
stable (46.3%) (59%)
Source: World Travel Directory 1978, 1982, 1985.

However, the number of firms exiting the market modifies this as-
sumption. Table 1 shows that from 1978 to 1982,316 (an average
of 78 per year) and from 1982 to 1985, 279 (an average of 93 per
year) firms went out of business. Even though there is a net growth
in firms entering the market, there is also a substantial number of
firms exiting the market.
Table 2 shows that in 1978 there were 588 tour companies in the
US: by 1982, that number had increased to 687, however, only 46
percent (272 companies) were common to both years. Over 54 per-
cent of the companies had exited the market. From 1982 to 1985,
the numbers rose to 1,001 companies, and 59 percent were com-
mon to both years. Only 34 percent of the companies in existence in
1978 were also in existence in 1985.
These figures demonstrate a fundamental instability in the in-
dustry. It is almost costless for firms to exit the industry quickly as
they have little invested in capital. These statistics differ from the
Touche Ross study which found that the majority of 56 firms sam-
pled had been in business for at least ten years. The reason for
difference is that their sample is biased towards stable companies
since their addresses were available and current. Also, the respon-
dents almost certainly biased the sample even more toward sta-
bility.

Table 2
Size of US Tour Operator Industry

Firms 1978 1982 1985

Number of firms 588 687 1,001
Percentage of firms from 1978 still in operation 100% 46% 34%
Source: World Trauel Directory 1978, 1982, 1985.

1986 ANNALS OF TOURISM RESEARCH 357

 THE TOUR OPERATOR INDUSTRY

This high level of turnover has caused problems for consumers in

the past. There are examples of “hit-and-run” entry by firms leav-
ing consumers stranded at the destination (Waters 1984). Conse-
quently, experienced travel agents depend on a few of the major
tour operators as mentioned above. This has led to a polarization in
the industry, a few, large stable and many short-lived firms. The
study by Touche Ross (1975) found that three percent of the firms
account for 30% of revenue. In the UK,‘a similar polarization has
occurred with five big tour operators controlling 60% of the market
(International Tourism Quarterly 198 1).
A major reason for this polarization is that volume is critical for
the tour operator to gain good discounts from suppliers and thereby
be price competitive. As volume begets lower prices, so lower prices
beget more volume and the spiral continues. Once a firm is estab-
lished and can generate large volume through advertising, operat-
ing efficiency, or specialized knowledge of a destination, economics
of scale are generated. These economies of scale are found in both
direct and indirect costs. Direct costs for the tour operator are those
incurred with suppliers (hotels, airlines, etc.). These decrease pro-
portionately with volume as higher discounts are given for larger
bookings. Firms which may have become vertically integrated by
purchasing hotels, bus companies, or other component suppliers
will have cost advantages over other firms. Indirect costs (the costs
of operation) also decrease with volume as can be seen from results
of the Touche Ross study displayed in Table 3.
For those firms which are not able to generate volume, one way to
stay in business profitably is to capitalize on some specialized
knowledge. Friedman explains that firms in industries with spe-

Table 3
Economies of Scale of Tour Operators

Average cost of
operation per
passenger
Firms Market share (indirect costs)
Operators with 1 - 5,000 passengers 3% $64.30
annually
Operators with 5,000 - 50.000 29% $53.50
passengersannually
Operators with more than 50,000 68% $33.90
passengersannually
Source: Tour Wholesaler Industry Study (Toy&e Ross 1975). Exhibit 14.

358 1986 ANNALS OF TOURISM RESEARCH

 PAULINE SHELDON

cialized factors will tend to be of different sizes (Friedman 1955). A

specialized factor is one that cannot easily be duplicated. The
knowledge of different destinations and their facilities, the knowl-
edge and ability to create special interest tours (such as historic,
adventure, or archeological tours), and negotiation skills are exam-
ples of specialized factors for tour operators. Specialized knowledge
is also required to develop special interest tours. Friedman explains
that in industries where specialized factors exist there will not be
an optimum-sized firm that all firms will tend towards, but rather
an optimum distribution of firm size. It appears that the polariza-
tion of the industry into a few larger well-established and many
smaller less-stable firms may be the optimum distribution for the
tour industry.
From the viewpoint of the consumer and the travel agent, a more
stable industry is preferred. There are two factors which can help to
stabilize the industry. They are advertising and investment in in-
formation technology. As mentioned previously, firms which have
advertised extensively will be less likely to exit quickly because of
the potential goodwill generated by the advertising. As the industry
becomes more reliant on computer technology, there will be addi-
tional incentives to stay in business because of the investment in
computer hardware and software. To the degree that computer soft-
ware is specific to the tour operator industry, an additional cost is
associated with exiting the industry. Therefore, technology may
have the effect of making the industry more stable in addition to
improving the efficiency of the firm in handling information. Other
than these two factors, an ethical approach to business, or mem-
bership in USTOA. there is little to deter firms from fast exit from
the industry.
Profitability figures for firms are difficult to obtain; however, esti-
mates of their cost structure and profit margin have been made. For
UK tour operators, the following breakdown of costs is available:
seventy-two percent of the tour price is the cost of the vacation
components, four percent is marketing expense, and five percent is
administration expense. The operators’ margin is based on a ten
percent markup of operators’ cost, and travel agents receive 10
percent commission on the selling price. This means that a 10
percent reduction in the selling price would leave the operator with
no profit, having just covered costs (International Tourism Quar-
terly 1984).
The above discussion shows the competitiveness of the tour oper-
ator industry. A new type of industry classification developed by
Baumol(1982) is the contestable market. The major characteristic

1986 ANNALS OF TOURISM RESEARCH 359

 THE TOUR OPERATOR INDUSTRY

of this type of market is that entry and exit are easy and costless.
The classification is not dependent on the number of firms as other
industry classification’s are (monopoly, oligopoly, competition).
The tour operator industry fits best into the classification of a con-
testable market.

PRICING OF PACKAGE TOURS: A CASE STUDY OF HAWAII

This section of the paper is an empirical study of package tours to
the Hawaiian Islands. It will analyze the distribution of visitors
using different types of packages and traveling independently. It
will also investigate whether volume discounts are being passed on
to consumers by tour operators. If so, then package tour travel will
be at a discount over independent travel. Since package tours are,
in a sense, “standardized” vacations, they require some conver-
gence of consumer tastes. Consumers on package tours will be
tested for evidence of similarities in tastes.
It has already been mentioned that package tours differ in the
amount of components included. For the purpose of this analysis
tours will be categorized into two types: basic tours and inclusive
tours. The basic package tour includes transportation, accommo-
dation, and some sightseeing. The inclusive package tour includes
transportation, accommodations, meals, a full program of sight-
seeing and entertainment, and is often escorted. These two types of
packages will be compared to independent travel. Independent
travel refers to the purchasing of the components of a vacation
separately by .the consumer either through a travel agent or
through suppliers.
The following three hypotheses will be tested:

Hypothesis I: More people travel independently than on a basic

tour, and more purchase a basic tour than an in-
clusive tour.
Hypothesis II: Basic tours represent a greater saving to the con-
sumer over the equivalent retail cost than do inclu-
sive tours.
Hypothesis III: Participants on an inclusive tour demonstrate
more similar characteristics than do those on a
basic tour, and those who travel independently
demonstrate the least similarity as a group.

Hypothesis I
It is expected that the more components added to a package, the
fewer people will purchase the package tour. This is because an
increasing amount of taste convergence is required as components
360 1986 ANNALS OF TOURISM RESEARCH
 PAULINE SHELDON

are added. It is easier to find people who will purchase a given

combination of hotel and airline, than to find people satisfied with
the same activities and meqls of an inclusive tour. This is demon-
strated by analyzing a sample of 1,646 tourists to Hawaii (the sam-
ple came from the Hawaii Visitors Bureau Expenditure Survey
1980). Table 4 shows the breakdown of tourists in each category.
These proportions are expected to be true for most destinations,
except for those at the beginning or end of their life cycle.

Hypothesis II
It is expected that since more people tend to purchase basic tours
than inclusive tours, tour operators will be able to obtain higher
volume discounts with suppliers and so basic tours will represent a
more substantial saving than inclusive tours, assuming that the
tour operator passes on some of the discounts to the consumer.
A representative sample of fourteen tours was taken from the
brochures of seven different companies selling tours to Hawaii to
test this proposition. The tours were divided into two categories:
seven were basic tours and seven were inclusive tours. Each tour
was broken down into its component parts and the retail price of
each component was estimated. The sum of these component
prices is called the Equivalent Retail Cost (ERC). Hotel tariffs, the
Official Airline Guide, and other supplier price lists were used for
this estimation.
A comparison was then mad&between the calculated ERC and
the actual tour price. The following formula was used to calculate
percentage discount from purchasing a package rather than pur-
chasing the individual components at the retail value:

ERC -;;;r price x loo%.

Percentage discount =

Table 5 shows this information from the fourteen tours. It can be

seen from the table that basic tours offer a substantial price dis-

Table 4
Visitors to Hawaii (1980) by Vacation Mode

Vacation Mode Number Percentie

Independent 965 59%
Basic tour 401 24%
Inclusive tour 280 17%
Total 1,646 100%

1986 ANNALS OF TOURISM RESEARCH 361

 Table 5
The Components and Prices of Compensation of Basic and Inclusive Tours

Tour Components Price Comparlsons

Car Sight-
Roundtrip Hotel lnterisland rental seeing Price ERC? Percentage
Operator airfare nights flights days Meals Tours Escort’ (in $1 (in $1 discount

Basic tours
A 7 1 1 379 441.48 14.15%
B Yes 7 1 1 409 485.68 15.79%
B yes 9 3 6 1 714 805.43 11.35%
B yes 7 3 3 679 807.51 15.91%
z D Yes 7 * 469 603.72 22.31%
2 D yes 7 539 661.96 18.58%
, E 7 3 4 480 524.68 8.5%
5 Inclusive tours
2 C 12 4 5 1341 1224.39 -9.5%
t;; B yes 7 4 5 1 2 829 816.92 - 1.48%
$ C 12 4 27 7 yes 1695 1599.3 1 -5.98%
3 H 12 5 33 7 yes 2141 2254.2 +5%

2
z F
F 10
9 5 2
4 5
3 yes
yes 1325
945 1309.8
915.24 -3.25%
-1.2%
?z F 7 1 2 3 3 yes 995 904.23 - 10.04%
I Cost of escorting is not included in calculation of ERC.
$ * Small items such as group pholographs. flight bags. and cocktails are components of many tours. Their cost has been added into
F the ERC. however they are not marked on the table.
N.B.: All tours include lei greetings and airport transfers.
 PAULINE SHELDON

count to the traveler (mean = 15.2%). whereas inclusive tours

charge a premium over the retail cost of the components (mean =
-3.78%). The only exception to this is operator H which only offers
one tour and therefore may have greater purchasing power and
lower costs than other companies.
It is interesting to note that most inclusive tours do not include
round trip airfare. The only exception to this is tour operator B
which also offers basic tours and therefore has the volume to obtain
large discounts from the airlines.

Hypothesis III

It is expected that since people who are on inclusive tours spend

their time doing the same things, they will have more similar char-
acteristics than those who travel on basic tours or independently.
An analysis of the age, expenditure (as a proxy for income) and
party size of the sample of 1,646 tourists to Hawaii was performed.
Table 6 shows the mean, standard deviation, and coefficient of
variation for each group (the coefficient of variation standardizes
the standard deviation for the mean, and allows a comparison of

Table 6
Coefficients of Variation for Tourist Characteristics on
Each Vacation Mode

Independent Basic Inclusive

Age’
Mean 5.31 5.27 5.73
Standard deviation 1.39 1.46 1.31
Coefficient of variation .26 .28 .229
Expenditure
Mean 67.55 72.21 82.27
Standard deviation 35.4 26.81 18.67
Coefficient of variation .524 .37 .224
Party Size
Mean 2.14 1.93 1.77
Standard deviation 1.02 .65 .43
Coefficient of variation .48 .34 .24
1The age data is grouped as follows:
Cl0 1
10-19 2
20-29 3
30 - 39 4
40-49 5
50-59 6
60+ 7

1986 ANNALS OF TOURISM RESEARCH 363

 THETOUROPERATORINDUSTRY

standard deviation between groups). The results show that in each

case the variation for inclusive tours is less than other vacation
modes for age, income, and party size. Therefore, the purchase of
an inclusive tour ensures the traveler of similar companions.

CONCLUSIONS
This paper has discussed the significance of tour operators to
domestic tourism and has shown that the US tour operator industry
is polarized into a few larger, stable and a majority of smaller, less
stable firms. This pattern is likely to continue as the larger firms
acquire the capital to become vertically integrated by purchasing
hotels, transportation, or other vacation components. Vertical in-
tegration reduces costs and permits the operator to be even more
price competitive. There is, however, one feature that may change
this. The increase in special interest tours represents a possible
means by which the smaller companies may gain a foothold in the
market, albeit a smaller market.
As market segmentation, customization, specialization, and ser-
vice become increasingly important, the companies which can
create tours based on a specialized knowledge of the destination
and its facilities have the opportunity to attract a growing market
and become successful. Market research on consumer trends will
be necessary to maintain that success. Tourism is growing to soon
become the world’s largest industry. As a part of that industry, it is
in the consumers’ interests that tour operators became more per-
manent and reliable. 0 0

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Submitted 30 May 1985,

Revised version submitted 15 September 1985
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Refereed anonymously.

1986 ANNALS OF TOURISM RESEARCH 365