Market Forecasts_ Transport, Travel & Tourism 2009

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Market Focus 2009

Fourth Edition February 2009Edited by James Manley

ISBN 978-1-84729-423-4

Market Forecasts: Transport, Travel& Tourism



© Key Note Ltd 2009

Market Forecasts: Transport, Travel & Tourism Foreword

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Market Forecasts: Transport, Travel & Tourism Contents


Contents

Introduction 1

OVERVIEW.......................................................................................................................................1

Airlines 2

REPORT COVERAGE .......................................................................................................................2

MARKET SECTORS..........................................................................................................................2

FORECASTS 2008 TO 2012 ............................................................................................................2

Table 1: Forecast Number of Passengers Uplifted by UK Airlines on Scheduledand Non-Scheduled Services (million), 2008-2012 .........................................................................3

FUTURE TRENDS .............................................................................................................................3

Long-Term Forecasts for Air Passenger Growth .............................................................................3

Oil Price Surge Threatens Airlines ...................................................................................................3

Open Skies Agreement — Phase 2 .................................................................................................. 4

Airports 5

REPORT COVERAGE .......................................................................................................................5

MARKET SECTORS..........................................................................................................................5

FORECASTS 2008 TO 2012 ............................................................................................................5

By Volume.........................................................................................................................................5

Table 2: Forecast UK Terminal Passengers, Aircraft Movements and Freight Moved

at UK Airports (million, 000 and 000 tonnes), 2008-2012 .............................................................6

By Value ............................................................................................................................................6

Table 3: Forecast UK Airport Revenue (£m), 2008-2012 ................................................................6

FUTURE TRENDS .............................................................................................................................7

Long-Term Forecasts for Air Passenger Growth .............................................................................7BAA Expansion Plans ........................................................................................................................7

Automative Services 9

REPORT COVERAGE .......................................................................................................................9

MARKET SECTORS..........................................................................................................................9

Car Servicing and Mechanical Repairs.............................................................................................9

Franchised Car Dealers .....................................................................................................................9

Independent Garages.....................................................................................................................10

Garage Chains and Autocentres ....................................................................................................10





Fast-Fit Centres ...............................................................................................................................10

Mobile Service Units.......................................................................................................................11

Car Body Repairs.............................................................................................................................11

Car Breakdown and Recovery Services..........................................................................................11

FORECASTS 2008 TO 2012 ..........................................................................................................11

Table 4: The Forecast UK Market for Automotive Servicesby Sector by Value (£m), 2008-2012 .............................................................................................12

Car Servicing and Mechanical Repairs...........................................................................................12

Car Body Repairs.............................................................................................................................12

Car Breakdown and Recovery Services..........................................................................................13

FUTURE TRENDS ...........................................................................................................................13

Falling Car Sales Predicted ............................................................................................................. 13

Consolidation Expected in Bodyshop Sector.................................................................................13

2-Year MOT Testing........................................................................................................................14

BSI’s Kitemark for Garage Services................................................................................................14

Bus & Coach Operators 15

REPORT COVERAGE .....................................................................................................................15

MARKET SECTORS........................................................................................................................15

FORECASTS 2008 TO 2013 ..........................................................................................................15

Table 5: The Forecast Total Bus and Coach Services Market in Great Britainby Value at Current Prices (£m), Years Ending March 2009-2013 ..............................................16

Table 6: Local Bus Services in Great Britain — Forecast Number of Passenger Journeysby Area (million and %), Years Ending March 2009-2013 ..........................................................16

FUTURE TRENDS ...........................................................................................................................17

Targets for Public Transport ..........................................................................................................17

Business Travel Market 18

DEFINITION....................................................................................................................................18

Tourism............................................................................................................................................18

Forms of Tourism ............................................................................................................................18

Purposes of Tourism .......................................................................................................................18

Categories of Visitor.......................................................................................................................18Published Tourism Statistics ...........................................................................................................19

Categories of Tourism Expenditure...............................................................................................19

The Supplying Sectors ....................................................................................................................20

Transport Services...........................................................................................................................20

Accommodation .............................................................................................................................20

Travel-Management Companies....................................................................................................20

Other Services .................................................................................................................................20

FORECASTS....................................................................................................................................21

Domestic Business Travel................................................................................................................21

Table 7: The Forecast UK Market for Domestic Business Travel by Volumeand Value (000 trips and £m), 2008-2012 ....................................................................................21





Outbound Business Travel..............................................................................................................22

Table 8: The Forecast UK Market for Outbound Business Travel by Volumeand Value (000 visits and £m), 2008-2012 ....................................................................................22

Inbound Business Travel.................................................................................................................23

Table 9: The Forecast UK Market for Inbound Business Travel by Volume

and Value (000 visits and £m), 2008-2012 ....................................................................................23

Courier & Express Services 24

REPORT COVERAGE .....................................................................................................................24

MARKET SECTORS........................................................................................................................24

National Post...................................................................................................................................24

Other Courier and Express Services ...............................................................................................24

FORECASTS 2008 TO 2012 ..........................................................................................................25

Table 10: The Forecast UK Postal and Courier/Express Services

Market by Sector by Value at Current Prices (£m), 2008-2012 ...................................................25FUTURE TRENDS ...........................................................................................................................26

Environment ...................................................................................................................................26

Demographic Trends ......................................................................................................................26

Acquisition and Merger Activity....................................................................................................26

Cruise Market 27

DEFINITION....................................................................................................................................27

FORECASTS....................................................................................................................................27

Building Ships .................................................................................................................................27

Aker Yards, Norway........................................................................................................................28

Fincantieri, Italy ..............................................................................................................................29

Meyer Werft, Germany ..................................................................................................................29

Overcapacity ...................................................................................................................................29

Identities and Trends......................................................................................................................30

Caution............................................................................................................................................32

Around the World ..........................................................................................................................33

Table 11: Forecast Number of Cruise-Holiday Passenger Bookings Worldwideby Region (million and %), 2008-2013 .........................................................................................33

Key Points........................................................................................................................................36

European Short Breaks 39

DEFINITION....................................................................................................................................39

FORECASTS....................................................................................................................................39

Market Forecasts.............................................................................................................................39

Table 12: The Forecast UK Short-Break Holiday Market by Volumeand Value (million trips and £m), 2008-2012 ...............................................................................40

Economic Conditions ......................................................................................................................41The Environment ............................................................................................................................41





Holidaying at Home .......................................................................................................................41

Other Future Factors ......................................................................................................................42

Freight Forwarding 44

REPORT COVERAGE .....................................................................................................................44

MARKET SECTORS........................................................................................................................45

Freight Forwarding.........................................................................................................................45

Transport Principals........................................................................................................................45

FORECASTS 2007 TO 2011 ..........................................................................................................46

International Freight Services ........................................................................................................46

Table 13: The Forecast Total UK International Freight Services Market by Valueat Current and Constant 2000 Prices (£m, % and index 2000=100), 2007-2011 ........................46

Freight Forwarding.........................................................................................................................47

Table 14: The Forecast UK Freight Forwarding Sector by Value at Current Prices

(£m and %), 2007-2011 .................................................................................................................47

Transport Principals........................................................................................................................47

International Road Freight ............................................................................................................47

International Sea Freight ...............................................................................................................48

International Air Freight................................................................................................................48

International Rail Freight...............................................................................................................48

Table 15: The Forecast UK Transport Principals Sector by Subsector by Valueat Current Prices (£m and %), 2007-2011 .....................................................................................49

FUTURE TRENDS ...........................................................................................................................49

EU Transport Policy.........................................................................................................................49

EU Expansion ..................................................................................................................................50

Globalisation...................................................................................................................................50

A Changing Role for the Forwarder..............................................................................................50

Consolidation in the Forwarding Sector .......................................................................................51

Environmental Concerns ................................................................................................................51

Sustainable Mobility.......................................................................................................................51

Emissions Trading ...........................................................................................................................51

IT......................................................................................................................................................52

Security............................................................................................................................................52

Hotels 53

REPORT COVERAGE .....................................................................................................................53

MARKET SECTORS........................................................................................................................54

Corporate........................................................................................................................................54

Consumer ........................................................................................................................................54

FORECASTS 2008 TO 2012 ..........................................................................................................54

Table 16: The Forecast UK Hotel Market by Value at Current Prices (£m), 2008-2012 .............55

FUTURE TRENDS ...........................................................................................................................55





Rail Travel 56

REPORT COVERAGE .....................................................................................................................56

Report Structure .............................................................................................................................56

Definitions (Standard Industrial Classification) ............................................................................56

MARKET SECTORS........................................................................................................................57

National Rail Infrastructure ...........................................................................................................57

Mainline Rail Services.....................................................................................................................57

Urban Rail Services .........................................................................................................................58

International Rail Services..............................................................................................................58

Northern Ireland.............................................................................................................................58

FORECASTS 2008 TO 2012 ..........................................................................................................58

Table 17: Forecast Passenger Receipts on UK Rail Systems at Current and Constant2003 Prices (£m), Years Ending March 2008-2012 .......................................................................59

FUTURE TRENDS ...........................................................................................................................60

Demographics .................................................................................................................................60

Table 18: Forecast UK Resident Population by Sex (000 and %), Mid-Years 2008-2012 ...........60

Political Uncertainties.....................................................................................................................61

International Terrorism..................................................................................................................61

Regulatory Policy Framework ........................................................................................................61

White Paper — Delivering a Sustainable Railway ........................................................................61

Network Rail Targets......................................................................................................................62

Technological Changes...................................................................................................................62

Rail Competition.............................................................................................................................62

New Services ...................................................................................................................................62Eurostar...........................................................................................................................................62

Renaissance Trains..........................................................................................................................63

Transport for London.....................................................................................................................63

Modernisation and Investment Projects .......................................................................................63

Crossrail...........................................................................................................................................63

Cross River Tram .............................................................................................................................63

Croydon Tramlink ...........................................................................................................................63

Docklands Light Railway Extensions..............................................................................................63

Edinburgh Light Rail.......................................................................................................................64

Rolling Stock ...................................................................................................................................64Thameslink Programme .................................................................................................................64

West Coast Main Line.....................................................................................................................64

Other Continuing Issues.................................................................................................................65

Travel Agents & Overseas Tour Operators 66

REPORT COVERAGE .....................................................................................................................66

MARKET SECTORS........................................................................................................................66

Outbound Tourism .........................................................................................................................66

Domestic Tourism ...........................................................................................................................67





FORECASTS 2008 TO 2012 ..........................................................................................................67

The Total Market............................................................................................................................67

Table 19: The Forecast UK Resident Tourism Market by Sector by Value(£m and %), 2008-2012 .................................................................................................................68

Outbound Tourism .........................................................................................................................68

Table 20: The Forecast UK Outbound Travel and Tourism Market by Valueand Volume (£m, 000 and million), 2008-2012 ............................................................................69

Domestic Tourism ...........................................................................................................................69

Table 21: The Forecast UK Domestic Travel and Tourism Marketby Value and Volume (£m, 000 and million), 2008-2012 ............................................................70

FUTURE TRENDS ...........................................................................................................................70

Airlines Are Under Pressure ...........................................................................................................70

TUI Aims to Reduce Capacity in the UK ........................................................................................71

E-Commerce Bookings Continue to Rise .......................................................................................71

Tyre Industry 72

REPORT COVERAGE .....................................................................................................................72

MARKET SECTORS........................................................................................................................72

FORECASTS 2008 TO 2012 ..........................................................................................................72

Table 22: The Forecast Apparent UK Market for Rubber Tyres and Tubesby Value (£000 at msp), 2008-2012 ...............................................................................................73

FUTURE TRENDS ...........................................................................................................................73

UK Vehicle Production is Ahead in the First 9 Months of 2007...................................................73

Leading Tyre Manufacturers Increase Their Presence in Asia......................................................74

World Tyre Production Set to Increase..........................................................................................74

UK Tyre Retailers Revamp Their Operations.................................................................................74

HiQ...................................................................................................................................................74

Kwik-Fit ...........................................................................................................................................75

National Tyres and Autocare .........................................................................................................75

Vehicle Breakdown Services 76

DEFINITION....................................................................................................................................76

MARKET SECTORS........................................................................................................................76FORECASTS....................................................................................................................................77

Table 23: The Forecast UK Market for Vehicle Recovery Servicesby Value (£m), 2008-2012 ..............................................................................................................77

Key Note Research 78

The Key Note Range of Reports 79



© Key Note Ltd 2009 1

Market Forecasts: Transport, Travel & Tourism Introduction

Introduction

OVERVIEW

This Key Note Market Focus report is a compilation of Key Note MarketReports, Market Report Pluses and Market Assessment reports published in2008. The market forecast data and commentary in the text were correct atthe time the individual reports were initially published, and have not beenrevised for this edition.

This report covers Key Note titles relating to transport, travel and tourism:

Publication

Report Type MonthReport Title

Airlines Market Report July

Airports Market Report June

Automative Services Market Report May

Bus & Coach Operators Market Report December

Business Travel Market Market Assessment October

Courier & Express Services Market Report September

Cruise Market Market Assessment April

European Short Breaks Market Assessment AugustFreight Forwarding Market Report February

Hotels Market Report Plus November

Rail Travel Market Report May

Travel Agents & Overseas TourOperators Market Report November

Tyre Industry Market Report January

Vehicle Breakdown Services Market Assessment May




Market Forecasts: Transport, Travel & Tourism Airlines

Airlines

REPORT COVERAGE

This analysis covers the market for UK airlines. The main function of UKairlines is the provision of air transport for passengers from and within theUK. Freight is also carried on these passenger services, although the financialimpact of this is small when compared with revenues attributed to passengertravel.

MARKET SECTORS

The airlines market can be broadly divided in two different ways:

• scheduled and non-scheduled services

• domestic and international services.

In terms of market size it can be split into four main categories:

• by type of service (scheduled and non-scheduled)

• by nationality of airline (passenger and cargo transport)

• by origin of traveller

• by destination of traveller.

FORECASTS 2008 TO 2012

Although long-term growth in demand for air transport is projected, growthrates in the short to medium term could be affected by the general slowdownin the economy and by the rising cost of air travel. Key Note projects,therefore, that the rate of growth in passenger numbers will slip to around1.9% to 2% in 2008 and 2009, but then demonstrate higher levels of annualgrowth rates up to 2012. By 2012, Key Note forecasts that passenger numbers

will reach 147.5 million, a 10.3% increase on 2008. The number of passengerstravelling on scheduled flights is forecast to rise by 15% between 2008 and2012, to 120.5 million, while the number of passengers travelling onnon-scheduled service is forecast to fall by around 6.6% to 27 million.





FUTURE TRENDS

Long-Term Forecasts for Air Passenger Growth

The Department for Transport (DfT), in its December 2006 publication The

Future of Air Transport Progress Report , suggests that demand for air travel inthe UK could increase to 465 million passengers by 2030, if growth issupported by the developments detailed in the 2003 White Paper The Futureof Air Transport . The factors influencing these forecasts include GDP growth,the cost of oil, air fares, exchange rates, consumer attitudes towards air traveland the cost involved with carbon and climate-change measures andlegislation.

Oil Price Surge Threatens Airlines

A large proportion of the world’s airlines are expected to make significant

financial losses if oil prices stay at their current level. BA has already said thatit will struggle to break even, with oil above $120 a barrel and easyJet haswarned that, on top of this, every rise of around $1 in the cost of oil adds£2.5m to its costs. Ryanair also expects the current price of oil to add €400mto its operating costs in 2008. If the price of oil does remain high, then moreairlines will be forced to cut capacity, merge or possibly go out of business.The hope, however, is that the current high price of oil is not sustainable andthat prices will drop back to below $100 a barrel by the end of the year.

Table 1: Forecast Number of Passengers Uplifted by UKAirlines on Scheduled and Non-Scheduled Services

(million), 2008-2012

2008 2009 2010 2011 2012

Passengers Uplifted (million)

Scheduled services 104.8 108 111.8 116.0 120.5

Non-scheduled

services 28.9 28.4 27.9 27.4 27.0

Total 133.7 136.4 139.7 143.4 147.5

% change

year-on-year 1.9 2.0 2.4 2.6 2.9

Source: Key Note





Open Skies Agreement — Phase 2

New talks between the EU and the US could create a full-blown open aviationarea between the EU and US and also pave the way for a wave oftransatlantic airline takeovers. The new talks, which cover the second phaseof the Open Skies Agreement, will discuss matters such as the draconian

ownership rules, which prevent EU carriers acquiring US rivals — and viceversa. The first phase of the Open Skies Agreement also failed to break downbarriers that prevent EU carriers flying within the US domestic market. BothBA and Virgin Atlantic have repeatedly called for such protectionist rules tobe swept away.




Market Forecasts: Transport, Travel & Tourism Airports

Airports

REPORT COVERAGE

This analysis provides an overview of the UK airport industry. Commercialairports in the UK are licensed to operate landing and take-off facilities forscheduled and charter airlines providing passenger and freight services. Otherservices offered by airports include retailing, catering and baggage handling.Airport services are also provided by third-party organisations that rent orlease property from the airport operator.

Military airports and civil airports serving only light aircraft are excluded fromthis analysis.

MARKET SECTORS

The two main sources of income for commercial airports are commercialrevenues and aviation revenues. Commercial revenues cover retail servicesand related operations, whereas aviation revenues cover airport traffic andrelated charges. The balance between aviation and commercial revenues canvary considerably between airports.


By Volume

Key Note estimates that the number of passengers at UK airports will rise by2% in 2008, to 245.5 million (see Table 2). Thereafter, year-on-year growth ofbetween 2% and 2.5% is projected for the remainder of the forecast period(2008 to 2012), bringing the number of passengers to 268.5 million in 2012and resulting in overall growth of 9.4%.

The number of aircraft movements at UK airports is forecast to increase in2008 by a modest 0.2% in 2008, to 3.7 million, with similar levels of

year-on-year growth anticipated for the remainder of the forecast period.This will result in overall growth of 1%, raising the number of aircraftmovements to 3.7 million in 2012.

The freight market showed a slight increase in 2007 and, although somefurther recovery might be witnessed between 2008 and 2012, the rate ofgrowth is expected to be fairly subdued. By 2012, the volume of freightmoved is forecast to reach 2.4 million tonnes, which would be just 0.9%higher than the 2008 level.





By Value

As Table 3 shows, the total revenue generated by UK airports is forecast torise by 3.5% to £3.12bn in 2008, aided by the increases in aviation chargesabove the rate of inflation that the CAA has determined London Heathrowand London Gatwick can levy. These increases are also expected to supportairports’ revenues for the remainder of the review period and, by 2012, totalrevenue is projected to reach £3.62bn, which would be 16.2% higher than2008 forecasts.

Table 2: Forecast UK Terminal Passengers, Aircraft Movementsand Freight Moved at UK Airports

(million, 000 and 000 tonnes), 2008-2012

2008 2009 2010 2011 2012

Terminal passengers

(million) 245.5 250.5 256.0 262.0 268.5

% change year-on-year 2.0 2.0 2.2 2.3 2.5

Aircraft

movements (000) 3,659 3,666 3,673 3,684 3,695


Freight moved

(000 tonnes) 2,330 2,335 2,340 2,345 2,350


Source: Key Note

Table 3: Forecast UK Airport Revenue (£m), 2008-2012

2008 2009 2010 2011 2012

Revenue (£m) 3,115 3,224 3,346 3,480 3,620

% change

year-on-year 3.5 3.5 3.8 4.0 4.0

Source: Key Note





FUTURE TRENDS

Long-Term Forecasts for Air Passenger Growth

The Department for Transport (DfT), in its December 2006 publication The Future of Air Transport Progress Report , suggests that demand for airtravel in the UK could increase from 228 million passengers in 2005 to 465million passengers by 2030, if growth is supported by the developmentsdetailed in the 2003 White Paper The Future of Air Transport . The factorsinfluencing these forecasts include GDP growth, the cost of oil, airfares,exchange rates, consumer attitudes towards air travel, the cost of carbon andclimate-change thinking.

BAA Expansion Plans

The current capital-investment plans for London Heathrow and LondonGatwick in the period 2008/2009 to 2017/2018 are forecast to be in excess of£15bn (at 2007/2008 prices), depending on the outcome of certain planningapplications, such as runway 3 at Heathrow. Plans are also well developed forthe transformation of Heathrow, following the opening of Terminal 5, andwill include the configuration of Terminal 1 to accommodate the STARAlliance (an association of airlines) and the refurbishment of Terminals 3and 4. The proposals also include the construction of the T5C satellitebuilding and the development of a new terminal to replace Terminal 2 —Heathrow East. In March 2008, BAA submitted a planning application to thelocal council, which includes the provision of a second runway and terminal,and an initial capacity for around 10 million passengers per year.

The proposal will be subject to a separate planning inquiry, which is expectedto commence in either late 2008 or early 2009.

At Gatwick, plans largely focus on the expansion of the North Terminal,although, in 2008, the South Terminal departure-lounge extension will becompleted and work will begin on the inter-terminal track transit system.

Existing planning approvals provide for approximate passenger-trafficgrowth at Heathrow (including Terminal 5) to 90 million a year, at Gatwick toaround 40 million and at Stansted to around 25 million.

Edinburgh Airport aims to be handling 26 million passengers a year by 2030

(up from 9 million in 2007). The expansion will involve a £300m investment by2016, a major expansion of Edinburgh’s international route network, anexpansion of the cargo base and targets to improve public transport to andfrom the airport.

Glasgow Airport is also in line for a major facelift, which includes expandedterminal facilities, new maintenance hangars, plane stands and taxiingfacilities, along with the £210m Glasgow Airport Rail Link.





The revised Master Plan for Aberdeen Airport predicts that, by 2015, theterminal could be handling 4 million passengers, with as many as 5.9 millionby 2030. Aberdeen will also benefit from a £10m, 2-year internationaldevelopment plan (announced in December 2006), which will include runwayextension and an expanded international arrivals hall. Total investment overthe following decade (up to 2016) will amount to around £60m.




Market Forecasts: Transport, Travel & Tourism Automative Services

Automative Services

REPORT COVERAGE

This analysis of the automotive services market deals primarily with theaftermarket for cars. It covers the following sectors:

• car servicing and mechanical repairs

• car body repairs

• car breakdown and recovery services.

The financing, insurance and leasing of motor vehicles and the manufactureare not included in this analysis of automotive services.

MARKET SECTORS

Car Servicing and Mechanical Repairs

Car servicing and mechanical repairs are provided by a wide range oforganisations, including franchised car dealers, independent garages, garagechains and autocentres, fast-fit centres and mobile service units. This sector ishighly competitive, owing to the large number of service providers in mostregions of the UK.

Franchised Car Dealers

New cars are generally sold with a free 3-year/60,000-mile warranty. Regularmaintenance is usually a condition of this warranty, and franchised cardealers undertake much of the work. Manufacturers provide technicalsupport and, sometimes, training for the dealers’ mechanics, so the quality ofservice and the equipment available in these outlets are usually of a highstandard. Despite these advantages, franchised dealers have lost a lot ofroutine (but highly profitable) business to the fast-fit chains and independentgarages. Cost is a key factor, since the prices charged by franchised dealers are

often higher than those charged by non-franchised garages. The long serviceintervals for modern cars have also affected the workload of franchisedgarages that rely on warranties for the bulk of their revenues.

In addition to providing routine maintenance and repairs, most of the largestfranchised dealers have facilities for minor and major car body repairs at fullyequipped central workshops. To widen their appeal to prospective customers,some franchised dealers are willing to service other makes of vehicle.





Independent Garages

Independent garages range from one-man operations to organisations withseveral outlets. As a result, their expertise and level of investment inequipment vary considerably. Although most garages are prepared to servicemost makes of car, some are restricted by the increasing technical complexity

of modern vehicles, which can require heavy investment in specialisedequipment and access to technical information. Difficulties in obtainingtechnically advanced parts can also create problems for independent garagesand limit their ability to undertake more than just routine repairs.

Many of the smaller garages are excluded from the lucrative MOT market,because they need official authorisation to issue certificates. To obtain thisauthorisation requires the installation of expensive equipment and theemployment of personnel who are qualified to perform the various tests.Unless a large volume of business is guaranteed, the costs are likely to be toohigh for a small operator to bear.

The larger independent garages have better prospects, as they have thenecessary equipment, a variety of staff with a wide range of skills, and MOTfacilities that can cope with the latest upgrades in standards. Customers arealso more likely to take out-of-warranty cars to these operators.

Garage Chains and Autocentres

Garage chains and autocentres are operated by a range of organisations,including car manufacturers, tyre manufacturers, franchised dealers andindependents. These outlets usually provide a drive-in service similar to thatoffered by the fast-fit chains (see the following subsection), but they also

undertake MOT tests and will service most makes of car.

Garage chains and autocentres are popular with customers because they offerquick service, a wide choice of replacement items and fixed-cost ‘menus’ forgeneral repairs and routine servicing. They usually operate in a repair market,where cost is very important — especially in the case of the second or thirdbuyer of a relatively low-age car. As a result, servicing and repairs are notparticularly profitable activities for many of these outlets.

Fast-Fit Centres

Fast-fit centres provide unscheduled drive-in services for the replacement ofitems such as tyres, exhausts and brake pads. Some also offer other services,such as clutch replacement and steering alignment. Fast-fit chains havebecome a more prominent part of the market in recent years. They have alower cost base than other operators, since the workforce needed to performthese relatively simple tasks needs less training and experience. The parts theyfit are less likely to be required for cars that are under 3 years old, so theseoperators work mainly on older vehicles.





Mobile Service Units

Motoring organisations such as the AA and the RAC are the main providers ofmobile repair services. They have millions of subscribers and operate fleets offully equipped repair vehicles. Other organisations, such as Green Flag,manage national networks of independent recovery agents, rather than

operating their own patrols. Outside of these networks, independentoperators of mobile service units are comparatively rare, owing to thedifficulty in obtaining business. When they are used, it is most likely to be foremergency work, when vehicles are unexpectedly immobilised at home or bythe roadside.

Car Body Repairs

Car body repair is an important sector of the industry, owing to the increasingnumber of cars on UK roads. Insurance companies have an important role inthis market, because they effectively control the prices paid for repair work

when insurance claims are involved.

Much of the repair work undertaken requires expensive specialist equipmentand expertise, and a relatively small number of organisations (includingfranchised and independent garages) are involved in the market. Since themid-1990s, the number of body repair shops operating in the UK has fallen,as tight budgets have been imposed by insurance companies, making thework uneconomical for some firms. The rapidly declining value of used carsalso creates problems for bodyshops, as the insurance companies are ofteninclined to scrap damaged cars, rather than spend money repairing them.

Car Breakdown and Recovery Services

A large majority of the motoring public, and most owners and operators ofcommercial vehicles, are members of breakdown and recovery organisations.The number of organisations offering these services has grown over the past25 years, but the industry pioneers — the AA and the RAC — remain theleading operators and the best-known names in the sector.

The services offered by these companies range from basic roadside assistanceand ‘home start’ to the transportation of a broken-down vehicle and itspassengers to their destination. The price of the basic service tends to be lowand, accordingly, many breakdown and recovery organisations offer theirmembers a range of additional services. Some of these are only partly relatedto the main business, but they often generate more revenue and profit.


The Society of Motor Manufacturers and Traders (SMMT) predicts that thenumber of new car registrations in the UK will fall by around 2.7% in 2008,to 2.3 million units. Slowing economic growth, relatively high interest ratesand weakening consumer confidence will all contribute to the fall. On the

plus side, however, the vehicle manufacturers are expected to offer attractivefinance deals to generate sales and launch a range of new models.





Fuel-efficient vehicles, including lower-medium-sized vehicles anddiesel-powered vehicles, remain popular and these are expected to show salesgrowth and increase their share of new vehicle sales.

Other factors expected to support demand for automotive services includethe continued high volume of used-cars sales, the steady rise in the number of

cars on the road and the revenues generated by MOT testing and repairs.

Key Note forecasts that the market for automotive services will increase invalue by 3% in 2008, to £16.28bn (see Table 4). Thereafter, the market isforecast to grow by 3.5% to 3.8% per year, resulting in a market value of£18.77bn in 2012 and overall growth of 15.3%.

Car Servicing and Mechanical Repairs

The car servicing and mechanical repairs sector is forecast to grow by 3% in2008, to £10.07bn, and continue to increase in value year-on-year for theremainder of the forecast period. This would increase the value of the sector

over this period by 15.9%, to £11.67bn. The sector will continue to benefitfrom the expected increase in the number of cars on the road, plus the needfor car owners to have their vehicles regularly maintained.

Car Body Repairs

The car body repairs sector is forecast to increase in value by 2.5% in 2008, to£4.94bn, before rising by 12.6% across the forecast period, to reach £5.56bnin 2012). Helping to generate turnover in this sector is the relationshipbetween the volume of accidental damage that necessitates repair work andincreases in the number of cars on the road. Dampening the potential for

higher levels of market growth are the rapidly falling values of new and used

Table 4: The Forecast UK Market for Automotive Servicesby Sector by Value (£m), 2008-2012

2008 2009 2010 2011 2012

Car servicing and

mechanical repairs 10,070 10,420 10,790 11,220 11,670

Car body repairs 4,940 5,090 5,240 5,400 5,560

Car breakdown and

recovery services 1,267 1,330 1,397 1,467 1,540

Total 16,277 16,840 17,427 18,087 18,770


Source: Key Note





cars and the tendency of insurance companies to write off damaged vehicles,especially older vehicles, rather than repair them.

Car Breakdown and Recovery Services

The value of the car breakdown and recovery services sector is forecast toreach £1.27bn in 2008, following a 5% increase on 2007, before risingsteadily, by a total of 21.5%, between 2009 and 2012, to £1.54bn. Increases inthe number of motorists and vehicles on UK roads should help to maintaingrowth in this sector and the relatively low cost of the basic breakdown andrecovery service also enhances its appeal among many motorists.

FUTURE TRENDS

Falling Car Sales PredictedThe Sainsbury’s Finance Car Buying Index confirms that car sales could fallbetween March and August 2008, as the number of people planning to buyfalls. The Index , which is based on research conducted by TNS among 2,022people between 1st February and 10th February 2008, suggests that6.9 million people plan to buy a car between March 2008 and August 2008,which is around 1 million fewer than in the preceding 6-month period fromSeptember 2007 to February 2008.

The Sainsbury’s Finance Car Buying Index also suggests that the total amountexpected to be spent on cars and car purchases between March and August

2008 will be at its lowest level since March 2005, with the reduction being dueto a mixture of factors, such as concerns about economic pressures andenvironmental anxieties. The research further indicates that the overall costof motoring, including servicing, insurance and fuel, increased by 10% in theyear ending February 2008.

Consolidation Expected in Bodyshop Sector

Consolidation is expected to be a feature of the UK bodyshop sector in 2008,partly as a result of insurance companies favouring the larger bodyshopgroups. For example, the decision by Zurich Insurance to appoint four

bodyshop groups to handle all of its repair work — and to reward thesecompanies with 5-year contracts — is seen as paving the way forconsolidation and amalgamation in the body repair market.





2-Year MOT Testing

The MOT servicing industry remains concerned that the Government willintroduce extended testing intervals. Currently, an MOT test is required oncea vehicle is 3 years old and annually thereafter. However, the Government isconsidering extending the period before which the first test is required to

4 years, with subsequent tests being required every 2 years. Should theextended testing interval be introduced, testing stations could be badlyaffected by the loss of business and many might be forced to close.

BSI’s Kitemark for Garage Services

The British Standards Institution (BSI) still hopes to raise the number ofgarages that join its Kitemark for Garage Services scheme, which is intendedto raise standards in vehicle service and repair. Although around 150 licenseeshave signed up for the scheme, this still only represents around 1% of the18,000 garages in the UK, and further large-scale representation is needed.

The Kitemark scheme aims to act as a counter against the increasing numberof ‘horror stories’ in which consumers are ‘ripped-off’ by rogue garages, apractice that damages the overall trade’s image.




Market Forecasts: Transport, Travel & Tourism Bus & Coach Operators

Bus & Coach Operators

REPORT COVERAGE

This analysis assesses the market for bus and coach operators in Great Britain.According to the Department for Transport (DfT), local buses are the mostsignificant form of public transport in terms of passenger journeys,accounting for around two-thirds (66.9%) of the 7.72 billion journeys taken inthe year ending March 2008. Measured in terms of passenger kilometres,trains held a slightly larger share of the public transport market than buses in2006, with a 6.8% share of the 812 billion passenger kilometres made in thatyear, compared with a 6.2% share for buses and coaches (according toNational Statistics’ Annual Digest of Statistics).

MARKET SECTORS

There are three main types of bus and coach services:

• local timetabled services

• long-distance scheduled services (non-local services)

• excursion/holiday services.

Excursion and holiday services are considered to be part of the holiday market

and are therefore not covered in this analysis.


Key Note forecasts that the value of the total bus and coach services marketwill increase to around £6.63bn in 2008/2009 (year ending March), and will beworth approximately £7.92bn by 2012/2013. The factors that are expectedto aid this increase over the forecast period include: additional travel underconcessionary fare schemes; partnerships with local authorities; and somemoves by consumers to public transport as a result of rising motoring costs

and concerns about the environment.





On the downside, the behavioural changes due to concessionary fare changesin 2006/2007 and 2008/2009 are expected to have largely occurred in the first2 to 3 years, and, although the resulting higher level of bus use by elderlypass holders may continue, this is likely to be diluted over time by increasinglevels of car ownership among older people. In the longer term, patronageoutside London is expected to resume its long-term decline due to increases

in car ownership and in bus-operating costs.

Key Note forecasts that the number of passenger journeys carried out on localbus services between 2008/2009 and 2012/2013 will increase, although mostof this rise is anticipated to take place in the London area. Journey numbersin other parts of Great Britain are expected to show lower rates of growth,or to fall back a little.

Table 5: The Forecast Total Bus and Coach Services Marketin Great Britain by Value at Current Prices (£m),

Years Ending March 2009-2013

2008/ 2009/ 2010/ 2011/ 2012/

2009 2010 2011 2012 2013

Local services† 4,770 5,060 5,350 5,620 5,900

Non-local services 1,860 1,900 1,940 1,980 2,020

Total 6,630 6,960 7,290 7,600 7,920

† — includes passenger receipts and concessionary fare reimbursements; excludes

public transport support

Source: Key Note

Table 6: Local Bus Services in Great Britain — Forecast Numberof Passenger Journeys by Area (million and %),


2008/ 2009/ 2010/ 2011/ 2012/

2009 2010 2011 2012 2013

Passenger Journeys (million)

England

London 2,180 2,245 2,300 2,345 2,380

English PTE areas 1,125 1,130 1,135 1,130 1,120

English non-PTE areas 1,305 1,310 1,315 1,310 1,305

Table continues...





FUTURE TRENDS

Targets for Public Transport

The Department for Transport’s (DfT’s) Spending Review has national targetsfor increasing public transport bus use over the decade to 2010/2011, with2000/2001 as the starting point. This includes improving performance in areassuch as reliability, fleet age, accessibility and passenger information.

• Reliability — Confederation of Passenger Transport UK (CPT) memberoperators are working towards a target that requires them to run 99.5%of their scheduled mileage services, except where this is affected by factorsbeyond their control.

• Fleet age — the CPT has committed its members in Great Britain to a targetthat aims to achieve and maintain an average fleet age of 8 years or less fortheir vehicles, which are mainly used for local bus services.

• Accessibility — the aim is to ensure that the proportion of the full-size busfleet that is fully accessible by wheelchair users reaches 50% of all vehiclesby 2010. (This target has already been met, with 62% of full-size busescurrently having low-floor wheelchair accessibility [in the year endingMarch 2008].)

• Passenger information — the target for operators in England is to achieve

year-on-year improvement on information at bus stops, based on DfTpassenger satisfaction ratings.

...table continued

2008/ 2009/ 2010/ 2011/ 2012/

2009 2010 2011 2012 2013

Passenger Journeys

(million [cont.])

Total England 4,610 4,685 4,750 4,785 4,805

Scotland 520 525 530 535 540

Wales 122 124 124 125 126

Total Great Britain 5,252 5,334 5,404 5,445 5,471

PTE — Passenger Transport Executive

Source: Key Note

Table 6: Local Bus Services in Great Britain — Forecast Numberof Passenger Journeys by Area (million and %),





Market Forecasts: Transport, Travel & Tourism Business Travel Market

Business Travel Market

DEFINITION

Tourism

In this analysis, travel and tourism is defined in accordance with the criteriarecommended by the World Tourism Organization (UNWTO) and adopted bythe United Nations Statistical Commission in March 1993.

Tourism is defined by the UNWTO as comprising ‘the activities of personstravelling to and staying in places outside their usual environment for notmore than one consecutive year for leisure, business and other purposes’.

In accordance with this definition, business travel or tourism is defined as acomponent of tourism demand that includes travel away from home, eitherin the country of residence or abroad, but excludes the journey to work.

Forms of Tourism

The following forms of tourism can be identified in relation to a givencountry:

• domestic tourism — travel by the country’s residents within that country

• outbound tourism — travel by the country’s residents to other countries

• inbound tourism — travel to the country by residents of other countries.

Purposes of Tourism

Several purposes of visit are distinguished. These are:

• leisure, recreation and holidays

• visiting friends and relatives

• business and professional

• health treatment

• religion/pilgrimages

• other.

Categories of Visitor

Visitors are defined as all travellers engaged in tourism, including businesstravellers. It should be noted, however, that some travellers (e.g. migrantworkers, lorry drivers, airline pilots, ships’ crews and those travelling to theirplace of work) are not engaged in tourism and so are not classed as visitors.





There are two main categories of visitor:

• an international visitor — ‘any person who travels to a country other thanthat in which s/he has his/her usual residence but outside his/her usualenvironment for a period not exceeding 12 months and whose mainpurpose of visit is other than the exercise of an activity remunerated from

within the country visited’

• a domestic visitor — ‘any person residing in a country, who travels to a placewithin the country, outside his/her usual environment for a period notexceeding 12 months and whose main purpose of visit is other than theexercise of an activity remunerated from within the place visited’.

Both international visitors and domestic visitors are further classified as:

• overnight visitor (tourist) — a visitor who stays at least 1 night in collectiveor private accommodation in the place visited

•same-day visitor — a visitor who does not spend the night in collective orprivate accommodation in the place visited.

Published Tourism Statistics

Published statistics on domestic and international tourism do not normallyconsider the demographic characteristics of visitors but instead show thenumber of visits or trips made. Thus, an individual overseas or UK residententering or leaving the UK more than once during a given period is recordedon the occasion of each visit. Similarly, the number of domestic trips recordedover a given period may include multiple trips by particular individuals.

In the case of international travel, the basic unit of measurement is the ‘visit’(where this is for 1 night or more) or the ‘day trip’ (where no overnight stay isinvolved). For domestic travel, the unit of measurement is the ‘trip’.

Categories of Tourism Expenditure

The following categories of tourism expenditure are typically identified:

• package travel (package holidays/package tours)

• accommodation

• food and drink

• transport

• recreation, culture and sporting activities

• shopping

• other.





The Supplying Sectors

Transport Services

Business travel, by definition, requires the supply of transport services.These are provided by transport principals, mainly commercial airlines,airports, railway companies and ferry operators. However, where relativelyshort journeys are concerned, the private car is the dominant mode.

Accommodation

Where the visit requires an overnight stay, business travel also involves thesupply of accommodation, by hoteliers and others, both at home and abroad.Even where an overnight stay is not involved, the hospitality industry isfrequently involved in the provision of other services, such as restaurantservices and banqueting and conference facilities.

The UNWTO classifies tourism accommodation under the following headings:

Collective Tourism Establishments

• hotels and similar establishments

• specialised establishments (health establishments/work and holiday camps/ public means of transport/conference centres)

• other collective establishments (holiday dwellings/tourist campsites/other).

Private Tourism Accommodation

• owned dwellings

• rented rooms in family homes

• dwellings rented from private individuals or professional agencies

• accommodation provided without charge by relatives and friends

• other.

Private tourism accommodation mainly serves leisure travel markets, but it isalso used by some business travellers — particularly those employed by small

and medium-sized enterprises (SMEs) or operating as sole traders.

Travel-Management Companies

Although business travel may be organised by the person travelling, it ismore typically arranged by someone who has been given that specificresponsibility. If the employing company does not handle this functionin-house, the service may be provided by a travel-management company.

Other Services

Other suppliers to the tourism market include providers of global distributionsystems, car-rental companies, banks and credit-card firms.





FORECASTS

Domestic Business Travel

The slowdown in economic activity that has been experienced in 2008 islikely to be accompanied by a decline in domestic business travel. Despite anexpected modest recovery in this market from 2011 onwards, the number ofdomestic business trips taken is forecast to remain static over the period from2008 to 2012 as a whole. As average spending per trip increases, fuelled byinflation, growth in expenditure is expected to be marginally positive overthe period as a whole, at an average of 1.3% per year.

Table 7: The Forecast UK Market forDomestic Business Travel by Volume and Value

(000 trips and £m), 2008-2012

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

Av er a g eAnn u al %

C h an g e2 0 0 8 -2 0 1 2

Trips (000) 18,500 18,300 18,000 18,200 18,500 0.0

% change

year-on-year -3.1 -1.1 -1.6 1.1 1.6

Expenditure (£m) 4,550 4,590 4,600 4,670 4,800 1.3

% change

year-on-year 0.4 0.9 0.2 1.5 2.8

Note: excludes journeys not involving an overnight stay away from home.

Source: Key Note





Outbound Business Travel

Growth in outbound business travel by UK residents is expected to slowthroughout the remainder of 2008 and into 2009, with higher growthresuming as the UK economy recovers. Over the period from 2008 to 2012 asa whole, Key Note forecasts that the number of trips taken will increase by

an average of 5.1% per year, with expenditure growing by 7.9% per year.

Table 8: The Forecast UK Market forOutbound Business Travel by Volume and Value

(000 visits and £m), 2008-2012

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2


C h an g e

2 0 0 8 -2 0 1 2

Visits (000) 9,500 9,570 10,100 10,800 11,600 5.1

% change

year-on-year 1.1 0.7 5.5 6.9 7.4

Expenditure (£m)† 5,600 5,850 6,300 6,900 7,600 7.9

% change

year-on-year 4.8 4.5 7.7 9.5 10.1

† — excludes payments for air and sea travel to and from the UK

Source: Key Note





Inbound Business Travel

The rate of growth in the market for business travel to the UK by overseasresidents is expected to slow in 2008 and 2009 as the world economy falters,with recovery taking place towards the end of the forecast period. Over theperiod as a whole, growth in the number of trips taken is expected to average

6.4% per year, with growth in expenditure averaging 8.8% per year.

Table 9: The Forecast UK Market forInbound Business Travel by Volume and Value

(000 visits and £m), 2008-2012

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2


C h an g e

2 0 0 8 -2 0 1 2

Visits (000) 9,200 9,270 9,900 10,800 11,800 6.4

% change

year-on-year 0.3 0.8 6.8 9.1 9.3

Expenditure (£m)† 5,000 5,200 5,650 6,300 7,000 8.8

% change

year-on-year 3.8 4.0 8.7 11.5 11.1

† — excludes payments for air and sea travel to and from the UK

Source: Key Note




Market Forecasts: Transport, Travel & Tourism Courier & Express Services

Courier & Express Services

REPORT COVERAGE

This analysis covers the UK market for courier and express services, whichsupplies the need for rapid collection and delivery of documents andpackages. Items covered by this definition include mail, parcels and otheritems with a high value-to-weight ratio and a time-sensitive deliveryrequirement. Modes of transport used by companies supplying this marketrange from scheduled airline services to dedicated specialist operations byroad and air.

However, it should be noted that the boundaries between courier and expressservices and other parts of the UK freight logistics industry are not clearlydefined. For example, the upper weight limit for items deemed to be

‘express’ is not precisely defined. In addition, many express carriers haveexpanded into other freight markets, while firms that once would havedescribed themselves as road hauliers or freight forwarders have beenredefined as express carriers.

MARKET SECTORS

National Post

This sector includes:

• collection, transport and delivery (domestic or international) of mail andparcels

• collection of mail and parcels from public letter boxes or from Post Offices

• distribution and delivery of mail and parcels

• mailbox renting, etc.

This class excludes:

• postal giro and postal savings activities, and other financial activities carriedout by national postal administrations.

Other Courier and Express Services

This sector includes:

• collection, transport and delivery of letters and mail-type parcels andpackages by firms other than national post. Either only one kind oftransport or more than one mode of transport may be involved and theactivity may be carried out with either self-owned (private) transport media

or via public transport





• home-delivery services

• city messenger and goods taxi services.

FORECASTS 2008 TO 2012Key Note forecasts that the value of the national post market will graduallydecline between 2008 and 2012, owing to factors such as increased use in thealternative methods of communication and a growing environmentalawareness, which is expected to lead to a gradual reduction in the amount ofpaper used for mail communications.

The value of the market for other courier and express services is forecast toshow growth between 2008 and 2012, although the difficult economicclimate in the UK, including the slowdown in retail sales, could affect the rateof expansion in 2008.

Therefore, the total UK market for national post and courier/express servicesis forecast to increase in value by 2.5% between 2008 and 2012, to around£15.24bn (see Table10).

Table 10: The Forecast UK Postal and Courier/Express ServicesMarket by Sector by Value at Current Prices (£m), 2008-2012

2008 2009 2010 2011 2012

National post 8,720 8,590 8,415 8,290 8,120

% change

year-on-year -2.0 -1.5 -2.0 -1.5 -2.1

Other courier and

express services 6,150 6,330 6,550 6,810 7,120

% change

year-on-year 2.5 2.9 3.5 4.0 4.6

Total 14,870 14,920 14,965 15,100 15,240% change

year-on-year -0.2 0.3 0.3 0.9 0.9

Source: Key Note





FUTURE TRENDS

Environment

There is a growing consensus among the general public, politicians andothers that climate change is threatening the environment. Since transportand distribution contribute to emissions that are considered by some to bepart of the problem, the transport and distribution industries will be affectedsignificantly by any measures or regulations introduced to reduce suchemissions. Some industry organisations have already responded to thischallenge; for example, TNT has launched a global environmental initiativecalled Planet Me.

Demographic Trends

Demographic trends are changing the composition of the population acrossthe globe, with an increasing percentage of the population being over theage of 65. As a result of this ageing population, spending in areas such ashealthcare is expected to increase significantly and could, in turn, lead to anincreased need for special handling services in the healthcare market. Thesetrends have several implications for the transport and distribution industries,such as accelerated growth of healthcare-product deliveries and thedistribution networks required to facilitate this.

Acquisition and Merger Activity

Europe is a key market for courier and express service providers and theacquisition of Europe-based companies, particularly by the large US operatorsthat are looking to increase their presence in the European market, is anongoing possibility. On the domestic level, the acquisition or consolidation ofsmall local or niche couriers is a constant feature of the market and isexpected to remain so in 2008 and 2009.




Market Forecasts: Transport, Travel & Tourism Cruise Market

Cruise Market

DEFINITION

This analysis is concerned primarily with cruises on liners built or adapted tooffer holidays to fare-paying passengers, including fly-cruise holidays, whichenable passengers to embark thousands of miles from their home. Althoughthe UK is the primary focus for this review, cruising is a global industrydominated by two international corporations, and so this analysis considersthe UK in the context of the world market.

The market segments within cruising include:

• Value — for budget-conscious passengers content with easily accessibledestinations. EasyCruise is a good example.

• Speciality — such as expedition and adventure cruises. Swan Hellenic is anexample.

• Luxury — comfortable mass-market cruises to a wide range of destinations,e.g. the Carnival and Celebrity lines.

• Premium — cruises offering higher levels of comfort and service than‘luxury’, such as the Azamara and Crystal lines. Sometimes, however, ‘luxury’and ‘premium’ appear to be used interchangeably, and the description‘ultra luxury’ adds to the confusion. The term ‘ultra premium’ is becomingaccepted as a notch above premium; for example, cruises with Oceania,

Windstar and Silversea.

• Themed resort — the Disney Cruise Line is a prime example. The wholecruise is themed to accord with specific brand features and values.

FORECASTS

Building Ships

Cruise liners are of crucial importance to the future of a handful of

shipyards in Europe and to the economies of the regions in which the yardsare located. In 2007, the long-term future of European yards building cruiseliners began to look less secure. During the previous 5 years, European yardsheld almost 85% of the value of cruise-ship building and refitting, but thatwas a decline from the 1980s and 1990s, when around 97% of new cruiseships came from Europe. Japan tried to enter this market, and Mitsubishi builttwo liners, but at a big loss, and so did not pursue the activity.





Korean yards are looking to diversify from container ships and tankers intocruise liners, and as part of this new mood, STX Shipbuilding of Koreapurchased 39.2% of the Norwegian shipbuilder Aker in 2007. The revenuesfrom building a cruise liner are, per ton, five times greater than those frombuilding a tanker. By taking the part-ownership route, STX may be able toacquire, relatively cheaply, expertise in liner design and construction.

Mitsubishi of Japan plunged $100m into debt when, in the 1990s, it movedinto cruise-ship construction: STX does not want to follow in Mitsubishi’stracks. The Korea Development Bank wants to persuade the country’sshipyards to move into cruise-liner construction, because Korean yards arestarting to lose out to the People’s Republic of China (PRC) in the market tobuild tankers and container ships. The UK tour company Saga was reportedearly in 2008 to be discussing with the Korean yard STX a possible contract tobuild a 34,000-ton liner.

The global cruise industry’s spending during 2005 on ship construction,refurbishment and maintenance in Europe accounted for €3.1bn, more than

35% of the total value of the cruise industry to Europe, the European CruiseCouncil (ECC) reported in 2007.

Figures published by the ECC in 2008 show that, in 2006, this amounthad increased by around 32% — with the global cruise industry spending4.11bn with European shipyards for newbuildings and the maintenanceof existing ships. This equated to approximately 38% of total Europeancruise-industry expenditures.1

The following paragraphs include brief summaries of some of the work onorder from European cruise-ship builders. Any diminution in futureconstruction of cruise lines would have adverse repercussions for these

shipyards, for the network of subcontractors across Europe (who do up to85% of the construction work for a new build or for a refit), and for the widercommunities in which the yards are located.

Aker Yards, Norway

Aker, Europe’s largest shipbuilder, has 18 yards: six in Norway, two inGermany, three in Finland, and others in Romania, Ukraine and Vietnam.Aker Yards owns 75% of Aker shipbuilding in France and 51% of Akerin Brazil. The yards in Finland and France specialise in building cruise liners.Aker’s revenues in 2006 were around NKr25.86bn (of which just underNKr11.18bn was for cruise liners and passenger ferries); net income wasnearly NKr1.04bn; and the yards employed 20,000 people. The majorindustrial shareholder, however, is STX Shipbuilding of Korea, the world’sseventh-largest shipbuilder, which bought 39.2% of the company inOctober 2007 (a couple of months after Aker issued a profits warning, blamedon narrow margins in Finland).

1. Data from Contribution of Cruise Tourism to the Economies of Europe, 2008 Edition,produced by GP Wild (International) Ltd and Business Research and Economic Advisors

(BREA) for the European Cruise Council and its partners Euroyards, Cruise Europeand Medcruise.





Both of Royal Caribbean’s 220,000-ton, 5,400-passenger Genesis liners havebeen ordered from Aker in Finland, which constructed Royal Caribbean’sIndependence of the Seas, which joined the fleet in 2008. Aker France isbuilding the 2,550-berth MSC Magnifica and the 3,300-berth MSC Fantasia and MSC Splendida for MSC Cruises, and a 4,200-berth liner forNorwegian Cruise Line.

Fincantieri, Italy

Fincantieri is owned by the Italian State. Its Marghera yard built the2,000-berth Queen Victoria for Cunard; and the Monfalcone yard at Trieste,where flat-panel sections are made in a completely automated process,constructed the 3,076-berth Ventura for P&O. Carnival’s Carnival Splendor and Ruby Princess, and Holland America Line’s Eurodam (like Ventura,new in 2008) are also Fincantieri ships. Fincantieri has three Costa liners(two with 2,260 berths and one with 3,004 berths) for delivery in 2009and 2010, as well as Carnival’s Carnival Dream (with 3,652 berths) for 2009,

and a smaller 540-berth vessel for Silversea, also due in 2009. P&O has a sistership to Ventura due from Fincantieri in 2010; Holland America Line has asister ship to the Eurodam due the same year; and Cunard will take deliveryof a sister ship to the Queen Victoria. Carnival’s Carnival Magic, with 3,652berths, follows in 2011. Despite its healthy orderbook, Fincantieri is worriedabout future competition from the Far East, especially Korea, and could wellexplore a merger with one of the other major European shipbuilders.Profitability for Fincantieri is not very large: in 2006, net profit was upby 21%, to €58.7m — but, given the scale of operations, this was amodest amount.

Meyer Werft, Germany

Celebrity Equinox and Celebrity Eclipse, each with 2,850 berths, are on orderfrom Meyer Werft for Royal Caribbean’s Celebrity line for 2009 and 2010,following Celebrity Solstice in 2008. Two 2,500-capacity liners for Disney aredue in 2011 and 2012.

Overcapacity

When the world’s cruise lines ordered the new generation of ships, in theearly 2000s, their research suggested that lack of capacity was holding back

demand. In this view, the practice of discounting would be much lessnecessary if there were sufficient berths to justify heavy advertising in alltypes of consumer media.

The leading cruise lines tend to say that the giant vessels are a response tocustomer choice, because people want to be able to select from a widevariety of options and activities on board. However, it is also true that onships taking 3,000-plus passengers, the cost per person per day, in 2006, wasaround $100. Passengers on small ships had to pay well over double thisamount just for the operator to break even.

This analysis may have been correct when the new ships were ordered,

but makes less sense in 2008.





The North American market remains prime for the global cruise industry,but in the US especially, consumer debt, a deflating housing market andindifferent job prospects will restrain demand for cruise holidays.

Many Republicans were hoping for a permanent repeal of federal estate tax,which would increase the legacies received by the rich. The situation in 2008

was confused. The tax applied, at a top rate of 45% (as in 2007), to anyportion of estate in excess of $2m. In 2009, the exemption amount rises to$3.5m, and in 2010 there will be no estate duty at all. In 2011, however, it willbe reintroduced, and the threshold will be only $1m, with a top tax rateof 55%. Early in 2008, no one knew how the tax would develop after 2011,but the general feeling was that it would not disappear. ‘Baby boomers’ whohave inherited large sums of money are often keen cruise-takers, and so ahigh rate of estate tax would not be helpful to cruise lines.

The prevalence of discounting is a worry for the industry. It is not goodfor a luxury brand to be sold off at low prices; nor is it good if some buyersfind they have paid more than their fellow cruisers (especially if thedifferences are large). Heavy discounting takes prestige away from a brand.When customers know that a lot of new capacity is coming on stream,and they also know that they can grab a bargain by shopping around oncruise and holiday websites, they are unlikely to agree to pay the fullbrochure price.

Cruise lines, such as Royal Caribbean, that persist with the strategy ofgigantism risk diluting the cruise experience. A 220,000-tonner with 5,400passengers may result in lower operating costs per passenger, but is too bigfor most ports, and is arguably too sizeable to offer a personal experience,or to provide either a tranquil or an adventurous holiday.

The companies taking delivery of new cruise ships in 2008 to 2010 did theireconomic projections for them in 2004 to 2006. Back in January 2006, oil wastrading at around $63 a barrel, and many analysts believed this to be atemporary spike. However, 2 years later, the $100-per-barrel price point hadbeen breached. Food prices, too, have rocketed. Wheat, on 10th January2008, cost just under 97.7% more than 12 months earlier, according to theFinancial Times’ market data. Soybeans were nearly 93.2% more expensive,and corn cost 32% more than a year previously. The rising cost of foodis a concern for cruise lines, and there will be efforts to reduce the costper passenger. Yet passengers who have paid, perhaps, several thousanddollars for a cruise would be reluctant to submit to strict portion control, or to

food surcharges — although passengers do pay fuel surcharges, albeit oftenwith a grumble.

Should the expansion that cruise lines expect not fully materialise, ships couldbe ‘mothballed’, but this would be a waste of the huge investments made inconstructing them.

Identities and Trends

A cruise line with a brand so compelling that discounting would beunnecessary to attract sufficient customers is, in the climate of 2008, looking

like a distant dream.





Cruise-brand identities help customers to choose holidays they are likely toenjoy, but there is a problem: brands depend for their strength on uniformityand reliability, and in travel the trend is away from uniform packages andtowards individually chosen, customised holidays. Yet operators need theircaptive audience, because onboard spending is an increasingly important partof the cruise business, accounting for more than a quarter of net revenues.

The bigger the liner, the greater the scope for increasing revenues fromshopping and entertainment — two more compelling reasons for mega liners.

Carnival and Royal Caribbean have deals with port authorities to give themthe most attractive berths on the most popular days, notably weekends, andthese deals restrict opportunities for new entrants. However, the focus ofboth these companies on cruise ships as resorts in themselves is out of tunewith demand at the top end of the market, and boredom with the ship itselfas a holiday destination is likely to spread downwards.

On the other hand, associating a brand with the trend towards ‘à la carte’choices while still creating a strong revenue stream is extremely tricky, not tomention additionally difficult for a cruise operator because of the exigenciesof timetabling, tides, dock availability, refuelling, re-provisioning, and all theother demands of the clock. It is easier for a holidaymaker to design a‘hop-off, hop-on’ itinerary using scheduled coastal boat services, such as theboats that serve Norway’s coastal communities, than to book a stage on onecruise liner and a later stage on another liner.

The anti-package-holiday trend, especially marked among experiencedtravellers, favours freighters and mail lines, which are adding andrefurbishing cabins to attract travellers seeking a workaday ambience andfew other paying customers. The Royal Mail ship St Helena, which serves the

South Atlantic island of the same name, reported that in the year toSeptember 2007, the ship carried 38% more passengers to the island than inthe previous year1.

Adventure is not without risk: in November 2007 the Liberian-registeredExplorer, built in Finland in 1969 and operated by GAP Adventures ofCanada, capsized in the Antarctic. All passengers and crew evacuated theship safely and were rescued, but cruising in hostile regions will never beboringly safe.

Fitness cruises are a trend for 2008 and beyond, as holidaymakers fightobesity and other health-related issues. Spa cruises, for therapeutic

relaxation, are also attracting more customers.

The opening up of Cuba to visitors from the US would significantly expandthe potential for inexpensive near-shore cruising for North Americancustomers, who at the time of this report’s publication in April 2008 areprevented from visiting Cuba by the embargo that the US FederalGovernment maintains. There has been some speculation that changes ofPresident in Cuba in February 2008 (when Raul Castro took over from hisailing older brother Fidel) and in the US in January 2009 (when a newPresident will take office) could lead to the easing or even the end ofthe embargo. The inclusion of Cuba on cruise itineraries for US ships andUS passengers would be of great benefit to cruise lines as well as to the

1. Passenger Shipping Association, membership news September 2007.





Cuban economy. Carnival Corporation and Royal Caribbean have both beenawaiting the lifting of the embargo. However, in March 2008, President Bushreaffirmed the embargo — stating that, in the absence of certain conditionsbeing met with regard to democracy and human rights in Cuba, the changeof leadership there would not alter US policy towards the island.

Caution

In the UK, Key Note estimates that the number of cruise-takers shouldapproach 1.6 million in 2008 and exceed 1.7 million in 2010.

All Leisure Group reported in 20071 that demand for cruises increased by9.7% a year between 1997 and 2006, and by 12% in just 2006 to 1.2 millionpeople — one in every 16 of those who bought a package holiday.The number of cruise nights rose by more than 19% in 2006, becausepassengers purchased longer cruises, and the sector was worth £1.2bn to theUK economy. The UK market accounted for 35% of the entire European

demand for cruise holidays. Europe as a whole is forecast to provide 4 millioncruise passengers by 2010 and 5 million by 2015, All Leisure reported.The sector could be worth £8.6bn to European economies in 2010.

If Europeans are to match the Americans for the numbers of cruises bought inrelation to population, the European demand for cruises would have to riseby a compound rate of 12% a year for 10 years, according to UBS2 —but economic circumstances are unlikely to be favourable enough for this tobe achieved. In addition, fly-cruise holidaymakers dislike the long securityand immigration procedures affecting flights from and to airports in the USand the UK.

However, the mood of caution among analysts intensified in 2008.In May 2007, Barclays3 reported that although UK residents made a record68.5 million visits abroad in 2005, the growth rate slowed from 3.5% to 3.1%.Destinations in dollar zones, apart from the US itself, were popular becauseof the strength of sterling against the dollar, a movement that reversed alittle early in 2008. Despite increasing numbers of foreign trips, holiday travelfrom the UK stagnated in 2005 and 2006, Barclays reported. The growth hasbeen in business travel and in visits to relatives and friends — the lattercategory accounting for 17% of outbound travel in 2007, compared with12% in 2000.

Yet even in a flat economy, and in the context of declining popularity ofpackage holidays overall, the cruise sector should do relatively well. In 2002,20.6 million foreign package holidays were sold in the UK, falling to fewerthan 19 million in 2006, the Passenger Shipping Association (PSA) reported inMay 2007. However, the cruise sector grew in popularity, increasing its marketshare of package holidays by 65% over the same period to between 6% and7% by volume, and to around 10% by value. The number of berths availableto the UK cruise market will grow by a huge 40% in 2008, said Nigel Lingard,Marketing Director of Fred. Olsen Cruise Lines4. This capacity would bedifficult to utilise profitably in its totality, even in a buoyant market.

1. Announcement of placing of 10,920,617 shares, 25th September 2007.

2. Reported in ‘Cruising’s appeal’, FT.com, 15th July 2007.3. Barclays’ Hospitality and Leisure Services Review , May 2007.





Around the World

The figures in Key Note’s forecast (see Table 11) are for ocean cruises on theglobal liner fleet. River cruises added more than 40% to the German totalin 2007, around 310,000 holidaymakers on top of the 780,000 or so oceancruise-takers. River cruising is also significant in France, on the Seine and the

Rhône, as well as on the Nile in Egypt and on major rivers such as theMississippi and Ohio rivers in the US. River cruising is also developing in thePRC and South East Asia. River cruising in the UK is generally on very smallboats in places such as the Norfolk Broads and on canals: the UK does nothave water courses long or broad enough to offer a wide range of holidayslasting a week or more, and thus is not an important destination for rivercruises. However, UK holidaymakers are likely to remain keen customers forriver cruises in Europe and Egypt.

4. ‘Supply of berths on UK cruise market to grow 40% in 2008’, Cruise Business Review ,1st August 2007.

Table 11: Forecast Number of Cruise-Holiday PassengerBookings Worldwide by Region (million and %), 2008-2013

%

Change2008-

2008 2009 2010 2011 2012 2013 2013

Number of

Bookings (million)

US 10.66 11.09 11.53 11.93 12.35 12.76 19.7

UK 1.58 1.66 1.71 1.76 1.80 1.85 17.1Germany 0.84 0.91 1.05 1.12 1.20 1.28 52.4

Rest of Europe 1.89 2.02 2.13 2.24 2.34 2.41 27.5

Elsewhere in

the world 1.34 1.41 1.48 1.56 1.65 1.74 29.9

Total 16.31 17.09 17.90 18.61 19.34 20.04 22.9

Table continues...





The fastest growth in ocean cruising between 2008 and 2013 is set to be inGermany, for which Carnival Corporation is building five liners for theAIDA line, all with space for more than 2,000 passengers, for deliverybetween 2008 and 2012. The extra capacity for the German market could be achallenge for lines to fill, despite increasing customer demand, because somany new liners are destined for a mainly European clientele. Apart fromAIDA’s five ships, MSC is taking delivery of four ships between 2008 and 2012,and Carnival’s Costa has five on order, giving almost 36,000 additional berths,enough for around 1.5 million additional holidaymakers. Even if the newliners targeted at UK holidaymakers, from P&O and Cunard, are added to theequation, capacity may still be up to 10% ahead of effective demand in 2012.

The most likely issue is not lack of intent from the public, but insufficientdisposable income to afford as many cruises as the lines have envisaged.In the UK, 2008 should see a significant jump, of around 250,000cruise-takers, as P&O’s Ventura and Royal Caribbean International’sIndependence of the Seas cater for the UK market, offering 6,743 lowerberths between them. However, growth is likely to be slower after 2008 —except at the top of the market, with ultra-luxury cruises. Approximately21,000 to 22,000 holidaymakers from the UK, 1.6% of all cruise-takers,booked an ultra-luxury cruise in 2007, but this small number brought inaround 6%, £100m, of UK-derived cruise-ticket revenues.

...table continued

%Change

2008-2008 2009 2010 2011 2012 2013 2013

% of Total

US 65.4 64.9 64.4 64.1 63.9 63.7

UK 9.7 9.7 9.6 9.5 9.3 9.2

Germany 5.2 5.3 5.9 6.0 6.2 6.4

Rest of Europe 11.6 11.8 11.9 12.0 12.1 12.0

Elsewhere in

the world 8.2 8.3 8.3 8.4 8.5 8.7

Total † 100.0 100.0 † 100.0 100.0 100.0 100.0

† — does not sum due to rounding

Source: Key Note

Table 11: Forecast Number of Cruise-Holiday PassengerBookings Worldwide by Region (million and %), 2008-2013





Elsewhere in the world, cruise holidays should continue to gain popularityamong customers in the PRC, India and South East Asia, and in SouthAmerica, especially Brazil. By 2013, the UK should still have more than 9% ofglobal cruise-market passengers, compared with 8.8% in 2007, but the US’sshare may fall to less than 64% from more than 66% in 2007.

In the UK, demand is rising for cruises leaving from UK ports, as well as forfly-cruises. Customers concerned about the environment have complexcalculations to make about the carbon footprints of air travel compared withsea transport. Demand for cruises leaving UK ports rose by 12% in 2006 tomore than 450,000 passengers, and fly-cruise demand increased by 13% to753,000 holidaymakers, whose preferred destinations were in theMediterranean (which accounted for 38% of all the 1.2 million cruisespurchased in the UK)1. The popularity of the Mediterranean is set to growfurther, but needs small to medium-sized ships that can visit a wide variety ofharbours, including village ports on Greek islands, Sardinia, Corsica, andalong the magnificent coasts of countries such as Croatia and Italy.

Worldwide, speciality cruises, such as Peter Deilmann’s golf and gardencruises, have bright prospects among the affluent, active middle-aged.The outlook for Folkestone-based Saga’s three liners, catering only forholidaymakers aged 50 and over, is good from the point of view of theageing population, provided the activities and excursions keep abreast of theeclectic interests of modern pensioners. Saga’s decision to sail from regionalports such as Newcastle-upon-Tyne and Liverpool in 2008 signals an intentionto offer convenient embarkation points.

On the other hand, the major luxury segment, exemplified by Carnival andRoyal Caribbean, providing mass-market cruises to popular destinations, is at

risk of excessive commodification. This could also apply to themed resortlines, notably Disney, but juvenile themes continue to have a strong appealto children. Supersized liners may enable operators to cut the daily cost perberth, but they come with difficulties: several thousand people need toembark and disembark in a short time, resulting in traffic build-ups in ports.Huge liners cannot change itineraries quickly, because of the few portsable to take them, and if one has a major problem, it would make theworld headlines and damage the brand, because of the numbers ofpeople involved.

Premium cruise lines such as Windstar and Crystal, making a feature ofpersonal service on small or medium-sized ships, have greater costs per

passenger than on superliners, and need to attract high proportions of repeatbusiness to avoid excessive marketing costs.

1. Figures from the Passenger Shipping Association’s Annual Cruise Review 2006 ,published in May 2007.





For travel agents, the trend away from packaged holidays can be anopportunity to book personal itineraries for customers too busy to do thisthemselves. The increasing frequency with which travel agents book flightsand accommodation for customers led the Civil Aviation Authority (CAA) toclaim that these agents should register for the Air Travel Organisers Licence(ATOL) scheme, for which they would have to take out bonds, at a cost of

around £275m annually, which would have fed through to the pricescustomers paid. The Association of British Travel Agents (ABTA) challengedthe CAA’s demand, and won in the High Court. However, the forthcomingregulation of ‘connected travel insurance’ — insurance sold alongside aholiday — is a concern for agents. From 1st January 2009, the FinancialServices Authority (FSA) will regulate this insurance, forcing travel agents toabide by stringent regulations.

The highest earners should still be able to fund tickets on premium andadventure cruise holidays. The prospects remain good for ultra-premiumlines catering for very affluent, discriminating travellers seeking both comfort

and fascination.Budget lines should benefit from customers trading down, as well as frompassengers new to cruising. Fuel costs and environmental protectionregulations will tend to push ticket prices up, while global security issues andunpredictable weather patterns are likely to put some customers off.The cruise industry cannot ignore climate change and associated alterationsin weather patterns. The Caribbean could suffer heavily from hurricane windsand floods that would detract from the pleasure of cruising. Most operatorswill not be looking a century ahead, but by 2100 global sea levels could besignificantly higher than in 2008. This would affect ports and manytourist attractions, as well as whole communities in low-lying island

cruise destinations such as the Maldives, the Seychelles and many Pacificcoral-reef islands. Before the start of 2008, the Vanuatu atolls in the Pacificwere in danger of disappearing beneath storm surges, and sea water wasseeping into the islands’ farmland and gardens, damaging the soil.

Key Points

• Shipyards — Cruise liners are of crucial importance to the future of ahandful of shipyards in Europe and to the economies of the regions inwhich the yards are located. In 2007, the long-term future of Europeanyards building cruise liners began to look less secure, as Korean yards

sought to compete for future business. Aker Yards, Fincantieri and MeyerWerft may not all survive in their present form, especially if orderbooks forpost-2012 do not fill up.





• Incomes — When the world’s cruises lines began to order the newgeneration of ships, in the early 2000s, their research suggested that lack ofcapacity was holding back demand. In this view, the practice of discountingwould be much less necessary if there were sufficient berths to justify heavyadvertising in all types of consumer media. Unfortunately, many newsuperliners will be coming into service between 2008 and 2012, when

consumers’ disposable incomes are likely to come under increasing pressure.

• Discounting — The prevalence of discounting is a worry for the industry.When customers know that a lot of new capacity is coming on stream,and they also know that they can grab a bargain by shopping around oncruise and holiday websites, they are unlikely to agree to pay the fullbrochure price.

• Gigantism — Cruise lines, such as Royal Caribbean, that persist with thestrategy of gigantism risk diluting the cruise experience. A 220,000-tonnerwith 5,400 passengers may cut the operating cost per passenger, but is toobig for most ports, and arguably too sizeable to offer a personal experience,or to provide either a tranquil or an adventurous holiday.

• Free choice — Associating a cruise brand with the trend towards‘à la carte’ choices while still creating a strong revenue stream is tricky.The anti-package-holiday trend favours freighters and mail lines, which areadding cabins to attract holidaymakers.

• Capacity — In the UK, Key Note estimates that the number of cruise-takersshould be near 1.6 million in 2008 and more than 1.7 million in 2010.The number of berths available to the UK cruise market will grow by40% in 2008, according to Nigel Lingard of Fred. Olsen Cruise Lines.This capacity would be difficult to utilise profitably in its entirety even in abuoyant market.

• Europe — The fastest growth in ocean cruising between 2008 and 2013 isset to be in Germany, for which Carnival Corporation is building five linersfor the AIDA line (all with space for more than 2,000 passengers), fordelivery between 2008 and 2012. The extra capacity for the German marketcould be a challenge for lines to fill. Even if the new liners targeted at UKholidaymakers, from P&O and Cunard, are added to the equation,cruise-ship capacity for Europe may still be up to 10% ahead of effectivedemand in 2012. The most likely issue is not lack of intent from the public,but insufficient disposable income to afford as many cruises as the lines

have envisaged.

• Elsewhere in the world — Cruise holidays should continue to gainpopularity among customers in China, India and South East Asia, and inSouth America (especially Brazil).

• Luxury cruises — The major luxury segment, exemplified by Carnival andRoyal Caribbean, providing mass-market cruises to popular destinations,is at risk of excessive commodification. This could also apply to themedresort lines, notably Disney, but juvenile themes continue to have a strongappeal to children.





• Budget cruises — The budget lines should benefit from customers tradingdown, as well as from passengers who are new to cruising.

• Premium and ultra-premium cruises — Prospects for ultra-premiumlines, catering for very affluent, discriminating travellers seeking bothcomfort and fascination, remain good.




Market Forecasts: Transport, Travel & Tourism European Short Breaks

European Short Breaks

DEFINITION

This analysis deals with the UK short-breaks market. It covers short breakstaken by UK residents both in the UK and in other European countries (whichare, due to distance and time constraints, the destination for 97% of UKresidents’ short breaks abroad).

The analysis uses conventions agreed by the World Tourism Organization(WTO), including the following:

• Tourism is defined as travel away from home involving at least 1 night inaccommodation.

•Holiday tourism is personally defined by survey respondents, who mayalso choose purposes such as business travel or visiting friends andrelatives (VFR).

• Holidays divide between independently organised holidays and inclusivetours (also known as ‘package’ holidays); the latter are defined as holidaysfor which both transport and accommodation are arranged by a company,sold at an inclusive price.

A short break lasts 1 to 3 nights in accommodation, whereas ‘long holidays’are 4 or more nights’ duration.

Breaks abroad are also referred to as ‘outbound’ holidays, and breaks withinthe UK by UK residents are classed as ‘domestic’ holidays. This summary doesnot cover the third strand of the total tourism market, i.e. inbound tourism.However, routes abroad are strengthened by an inbound infrastructure(e.g. flights between the UK and Poland), and improvements to a UKdestination (such as the London Docklands) can encourage both inboundand domestic visits.

FORECASTS

Market Forecasts

Table 12 presents a summary of the Key Note forecasts of demand for shortbreaks between 2008 and 2012. In volume terms, the domestic demand islikely to increase after some years of decline, with environmentalconsiderations being a factor, along with improved services inaccommodation and in packaging the ‘UK experience’.





The domestic forecast for 2012 includes an assumption that hostingthe Olympic Games in London (and some other UK venues) will boostinternal travel. However, their main effect will be to increase inboundtourism, which this analysis does not cover. (When Sydney, Australia,hosted the Games in 2000, inbound visitors to the city increased by 11%compared with 1999.)

Travel abroad will probably flatten off for economic and environmentalreasons, but this is unlikely to last for long with such an underlying demandfor travel. Volume growth will improve later in the decade but at the expenseof value growth, with short breaks proven to be a highly elastic market.

Table 12: The Forecast UK Short-Break Holiday Marketby Volume and Value (million trips and £m), 2008-2012

2008 2009 2010 2011 2012Volume (million trips)

Domestic breaks 55.0 57.0 60.0 60.0 62.0

Breaks abroad 7.5 7.5 7.7 8.0 8.0

Total 62.5 64.5 67.7 68.0 70.0

Value (£m)

Domestic breaks 8,000 8,700 9,300 9,500 9,900

Breaks abroad† 2,000 2,050 2,050 2,050 2,100

Total 10,000 10,750 11,350 11,550 12,000

† — excludes fares to and from the UK

Note: figures for domestic breaks are Key Note forecasts based on data for previous years from the United Kingdom Tourism Survey (UKTS); figures for breaks abroad are Key Note forecasts based on data for previous years from Travel Trends(National Statistics). Concerns about the methodology of the UKTS led to a change for

2005 onwards, with 2006 being the first full year of the current UKTS methodology.For this reason, data for domestic breaks from 2006 onwards are not strictly comparablewith the results from previous years.

Source: Key Note





Economic Conditions

Although superficially the ‘credit crunch’ or credit ‘squeeze’ in 2008 may seemlikely to depress demand for short breaks, there is also the positive factorthat, in these conditions, a short break can be a substitute for a longer,more expensive holiday. However, VisitBritain has commented that income

for leisure purposes is being squeezed, with the ‘average UK family paying£15 more per week for groceries than a year ago’.

VisitBritain also points to other questions about the future of the holidaymarket generally. One is the environmental impact and a more pressingconcern is whether ‘the high cost of the euro compared to the pound will putUK residents off visiting Europe’. The US, with the dollar being weak, is nowwell established as an alternative to Europe at such times.

Operators therefore have no way of knowing whether an economicdownturn is good or bad news for short breaks. For example, if the housingmarket slows down, home owners may be more likely to take more holidaysinstead of planning to move, but they may also worry about extra spending ifhouse prices fall. The end result may be that the market simply remains at asimilar level to the past.

The Environment

VisitBritain asks if ‘environmentally mindful consumers’ will opt to holidaymore at home rather than fly abroad, but Key Note’s research found thatconsumers gave this issue of ‘too many cheap flights causing damage to theenvironment’ a fairly low priority.

Hoseasons, the self-catering leader, is just one company taking the oppositeviewpoint, claiming that more people are choosing to holiday in theUK because of a demand for a ‘green’ and hassle-free alternative toflying abroad. Similarly, the ferry lines entered 2008 assuming that demandwould increase for their services as a greener alternative.

A more likely, and more realistic, scenario, is for consumers to fly abroad lessbecause of rising prices. The Government seems likely to ‘milk’ the aviationindustry with higher taxes, noting that some airlines are prepared to fill theirseats for very low prices, so a higher tax may not deter travellers.

Higher fuel charges could turn out to be a more decisive factor than either

taxation or consumer worries. easyJet commented in May 2008 that fuelprices were ‘a big issue and highly unpredictable’.

In contrast, Eurostar stands in good stead to take advantage of securityarrangements at airports and higher fuel costs for airlines, now that London’sSt Pancras International is open (since December 2007). The High Speed 1track has cut journey times to Paris, Disneyland Resort Paris and Brussels.The station itself is ‘state of the art’, having cost £800m to build over 6 years.

Holidaying at Home

It seems highly unlikely that UK consumers, who have taken more holidaysand breaks abroad every year in living memory, will suddenly ‘rediscover’





their home market for holidays. However, improvements to the domesticoffer could shore up a market — for domestic holidays generally — that hasbeen struggling for many years.

Accommodation is the target sector, because travellers abroad may put upwith poor accommodation as long as the sun shines and the cost of living

is cheap, but will not do so when holidaying at home. Some have argued thataccommodation should be much more tightly regulated to rid the market ofpoorly run bed-and-breakfast (B&B) accommodation and guest houses.

One ‘ray of sunshine’ has been the budget or lodge hotel sector. These weredeveloped on roadsides in the 1990s but are now appearing within cities,closer to where short-break tourists want to stay. Although they arebasic or ‘no frills’, the lodges and budget chains do offer standardisedaccommodation, and consumers may find that they tend to be a safer betthan choosing an urban hotel at random.

In London, for example, budget hotels in the Travelodge and Premier Inn

chains have opened to offer more reasonable prices than the very expensivetariffs typical of many London hotels. Edinburgh, another populardestination but infamous for expensive accommodation, has a range of hotelsat lower prices but in reasonable locations for the city centre.

Despite this availability, the UK is the most expensive country in Europe forhotels, according to bookings through Hotels.com. In 2007, average UK pricesrose by 12% to an average of £106 per night, driven by London prices.(The European average was up by 4.5%.) However, Hotels.com also noted theinfluence of the ‘super rich’, who are prepared to pay the highest priceswherever they travel.

Other Future Factors

In addition to the economy and the environment, other factors likely toinfluence future demand for breaks include the following:

• There will be a stimulus from extended holiday entitlement underEuropean law. For example, the statutory minimum number of days ofholiday per year for full-time workers in the UK will increase from 24 to 28days in 2009, releasing 8 million more holiday days to the market, accordingto Thomson Holidays.

• More hotels situated close to attractions will encourage overnight stays,taking former day trips into the short-break category. This is the futureplan for the mighty attractions group Merlin, which merged withMadame Tussauds in 2007 and already has experience of resort hotels atLegoland and Alton Towers.





• Operators will do more to develop customer loyalty, particularly in thedomestic market. At the moment, customers can easily leave their hotels orthe cities they visit with no incentive given at all to come back.

• Breaks with added value will continue to be in demand, particularly thoseoffering some sort of health benefit or pampering. There is a demand for

physical ‘rejuvenation’, with growing interest in spa facilities (e.g. hot tubs)and therapy breaks.

• There will be pressure to improve the domestic offer to cut down onflights abroad. The National Consumer Council has called for the tourismindustry to be given help to make the UK more attractive and better value,particularly by reducing rail fares, which are often more expensive thanflights abroad.

• The two big travel groups that emerged in 2007 — Thomas Cook and TUI— are likely to boost the short-break market by cutting back on the numberof cheap long holidays they offer. Thomas Cook plans to cut its

‘mainstream’ holidays to a turnover share of 72% by 2010 from 80%currently, instead offering more niche products, many of which will besuitable for short breaks. TUI’s capacity for mainstream short-haul holidays(long holidays, not short breaks) was 25% lower for 2008 than for 2007.

• Consumers will exploit the Internet even more in the future than theydo now, to create their own ‘dynamic’ holiday packages. A Google study of22,000 Web users in December 2007 found that travellers visited an averageof 22 websites before finally booking their holiday. To match consumerdemand, online booking agencies will offer more sophisticated choices.For example, Travelsupermarket.com, a price-comparison site, and Hotels4Uhave both launched city-breaks services in 2008, and Lastminute.combecame the first online travel agent selling Center Parcs breaks(from April 2008).

• Hotel groups will intensify the competition by making more tempting offersfor repeat custom. In 2007, Hilton International announced a standard,globalised Hilton Mini Break offer at 150 hotels around the world,under which guests can enjoy ‘lazy breakfast’ (served until 11am onSundays); later hotel check-outs; free accommodation for children under 18;and free meals for under-10s.




Market Forecasts: Transport, Travel & Tourism Freight Forwarding

Freight Forwarding

REPORT COVERAGE

This summary covers the market for the services provided by freightforwarders and others as defined in the UK’s Standard Industrial Classification(SIC — 2003) 63.4. This class covers ‘activities of other transport agencies’,which includes the following:

• forwarding of freight

• arranging or carrying out of transport operations by road, sea or air

• receipt of group and individual consignments (including pick-up of goodsand grouping of consignments)

• issue and procurement of transport documents and way-bills

• organisation of group consignments by road, rail, air or sea(including collection and distribution of goods)

• activities of customs agents

• activities of sea freight forwarders’ and air cargo agents’ goods handlingoperations, e.g. temporary crating for the sole purpose of protecting thegoods during transit, uncrating, sampling, weighing of goods.

This class excludes:

• courier activities (SIC 64.12)

• activities related to the arrangement of freight insurance (SIC 67.20).

The activities listed are those engaged in by the UK freight forwarding sector,in broadly defined terms. Traditionally, a freight forwarder has been definedas ‘an agent who arranges transport and prepares shipping documentation’,but this definition no longer serves to describe the entire range of activitiescurrently carried out by those who describe themselves as forwarders. TheBritish International Freight Association (BIFA) — the industry’s main tradeassociation — describes its members as belonging to ‘the international freight

services industry’. From the BIFA perspective, the defining characteristic offreight forwarders is that they are ‘independent of the physical carrier, andthus able to choose the best options for the customers’ distribution needs’.

As competition in this market has intensified, transport principals haveincreasingly sought to market their services direct to the customer,undermining the role of the traditional freight forwarder. Many traditionalforwarders have responded to this by organising transport services undertheir own name.





This analysis therefore also covers certain other sectors of the UK freightservices industry that compete in the same market as freight forwarders,notably the providers of international transport services by rail, road,sea and air.

MARKET SECTORS

Freight Forwarding

Freight forwarding activities — as classified under UK SIC (2003) 63.4 — canbe grouped into identifiable market sectors that align closely with the rangeof services provided by BIFA members. These are as follows:

• air freight consolidation and forwarding

•

maritime intermodal services• European road and rail distribution

• customs broking and consultancy

• packing of goods for export

• warehousing and distribution

• logistics and supply-chain management.

Transport PrincipalsProviders of transport services, together with freight forwarders, constitutethe international freight services market. The freight forwarding sector actsas an intermediary between the customer and the transport principals:

• international road transport — international freight transport by road(part of SIC heading 60.24)

• international sea transport — international transport of freight overwater, whether scheduled or not; transport by towing or pushing of barges,oil rigs, etc.; renting of ships and boats with crew for transport of freight(part of SIC heading 61.10/2)

• international air transport — international transport of freight by airover regular routes and on regular schedules (part of SIC heading 62.10/9);international non-scheduled transport of freight by air; and regular freightcharter flights (part of SIC heading 62.20/9)

• international rail transport — international freight transport via rail(part of SIC heading 60.10/2).






International Freight Services

It is anticipated that improvements in the productivity of the UK internationalfreight services sector will continue throughout the forecast period.Among such changes is a predicted streamlining of procedures within theSingle European Market (SEM) to be adopted by the European Commission.These and other efficiency improvements undertaken across most transportmodes imply a slower rate of growth in this sector than in the internationaltrade sector on which it depends. The forecasts in Table 13 are based onpredictions of developments in each of the separate markets, although acommon factor is the impact of continuing growth in world trade.

Table 13: The Forecast Total UK International Freight ServicesMarket by Value at Current and Constant 2000 Prices(£m, % and index 2000=100), 2007-2011

AAV %

2007-2007 2008 2009 2010 2011 2011

Current prices (£m) 19,187 19,950 20,773 21,726 22,749 4.4


Estimated price index

(2000=100) 113.6 116.7 119.7 123.0 126.4 2.3


Constant 2000 prices (£m) 16,887 17,095 17,348 17,665 17,993 2.0


AAV — annual average percentage variation; base year 2006

Source: Key Note





Freight Forwarding

Freight forwarding activity has been affected by the reduction of the needfor customs documentation in respect of trade between the UK and thecountries that acceded to the EU in 2004 and 2007. However, there areindications that the entry of Romania and Bulgaria in January 2007 had less

of an impact than the earlier expansion, with the volume of trade betweenthe UK and these two countries being much smaller than was involvedbetween the UK and the 2004 accession countries. Based on these earlyindications, some recovery is expected in 2007 from the decline experiencedin 2006. As measured by turnover, the freight forwarding sector is forecast toincrease between 3.5% and 4.8% year-on-year — an annual average rise of4.3% from 2006 to 2011 — between 2007 and 2011, in line with growth in theinternational freight services market as a whole.

Transport Principals

International Road Freight

It is anticipated that the UK international road freight sector will continue tomeet competition from operators based in other EU countries, particularly

the new accession states in Eastern Europe. However, some recovery from therecent period of low growth is expected, with a forecast annual averagegrowth of 4.3% (2% in real terms) between 2006 and 2011. This is somewhatlower than the rate of growth expected in both the UK economy and inworld trade.

Table 14: The Forecast UK Freight Forwarding Sectorby Value at Current Prices (£m and %), 2007-2011

AAV %

2007-

2007 2008 2009 2010 2011 2011

Turnover (£m) 14,600 15,200 15,850 16,600 17,400 4.3



Source: Key Note





International Sea Freight

In 2007, some recovery in international sea freight is expected from the sharpdecline in turnover experienced in 2006, and this is forecast to continuethroughout the rest of the forecast period. This sector is expected to showstrong growth of 14.6% between 2007 and 2011, fuelled by expansion of

global markets, in particular the increase in Chinese manufacturing exportsand demand for commodity imports. Despite strong competition fromforeign operators in this market, UK operators’ turnover is forecast togrow at 5.8% a year (just over 2% in terms of constant prices) between 2006and 2011. Although not covered in these forecasts, the participation ofUK-registered shipping companies in the cross trades is expected to continueat a high level.

International Air Freight

Although far less significant than sea freight in terms of the tonnage of

goods transported, air freight continues to have an important role in thecarriage of high-value items and urgent consignments. Like the UK transportoperators in the international road and sea freight markets, UK airlines alsoface competition from foreign operators. Sector turnover is forecast toincrease by an annual average 4.4% (just over 2% in constant price terms)between 2006 and 2011.

International Rail Freight

In 2007, it is forecast that the international rail freight sector will continue itsmodest recovery from the sharp decline experienced (of 14.3%) in 2005.

The restructuring of Eurotunnel and the removal of the immediate threatof bankruptcy that previously faced the organisation have given some hopethat its commercial prospects will also improve. Among these positivedevelopments are the announcement in October 2007 of a new simplifiedand more competitive pricing structure applicable to all rail-freight operators,both existing and new entrants. The new arrangements include measures toensure cross-Channel open access for all rail operators, to encourage greatertransfer of freight transport to rail, in line with the environmental protectionobjectives supported by the Government. Key Note forecasts that, between2006 and 2011, turnover will increase by an annual average of 9.3%,reaching a level that is still considerably below the Tunnel’s capacity to handlerail freight.





FUTURE TRENDS

EU Transport Policy

Among the most significant developments in EU transport policy that arelikely to have an impact on the international freight services market over thenext few years were those announced in October 2007, which are aimed atmaking freight transport in the EU more efficient and sustainable throughthe creation of a freight transport logistics action plan, a freight-orientedrailway network, a ports policy and measures affecting maritime andshort-sea shipping. These policies, if implemented, should provide manyopportunities for the international freight services market to enhance itsproduct offering.

Table 15: The Forecast UK Transport Principals Sectorby Subsector by Value at Current Prices (£m and %), 2007-2011

AAV %

2007-2007 2008 2009 2010 2011 2011

Road freight† 2,250 2,330 2,420 2,520 2,630 4.3


Sea freight‡ 1,300 1,340 1,380 1,430 1,490 5.8


Air freight§ 1,010 1,050 1,090 1,140 1,190 4.4


Rail freight†† 27 30 33 36 39 9.3



† — international turnover attributable to UK registered vehicles over 3.5 tonnes

‡ — international turnover of UK shipping industry, excluding cross trades and

charter receipts§ — international turnover of UK airlines

†† — turnover attributable to UK companies’ operations through the Channel Tunnel

Source: Key Note





Examples include proposals put forward as part of the freight transportlogistics action plan, such as innovation in the use of information andcommunication technologies (ICT), including the use of Radio FrequencyIdentification (RFID); the development of standards for loading units suitablefor all modes of transport; and the review of current limits on road vehicleweights and dimensions. Proposals for the creation of a freight-oriented

railway network and improvements to the European port network wouldimprove transit times, reliability and capacity, and would also provide thebasis of a better service to clients.

The policy of reducing barriers to maritime transport aims to reduce thebureaucratic procedures encountered by ships moving between EU ports,including a number of checks and inspections by the immigration, customs,health, veterinary and other authorities. However, from the perspective ofthe freight forwarder, such measures might have the effect of reducing theclients’ need for the type of expertise the forwarders offer.

EU Expansion

Following the recent expansion of the EU to include Malta, Cyprus and tenother countries in central and eastern Europe, several other countries havebecome candidates to accede to the EU and so become part of the SEM, inparticular, Croatia, the former Yugoslav Republic of Macedonia and Turkey.However, accession of any of these countries, or other candidate countriessuch as Albania and Serbia, is considered unlikely during the forecast period.As such, it is not likely, over this period, to lead to the type of reduction in theneed for customs-related services brought about as a result of earlierenlargements.

Globalisation

Globalisation of the world economy continues apace, despite the failure ofthe Doha round of trade talks and signs of an increase in protectionistsentiment in the US and some European countries. Trade between the UK andthe giant economies of the People’s Republic of China and India in particularseems set to expand, to the benefit of UK freight forwarders andinternational transport operators.

A Changing Role for the Forwarder

Many importers and exporters are reviewing their overall logistics operations,and forwarders and other operators are using increasingly sophisticated ITsolutions to provide this service. These include software and services designedto optimise the systems to deal with the order, shipment and settlementprocesses involved in global trade, leading to a changing role for theforwarder. Meanwhile, competition continues between traditionalforwarders and those that provide a wider range of services. In thiscompetitive trading environment, opportunities will continue to exist forinnovative freight forwarders and other participants in the internationalfreight services market to benefit by providing a range of value-added

services.





Consolidation in the Forwarding Sector

Competitive pressure is felt particularly by smaller companies, which mightfind it difficult to extend the boundaries of their businesses by offering therange of services that clients are seeking or who have not fully grasped theopportunities offered by the newer technologies. Many are likely to find such

pressures too great and will either go out of business or be taken over bylarger groups. Even some of the larger groups might find themselves thetarget of takeover activity by the even larger global logistics companies.

Environmental Concerns

Sustainable Mobility

Sustainable mobility is a concept aimed at reducing the negative impacts oftransport on the environment, including the need to reduce energy

consumption. Policies that embrace this concept will increase pressure on theinternational freight services market to become more environmentallyfriendly, with such policies impacting mainly on the transport principalsrather than the freight forwarders. The sectors most likely to be subject tosuch constraints are road and air transport, with rail and sea transportsupport sectors considered to be more environmentally friendly. In addition,many of the measures considered to tackle this problem are targeted at thepassenger transport sector, with private car users, in particular, beingexhorted to make greater use of public transport, to walk or to cycle.However, some measures that are likely to be adopted also affect the freighttransport sector. The European Commission has many policies to address thisissue, including those seeking to encourage the transfer of freight from road

to short-sea and coastal shipping, inland waterway and rail. The UKGovernment also supports such moves, although, in some areas, consistencybetween different policies has yet to be achieved; for example, reconcilingthe need to reduce aviation emissions at the same time as supporting theconstruction of a third runway at Heathrow.

Emissions Trading

One way in which countries can meet their obligations to reduce carbonemissions under the terms of the Kyoto Treaty is to trade permits to emitcarbon dioxide and other greenhouse gases. In 2003, the EU published a

Directive covering the introduction of an Emissions Trading System (ETS).The first transport sectors to be covered by the scheme are the aviation andmaritime sectors, although implementation is unlikely to take place before2009 at the earliest. The European Commission has also considered thepossibility of including road transport in the ETS review, but has focused onthe inclusion of car manufacturers and individual motorists rather thancommercial road freight operators.





IT

Progress will continue to be made in developing IT applications in support offreight transport operations through improved methods of communicationwith customers, operatives and suppliers, and in the opening up of marketopportunities for companies in the sector. Prospects for forwarders are mixed:

developments in IT provide clients with greater ability to source some of theirfreight transport needs via the Internet, cutting out the forwarder, althoughthe increasing complexity in international trade may push clients to seekspecialist advice from forwarding experts.

Security

Regulations aimed at countering the terrorist threat to freight transportoperations are likely to increase over the forecast period. However, for thefreight forwarding sector in particular, this situation may have a morepositive outcome in that exporters and importers might seek their specialist

advice and assistance where the security implications of the shipment ofgoods need to be fully considered.




Market Forecasts: Transport, Travel & Tourism Hotels

Hotels

REPORT COVERAGE

Overnight accommodation, as well as other facilities and services that can befound in hotels, are offered by various bodies. This summary defines hotels inaccordance with the specifications on VisitBritain’s website(www.qualityintourism.co.uk), which state that hotels comprise formalaccommodation with full service and a minimum of six bedrooms,are licensed and offer dinner (except hotels classified in the Metro category).All bedrooms must also be ensuite or have a private bathroom.

The grading system imposed by VisitBritain is outlined below:

• Country house hotel — a country house with ample grounds or gardens,

in a rural or semi-rural location. The emphasis is on peace and quiet.

• Small hotel — a hotel with a maximum of 20 guest bedrooms, which ispersonally run by the proprietor and is likely to have limited functionbusiness.

• Town-house hotel — a high-quality town-/city-centre property of individualand distinctive style with a maximum of 50 guest bedrooms and a highstaff-to-guest ratio. Public areas may be limited. It is possible that theseestablishments do not serve dinner, but offer room service instead. Where adining room is not available, room service breakfast is acceptable.

• Metro hotel — a town/city hotel providing full hotel services, with theexception of dinner. A range of places to eat will be within easy walkingdistance.

• Budget hotels — always part of a large, branded hotel group, a budgethotel offers clean and comfortable en-suite facilities, 24-hour reservationsand a consistent level of facilities.

Hotels are also given a rating from one to five stars. The greater the numberof stars, the higher the quality and the greater the range of facilities andlevel of services provided:

•1 star — simple and comfortable, with no frills

• 2 stars — well presented and well run

• 3 stars — good level of quality and comfort

• 4 stars — excellent standard throughout

• 5 stars — exceptional with a degree of luxury.

Gold and silver awards are also given to properties that not only achieve theiroverall rating, but also exceed the expectations within their rating level.





MARKET SECTORS

It is necessary to divide the hotel industry into two sectors — corporate andconsumer — in order to assess the size of the market:

Corporate

The part of the market paid for by businesses comprises the corporate sectorof the hotels market. In addition to accommodation used for business travelpurposes, this sector includes conferences, business meetings and otherbusiness uses.

Consumer

Hotel revenue gained from individuals and non-business purposes accounts

for the consumer sector of the market. This sector primarily includesaccommodation, as well as the use of hotel facilities as social venues forweddings and Christmas parties, for example, and for other leisure purposes,such as the use of health and fitness facilities.


In July 2008, a report published by PricewaterhouseCoopers stated that,while UK hotels may have enjoyed positive trading in the first half of the year,the second half was likely to see significant deterioration. On 18th July 2008,

www.caterer.com reported Robert Milburn, partner and UK leader ofhospitality and leisure at the company, as saying that:

“Hoteliers are facing fragile and volatile conditions.Lead-in times are getting ever shorter, 1-2 weeks rather

than 4-6 weeks is now the norm, and this could result indiscounting if hoteliers start to panic.”

In August 2008, Malmaison and Hotel du Vin reported a loss of £5.4m in thefirst half of the year, with a £19m fall in its property values. Also recordingan operating loss for the first half of 2008, The Real Hotel Companycommented that the mid-market was beginning to feel the impact

of the contracting economy.

According to National Statistics data, the number of overseas visitors to theUK dropped by 5% between April and June 2008, although spending levelsremained constant. In response, some hotels have increased room rates inorder to protect margins.

In light of this data, Key Note forecasts that the UK hotel market will fall by1.8% in value terms in 2008. It is then predicted to recover slightly in 2009,although performance levels are not likely to stabilise before 2010.





FUTURE TRENDS

While the focus of activity for many hoteliers has been at the luxury endof the market, the economic downturn may prove a challenge. In October2007, Marriott estimated growth in revenue per available room at between5% and 7% in 2008; however, by May 2008, this had been revised to between3% and 5%. As clients reduce their spending, it is likely that oversupply willbe seen in the market and this will lead to some brand rationalisation.

Budget hotels seem best placed to weather the credit crunch. However, therehas been a considerable expansion in the number of rooms available in thissector over the past few years and, as such, overcapacity may become anissue, although these establishments have lower overheads. Both Travelodgeand Premier Inn reported that they were attracting more business travellersin 2008. Mid-market hotels are likely to feel the squeeze as they are stronglypositioned between the value and luxury hotel options. The developmentof more tiering in the budget sector will also have a detrimental affect onoperators of 3-star hotels.

Hotel operators have focused a high level of investment at the top end of themarket and this may prove to be a successful strategy. The luxury market isoften slower to show the impact of cutbacks in spending. Nevertheless,with its high dependence on corporate travellers, the hotel market maystill stumble.

Any slowdown in the market will bring casualties, and opportunities mayemerge for further consolidation in the hotel market as more of the smallergroups disappear or are absorbed by larger companies. In addition, theaggressive expansion plans of the larger names will also push more marginalsuppliers out of the market.

Table 16: The Forecast UK Hotel Market by Valueat Current Prices (£m), 2008-2012

2008 2009 2010 2011 2012

Value (£m) 14,800 14,875 15,140 15,448 15,786

% change year-on-year -1.8 0.5 1.8 2.0 2.2

Source: Key Note




Market Forecasts: Transport, Travel & Tourism Rail Travel

Rail Travel

REPORT COVERAGE

Report Structure

The market covered in this analysis is UK travel by rail, which includes travelon the services provided by main passenger railway operators — includingunderground, metro, light rail and tramway undertakings — as well as theinternational operators Eurostar and Eurotunnel. Reference is also made torail services in Northern Ireland, where an entirely separate organisationalstructure applies. The activities of preserved railways, such as the Mid-HantsRailway (Watercress Line) and the Romney, Hythe and Dymchurch Railway,function more as tourist attractions than transport operations and, as such,

are not covered in this summary. Analysis includes a range of purposes for railtravel, such as business trips, journeys to work and school, leisure and otherpersonal reasons.

Definitions (Standard Industrial Classification)

The main services covered in this analysis are defined under StandardIndustrial Classification (SIC) codes:

• 60.10/1 Transport via railways — inter-city services

• 60.10/9 Other transport via railways

• 60.21/3 Urban and suburban passenger transportation by underground,metro and similar systems

• 63.21 Other supporting land transport activities, including the operationof terminal facilities such as railway stations, the operation of railroadinfrastructures and the minor maintenance and repair of rolling stock.

Other important sectors supplying products and services to the UK railwayindustry (by SIC code) include:

• 29.12 Manufacture of pumps and compressors

• 29.14 Manufacture of bearings, gears, gearing and driving elements

• 31.10 Manufacture of electric motors, generators and transformers

• 33.30/1 Manufacture of electronic industrial process control equipment,manufacture of railway and tramway locomotives and rolling stock

• 45.23 Construction of motorways, roads, railways, airfields and sportfacilities, cargo handling and storage

• 63.21 Other supporting land transport activities

• 70.32 Management of real estate on a fee or contract basis





• 72.2 Software consultancy and supply

• 74.20 architectural and engineering activities and related technicalconsultancy.

The industry serving the present-day rail traveller has a long and complicated

history, and has experienced many structural changes over the years since theopening of the first steam-powered passenger rail service between Stocktonand Darlington in 1825. These have involved changes in ownership and inorganisation, with both national and local government bodies having apowerful influence. Even today, following the privatisation of most of thenational rail network in the 1990s, public-sector involvement continues.

The most significant developments affecting the rail travel market over thepast few years include the severe problems associated with the maintenanceof the rail infrastructure and the perceived poor performance of a numberof the train operating companies (TOCs).

MARKET SECTORS

While the market can be segmented in terms of journey purposes, the mainmarket sectors are defined by the geographical areas served, including thefollowing:

National Rail Infrastructure

Since June 2002, the operation of the British national rail network, its track

and other infrastructure has been the responsibility of Network Rail,an organisation that is not in charge of the operation of train services.In Northern Ireland, the rail travel market is served differently, withNorthern Ireland Railways (NIR) being responsible for both infrastructureand train operations.

Mainline Rail Services

The main products provided by the TOCs are inter-city services, which servemainly business markets, and regional and cross-country services serving bothbusiness and leisure markets, as well as commuter services in and around the

large conurbations, notably London and the South East. The majority of theseservices are provided under franchise agreements between the Secretaryof State, the franchisee (the owning group) and the franchise operator(the TOC). Other services that are not franchised by the Government, butinstead operate under the so-called ‘open access’ arrangements, include:Eurostar; Grand Central; Heathrow Connect; Heathrow Express; Hull Trains;and Wrexham & Shropshire (which started operating on 28th April 2008).





Urban Rail Services

Local urban and suburban services, including the London and GlasgowUnderground systems and other metro and light rail services, cater largelyfor the journey to work, although tourists are also significant users in areassuch as London.

International Rail Services

International rail services comprise the vehicle-carrying shuttle services ofEurotunnel, which operates between Folkestone and Calais, and caterslargely for the needs of leisure travellers; and the Eurostar high-speedthrough-passenger services from London to Paris and Brussels, whichserves both business and leisure markets.

Northern Ireland

In Northern Ireland, the major lines run from Belfast to Londonderryand from Belfast south to the border with the Republic of Ireland andon to Dublin.


Key Note’s forecasts for rail turnover between 2008 and 2012 are shown inTable 17. In general, these forecasts are based on the assumption of acontinuation of past trends, taking the rate of growth predicted for the

UK economy into account. They cover rail travel on the services of the trainoperating companies (TOCs), the urban railways, the international operators(Eurotunnel and Eurostar) and Northern Ireland Railways (NIR).

In addition, these forecasts assume that planned levels of investment in thenational rail system will be achieved and that there will not, therefore,be any limits on the capacity of track and other infrastructure toaccommodate predicted growth in demand.

Passenger receipts on urban and international rail travel are forecast to growat annual averages of 5% and 5.6%, respectively — a slower rate than thatpredicted for travel on the national network, at an average of 7% per year.

The greatest growth is expected for passenger receipts on NIR, at 9.5%.

Capacity constraints will limit growth on the London Underground —the largest urban railway operator in the UK — and international servicesare predicted to face ongoing competition from short-distance sea ferryoperators and low-cost airlines.





Table 17: Forecast Passenger Receipts on UK Rail Systemsat Current and Constant 2003 Prices (£m),


AAV %2007-

2008 2009 2010 2011 2012 2012

National rail 5,369 5,721 6,131 6,579 7,040 7.0

% change

year-on-year 6.6 6.6 7.2 7.3 7.0

Urban rail† 1,678 1,758 1,850 1,948 2,047 5.0

% change

year-on-year 4.7 4.8 5.2 5.3 5.1

International rail‡ 743 782 828 877 927 5.6

% change

year-on-year 5.4 5.2 5.9 5.9 5.7

Northern Ireland

Railways 25 27 30 33 36 9.5

% change

year-on-year 10.6 8.0 11.1 10.0 9.1

Total 7,815 8,288 8,839 9,437 10,050 6.5

% change

year-on-year 6.1 6.1 6.6 6.8 6.5

Total at constant

2003 prices 6,313 6,457 6,640 6,830 7,015 2.7

% change

year-on-year 1.9 2.3 2.8 2.9 2.7

AAV — annual average percentage variation

† — includes Underground, metro and tram services

‡ — Eurostar and Eurotunnel Passenger Shuttle

Note: total constant 2003 prices are based on the assumption that rail fares increase onaverage across all networks by 1% above retail price index (RPI).

Source: Key Note







Overall, there are likely to be implications for the rail travel market, includinga decline in the proportion of the population that is of working age and,therefore, in the number of commuters and business travellers. There is alsolikely to be a change in the nature of leisure travel demand, with moreattention having to be paid to the needs of the older sections of thepopulation, who already account for a significant proportion of travellers

on some urban rail systems. Many rail operators have already demonstrateda recognition of some of these trends by providing special offers, such asdiscounts for older passengers travelling outside peak times. However,some of these effects are likely to be felt only in the longer term, and to haveonly a minimal impact over the period covered by the following forecasts.

Political Uncertainties

International Terrorism

Terrorist acts undoubtedly have some impact on the willingness of individualsto travel, whether for business or for leisure purposes, and transport systemsare always near the top of the list of terrorist targets — as has been seenin the attacks of July 2005 on the London Underground — and the railwaysystem continues to be vulnerable.

However, experience also suggests that even terrorist attacks themselves,which are seen by many security experts to be almost inevitable, are likelyto have only a short-term effect on many of the markets considered in thisreport, since much rail travel is associated with the journey to work andother trips that are regarded as relatively essential. In summary, although thethe threat of terrorism remains and consequent uncertainties associated with

the national and international security situation persist, in the absenceof an actual attack, such concerns are likely to have only a minimal impacton economic growth or transport demand.

Regulatory Policy Framework

Although it is now more than 10 years since the privatisation of the nationalrail system, the Government still plays a crucial role in determining thestrategy for its development and in providing financial support. Trends inevolving government policy are, therefore, of relevance to any considerationof the sector’s future.

White Paper — Delivering a Sustainable Railway

Now that most of the proposals contained in the government White PaperThe Future of Rail and the Railways Act 2005 have been implemented,the most recent comprehensive guide to the direction of future governmentpolicy is contained in the White Paper Delivering a Sustainable Railway .Published in July 2007, this incorporates a long-term strategy for the railsector and a so-called High Level Output Specification (HLOS).





This meets the requirement which specifies, as laid down in the Railways Act2005, that the Government should define for the Office of Rail Regulation(ORR) and the rail industry in general, what it wants to be achieved duringthe period between 1st April 2009 and 31st March 2014. The HLOS contains aStatement of Funds Available (SoFA) during the period, while the WhitePaper also sets out three ‘long-term agendas’, which are aimed at increasing

the capacity of the railway, delivering a quality service for passengers andfulfilling rail’s environmental potential. Many of the railway assets beingprocured today will have a lifespan of 30 years or more, and this, therefore,is a key reason why such a long-term rail strategy is deemed to be necessary.

Network Rail Targets

In February 2008, the ORR published its plans to increase Network Rail’saccountability for its performance and reduce its costs through efficiencysavings. These plans included the introduction of obligations to particularTOCs with respect to delays caused by engineering works, and an availabilitymeasure has also been proposed that is designed to reduce the number ofroute closures.

Technological Changes

The development of the Internet as a means of marketing and distributingrail travel has some way to go before it reaches the level of exploitationachieved in many other areas of the travel business. There are cleardifferences between what is an appropriate approach in the distributionof rail travel services and what is acceptable in the case of air travel.Nevertheless, there are lessons to be learnt from the examples of low-costairlines, such as easyJet and Ryanair, which rely on the Internet almostexclusively as a means of marketing and selling their products.

Rail Competition

In the UK, the franchise system allocates entire local networks to particularoperators, limiting opportunities for head-to-head competition betweenoperators of the kind that is common with other modes of transport,notably air travel. However, there are a few such opportunities. For example,Chiltern Railways, one of the smallest TOCs, operates services betweenLondon Marylebone and Birmingham Snow Hill, in competition withVirgin Trains between London Euston and Birmingham New Street.However, competition certainly exists in relation to the franchiseapplication process.

New Services

Eurostar

Eurostar has plans to expand its route network by introducing services fromLondon to Amsterdam, Cologne and beyond over the next few years.





Renaissance Trains

Renaissance Trains, a company set up in 1997 to promote and invest inopen-access passenger and freight rail businesses, is currently involved in anumber of projects across the UK. Hull Trains is an example of such a projectthat is already in operation, with Wrexham & Shropshire starting in spring

2008. Other services that are planned to be launched in 2008 are:Glasgow Trains, providing services between Liverpool and Glasgow;and Humber Coast and City Trains, to run services between the City ofLondon, Lincoln and Humberside.

Transport for London

In November 2008, Transport for London (TfL) took over control ofseveral surface rail operations from Silverlink Metro, and now hasplans for additional services on routes operated as part of the LondonOverground concession.

Modernisation and Investment Projects

Crossrail

Crossrail is a proposed new East-West railway, linking Maidenhead andHeathrow with Shenfield and Abbey Wood through new tunnels undercentral London. In 2001, a company — Cross London Rail Links — wasestablished as a 50/50 joint venture between TfL and the Department forTransport (DfT), to promote its development. After public consultation andParliamentary consideration, the scheme was approved by the Governmentin October 2007, with construction due to start in 2010 and servicescommencing in 2020.

Cross River Tram

If approved, the Cross River Tram would provide an on-street tramway servicebetween London’s Euston and Waterloo stations, with branches to CamdenTown and King’s Cross in the North, and Brixton and Peckham in the South.

Croydon Tramlink

Another London light rail project is a proposed extension of the CroydonTramlink to Crystal Palace. This has yet to secure government approvalor funding, and the earliest it could start operating would be 2013.

Docklands Light Railway Extensions

The enhancements that are currently taking place on the Docklands LightRailway (DLR) network will provide for an anticipated increase in the numberof visitors to the area during the 2012 Olympic Games, as well as cateringfor the needs of other visitors and local residents. Extensions already underconstruction include routes to Woolwich Arsenal (due to open in 2009)

and Stratford International Station (due to begin operating in 2010).





Edinburgh Light Rail

A proposal for a new tramway network for Edinburgh has been approvedby the City of Edinburgh Council and the Scottish Executive. This scheme,which will cost £545m to construct, is scheduled to commence operationin 2011. Preparatory work to relocate underground cables and pipes that are

beneath the proposed track has already begun, and the main constructioneffort is expected to start later in 2008. These proposals are taking placeunder the auspices of Transport Initiatives Edinburgh (TIE), described as‘an arm’s length council-owned company’. This organisation is also planningto deliver a number of other major public transport schemes in the area overthe next 10 to 15 years, including a proposed West Edinburgh Guided Busway,and a heavy rail link to Edinburgh airport.

Rolling Stock

In January 2008, the UK Government published its plans for new trains,

following its earlier commitment to provide 1,300 additional carriages acrossthe national rail network. It was, however, made clear that some of the TOCsfacing continuing increases in passenger numbers might not see this newrolling stock before 2014.

Thameslink Programme

The Thameslink Programme is a scheme aimed at tackling overcrowdingon the Thameslink North-South routes through London, involving a £3.55bninvestment. The project will provide 50% longer trains across the currentnetwork, offer new direct services to additional destinations on the

Thameslink route, and reduce overcrowding on the Underground. Theproject involves Network Rail in the construction of new track and stations,and in the provision of extended platforms and improved signalling.Although the full benefit of the scheme is not expected to be realised beforethe end of 2015, some improvement to services should be experienced beforethe start of the 2012 London Olympic Games.

West Coast Main Line

Despite many difficulties experienced in the modernisation of the West CoastMain Line, the present project is intended to be completed by the endof 2008. New timetables are due to be implemented at this time, which willsignificantly increase the frequency of services and reduce journey timeson inter-city routes. In late 2007, the DfT invited comments on proposedtimetables covering the services of the three train operators affected:Virgin West Coast; Trans Pennine Express; and Govia.





Other Continuing Issues

Unlike some other sectors of the UK passenger transport industry, thedomestic rail sector is fairly mature and, consequently, in many respects,the future is likely to represent a continuation of the past.

Many other matters are, however, likely to remain live issues over the next 5years (to 2012) and even beyond. Examples of such issues include:

• the impact of demographic change on the type and volume of publictransport services

• the impact of franchising policy on the rail sector

• the role of the Internet in providing information about rail transportservices and supplying an efficient means of distributing it

• the need for financial support for certain public passenger transport

services on social grounds• the Government’s policy of reducing the burden on the general taxpayer by

requiring a higher proportion of rail investment expenditure to be paid forthrough fares increases

• concern for the environment and its impact on transport operations

• the possibility that taxes and charges of various kinds will be used as amechanism to discourage the use of the more environmentally damagingforms of transport.




Market Forecasts: Transport, Travel & Tourism Travel Agents & Overseas Tour Operators

Travel Agents & Overseas Tour Operators

REPORT COVERAGE

This summary examines the market for services provided by UK travel agentsand overseas tour operators.

The UK travel and tourism market comprises two main sectors:

• overseas travel by UK residents — outbound tourism

• travel within the UK by UK residents — domestic tourism.

Journeys to work are not included in this definition. Unless otherwise stated,the statistics quoted in this analysis include day trips (trips not involving anight spent away from home) to overseas destinations, but exclude domesticday trips, which rarely require the services of travel agents or tour operators.

MARKET SECTORS

The travel and tourism market can be analysed in a number of ways,including the following primary categories:

• by main mode of transport used to reach the destination (e.g. road, rail,air or sea)

• by duration of trip (holidays, short breaks or day trips)

• by consumer sector (outbound [overseas] or domestic travel).

For the purposes of this summary, the market is divided into consumer sectors— outbound and domestic travel.

Outbound Tourism

The outbound sector of the UK travel and tourism market — which covers UKresidents travelling abroad — is the main sector served by travel agents and

tour operators, since domestic travellers have historically been far more ablethan overseas travellers to arrange their own travel and accommodation.However, this situation is changing as it becomes easier for individualsto plan and book their own travel (for example, through the Internet)without the services of an intermediary such as a retail travel agent oran overseas tour operator.





Traditionally, there have been a number of different types of tour operator.Some serve the mass market, while others concentrate on particular sectorsof this market, such as exclusive resorts, age-related holidays, winter sportsand adventure holidays. These types of holidays are marketed both asfull-length vacations and as short breaks (e.g. city, golfing, sailing andtheme-park trips).

Domestic Tourism

Domestic holiday travel is less likely than overseas travel to involve travelagents and tour operators, as, in many cases, the holiday destinationis reached by car or independently booked rail travel. Exceptions to thisinclude coach tours (which are marketed in a variety of ways, such as throughretail travel agents and directly by coach tour operators). Holidays (includingshort breaks) within the UK are sometimes marketed by travel agencies andtour operators. In addition, some airlines offer package tours by air withinthe UK, and a few cruise lines also offer cruises in UK domestic waters.


The Total Market

Key Note forecasts that the value of the UK resident tourism market willincrease by around 3.3% in 2008 to around £58.6bn, and will be wortha projected £66.85bn in 2012 — representing a 14.1% increase on 2008. Highlevels of inflation are likely to take their toll on real growth rates in the early

years of the review period, although if inflation starts to fall again towardsthe end of the period, real growth in the market is expected to resume.

However, the projected increase in the share of the market accounted for bytravel agents and tour operators should be taken into account. If the higherlevels of turnover achieved by these companies in the first 5 months of 2008are maintained for the year as a whole, then, expressed as a percentage ofthe UK resident tourism market, the share accounted for by the travel agentsand tour operators could exceed around 42% in 2008. The substantialincrease in the turnover of travel agents and tour operators is thoughtto have resulted in part from increased demand for packaged holidaysby consumers, price increases by the tour operators and reductions in capacityby the leading operators — which in turn reduced the need for discounting.





Outbound Tourism

Key Note forecasts that the UK outbound travel and tourism market will showsome further growth in 2008, although the rates of expansion will again bemodest. The number of trips undertaken is forecast to rise by around 1%to 70.7 million; expenditure is projected to increase by 3.5% to £36.72bn;and the number of bed nights spent is expected to edge up to 706 million —a 0.5% increase on the previous year. Market conditions and growth rates in2009 are expected to be similar to 2008, although thereafter and up to 2012,slightly higher rates of growth are forecast. By 2012, the number of tripsundertaken is projected to reach around 76.2 million (a 7.7% increaseon 2008); expenditure is forecast to rise to £42.95bn by 2012 (a 17% advance

on 2008); and 760 million bed nights are forecast to be spent in 2012 —a 7.6% increase on 2008.

Table 19: The Forecast UK Resident Tourism Marketby Sector by Value (£m and %), 2008-2012

2008 2009 2010 2011 2012

Outbound tourism (£m)† 36,720 38,000 39,520 41,100 42,950


Domestic tourism (£m)‡ 21,875 22,310 22,645 22,985 23,900


Total 58,595 60,310 62,165 64,085 66,850


Turnover of travel agents

and tour operators (£m)§ 24,850 25,600 26,370 27,160 27,970


Turnover of travel agents

and tour operators

as a % of total

tourism expenditure 42.4 42.4 42.4 42.4 41.8

† — excluding fares

‡ — excluding day trips

§ — excluding local Northern Ireland enterprises

Source: Key Note





Domestic Tourism

The UK domestic travel and tourism market faces a number of threats in 2008,although several opportunities are also presenting themselves. The threatsinclude the current depressed state of the UK economy and the impact thiswill have on the holiday and business markets. Increases in operating costs —due to increased taxation and soaring food prices — are other major causesfor concern.

One positive trend that may aid the market is the falling cost of fuel — after

reaching a record high in July 2008, oil prices are now on the decline as thecurrent economic downturn threatens to reduce the demand for gasoline(as at October 2008). Other positive factors include the fall in the value ofsterling against the euro — which, as European breaks increase in cost, couldmake domestic breaks more attractive — and the possibility that during theeconomic slowdown, consumers may choose to holiday within the UK ratherthan travel abroad in order to save costs.

Table 20: The Forecast UK Outbound Travel and TourismMarket by Value and Volume (£m, 000 and million), 2008-2012

2008 2009 2010 2011 2012

Expenditure (£m)† 36,720 38,000 39,520 41,100 42,950

% change

year-on-year 3.5 3.5 4.0 4.0 4.5

Trips (000)‡ 70,730 71,440 72,870 74,330 76,190

% change

year-on-year 1.0 1.0 2.0 2.0 2.5

Bed nights (million) 706 713 727 742 760

% change

year-on-year 0.5 1.0 2.0 2.1 2.4

† — excluding fares

‡ — trips of less than 1 year, including day trips

Source: Key Note





Key Note forecasts that some growth will be witnessed for the year as awhole, although the increases will only be modest. Further growth thereafterand up to 2012 is likely to be affected again by the economic climate in theUK and the extent to which this has an impact on the propensity ofconsumers and businesses to undertake domestic holidays and business trips.The London Olympics in 2012 are expected to provide a positive stimulus to

the market.

FUTURE TRENDS

Airlines Are Under PressureAirline chiefs are concerned that soaring oil prices have pushed surchargesand other extra costs so high that passengers are being put off flying.The airline industry is also predicting that high oil prices will provoke moreairline failures and consolidation in 2008 and 2009, and that the industrycould be facing its most severe challenge to date. A number of airlines havealready stopped trading in 2008, and, to improve efficiencies and save costs,British Airways (BA), American Airlines and the Spanish airline Iberia havesigned a joint business agreement on flights between North Americaand Europe.

Table 21: The Forecast UK Domestic Travel and Tourism Marketby Value and Volume (£m, 000 and million), 2008-2012

2008 2009 2010 2011 2012

Expenditure (£m)† 21,875 22,310 22,645 22,985 23,900

% change

year-on-year 3.0 2.0 1.5 1.5 4.0

Trips (000)‡ 124,120 124,370 124,500 124,625 126,495

% change

year-on-year 0.5 0.2 0.1 0.1 1.5

Bed nights (million) 396.4 397.2 397.6 398.0 404.0

% change

year-on-year 0.5 0.2 0.1 0.1 1.5

† — excluding day trips

Source: Key Note





TUI Aims to Reduce Capacity in the UK

TUI Travel PLC aims to reduce capacity in its UK business for summer 2009and winter 2008/2009. Capacity for the summer 2009 season will be reducedby 15% compared with 2008, through a reduction of its third-party flyingprogramme and the removal of a further long-haul aircraft. The company

is now planning to operate six fewer aircraft in winter 2008/2009, and 11fewer aircraft in summer 2009 than in the current year. Capacity in its winter2008/2009 season overall will be reduced by 21%.

TUI has also indicated that, in order to recover fuel costs, and to meetexchange rates and all other cost inflation in its financial year endingSeptember 2009, its average prices would need to rise by around 6% in theUK, and by between 2% and 4% in most other mainstream source markets.The cost inflation in the UK will be higher due to the strengthening of theeuro against the pound.

E-Commerce Bookings Continue to Rise

The use of the Internet to book holidays is expected to increase furtherup to 2012. Thomas Cook has stated, for example, that it continues to seerapid growth in its two largest e-commerce businesses, with a significantincrease in bookings on the Web. In June 2008, for instance, 53% ofThomas Cook’s bookings in Northern Europe were made via the Internet,and in the UK, 26% of its bookings for summer 2008 were made online.Early signs for winter 2008/2009 and summer 2009 are also encouraging,with total tour operator bookings through its main website being upyear-on-year by 89% and 113%, respectively.




Market Forecasts: Transport, Travel & Tourism Tyre Industry

Tyre Industry

REPORT COVERAGE

This summary covers the UK market for rubber tyres and tubes. The majorityof tyres sold in the UK are fitted to passenger cars and commercial vehicles,including buses and lorries. Smaller quantities are fitted to motorcycles andscooters, bicycles, aircraft, agricultural and forestry vehicles, civil engineeringvehicles, and construction or industrial handling vehicles and machines.Rubber inner tubes are used mainly for bicycles and, to a lesser extent, formotor cars, buses and lorries.

The UK tyre manufacturing industry continues to experience difficult tradingconditions, as imports — some from low-cost manufacturing countries in Asiaand Eastern Europe — account for an increasing share of the market. Already

a feature of the market for some years, this trend is expected to continue inthe future.

MARKET SECTORS

The market is segmented by the types of vehicles for which tyres are used.The main sectors are:

• tyres for passenger vehicles

• tyres for light commercial vehicles

• tyres for heavy commercial vehicles

• tyres for motor cycles and scooters

• other tyres — including tyres for agricultural vehicles, bicycles, aircraft,civil engineering vehicles, construction or industrial handling vehicles andmachines, and solid tyres

• retread tyres.


Supported by rising imports, the apparent UK market for rubber tyres andtubes increased by an estimated 15.3%, to £1.36bn, between 2003 and 2007.Key Note expects this steady advance in the value of the market to continueover the next 5 years and forecasts that overall growth of 10.4%, at anaverage annual rate of 2.5%, will raise the value of the market to £1.54bnby 2012.





Factors such as the ongoing vulnerability of UK tyre-manufacturing plantsand competition from low-cost producer countries prevent forecasts at ahigher level. New vehicle registrations in the UK are also unlikely to increasesubstantially over the forecast period, and although the number of cars onUK roads is steadily rising, the annual growth is also fairly low. In the shortterm, however, vehicle production in the UK is expected to have risen in 2007,with new vehicle registrations showing some improvement over 2006.

FUTURE TRENDS

UK Vehicle Production is Ahead in the First 9 Months of 2007

Vehicle production in the UK in the first 9 months of 2007 was higher than inthe corresponding period in 2006. According to the Society of MotorManufacturers and Traders (SMMT), 1.29 million vehicles were produced inthe UK in the 9 months to September 2007, which was 2.1% higher than in2006. New vehicles from Mini, Honda, Land Rover and Nissan all contributedto the increase in the number of passenger cars produced, which rose by 1.9%over the period, to 1.13 million. Production of commercial vehicles increased

by 3.5%, to nearly 157,000 vehicles. The SMMT has forecast a rise of around1.2%, to 1.46 million, in the number of cars produced in the UK as a whole in2007, compared with 2006.

Table 22: The Forecast Apparent UK Market for RubberTyres and Tubes by Value (£000 at msp), 2008-2012

2008 2009 2010 2011 2012

Value (£bn) 1,394,000 1,428,850 1,464,571 1,501,185 1,538,715

% change

year-on-year 2.5 2.5 2.5 2.5 2.5

msp — manufacturers’ selling prices

Source: Key Note





Leading Tyre Manufacturers Increase Their Presence in Asia

Many of the leading international tyre manufacturers continue to switchtheir production facilities to low-cost countries. For example, Cooper Tire& Rubber Company and Continental Tyre Group have both established newmanufacturing plants in the People’s Republic of China, and Bridgestone is

developing its plants in countries such as India and Indonesia. Goodyear plansto build new tyre factories in Asia and Eastern Europe and Hankook hasrecently started delivering tyres from its newly constructed plant in Hungary.Michelin is similarly expanding production at its plant in Poland.

In addition to these countries, new production capacity and distributionnetworks are also being set up in countries such as Russia, Brazil andThailand. The trend for establishing and increasing production plants andfacilities in low-cost countries is ongoing and will continue to put pressure onhigher-cost plants in Europe and North America.

World Tyre Production Set to Increase

According to Michelin’s 2006 Annual Report, the global market forpassenger-car and light-truck tyres is expected to grow by 2.7% per year overthe next decade (up to 2016), although at different paces in the variousregions. The North American market is forecast to grow by an average of1.5% per year, Europe is set to experience annual, average growth of 2.4%and Asia could see growth rates of 4.2%. Overall, this could amount to anadditional 300 million tyres being produced by around 2016.

The market for replacement tyres will experience higher rates of annualgrowth, estimated at 3% per year to 2016, compared with 2% for originalequipment (OE).

UK Tyre Retailers Revamp Their Operations

A number of the UK’s leading fast-fit tyre-fitting businesses have announcedplans to develop their operations.

HiQ

As a result of concerns that, for some customers, visiting a fast-fit outlet can

be a negative experience, HiQ has embarked on a 3-year programme thatincludes the redevelopment of all of its centres to bring them in line withcustomer expectations. HiQ has also introduced open and honest pricingbased on the principle ‘the price we quote is the price you pay’ and an onlineservice that allows customers to purchase their tyres online and choose whenand where they want to have them fitted. A training academy has been setup to improve staff standards. HiQ plans to add at least another 100franchised centres to its existing 150-strong network over the 3 years (by theend of 2009).





Kwik-Fit

Kwik-Fit has launched a new-look fleet, retail websites and a locate-a-centretext service. The website details the company’s services, as well as informationon tyre safety. It also offers information on how to care for tyres, batteries,exhausts, brakes, shock absorbers, air-conditioning units and windscreens.

National Tyres and Autocare

National Tyres and Autocare has embarked on a refurbishment programmefor a number of its branches across the UK. This includes investment intobranch exteriors and signage, and upgrading branch interiors. It follows onfrom National’s recent investment in MOT centres and a brakes programmethat was rolled out in 2006 as part of National’s development strategy for thecompany.




Market Forecasts: Transport, Travel & Tourism Vehicle Breakdown Services

Vehicle Breakdown Services

DEFINITION

In recent years, the vehicle breakdown market has become increasinglycompetitive. New entrants, including insurance companies and supermarkets,have entered the market with inexpensive vehicle breakdown optionsand these are now challenging the dominance of the market leaders — theAA and the RAC. In addition, online services are making it ever easier forbuyers to shop around for the best deals; a development that has furtherincreased the competitive nature of the market.

Another trend has involved changes in the ownership of the leading vehiclebreakdown services suppliers. Insurance companies, such as Aviva PLC,Direct Line Insurance PLC and Liverpool Victoria Insurance Ltd, have realised

the benefits that could be gained through ownership of vehicle breakdowncompanies and respectively acquired the RAC, Green Flag and BritanniaRescue Services. The France-based Mondial Assistance is also partly owned bythe Allianz Group, a leading insurer.

Ownership of the AA differs from the other leading providers of vehiclebreakdown services, in that it was acquired in 2004 by two Europeanprivate-equity firms — CVC Capital Partners and Permira. During 2007,CVC Capital Partners and Permira decided to merge the AA with the SagaGroup, which provides holidays, cruises, insurance and financial services tothe over-50s market. The Saga Group has 2.5 million customers and themerger will enable the AA to cross-sell to these members.

Various levels of breakdown cover are offered by the leading providers,ranging from basic roadside assistance and home start to the transportationof the broken-down vehicle to the member’s choice of destination.Breakdowns are less common than in the past, so the cost of the basic serviceis kept relatively low, so as to attract new members and retain existingmembers. Extra income is subsequently generated by offering a wide varietyof additional services to the membership, some of which have the potentialto generate considerable income.

MARKET SECTORS

There are four main sectors of the vehicle breakdown market. These are:

• the private/retail sector

• the commercial sector

• the third-party sector

• the ad-hoc sector.

Some companies operate in two or three of these sectors; others operate in just one.





Market Forecasts: Transport, Travel & Tourism Key Note Research


Key Note Research

Key Note is a leading supplier of market information, publishing an extensive range ofconsumer, industrial, business-to-business and services titles. With over 25 years’ experience,Key Note represents clear, concise, quality market information.

For all reports, Key Note undertakes various types of research:

Online searching is carried out by product code or free search method, and covers the periodfrom the last edition of the report to the current day.

The internal my ICC service is used to select company information relevant to the particularreport. The financial information extracted may then be backed up by further onlinesearching on particular companies.

Trade sources, such as trade associations, trade journals and specific company contacts, areinvaluable to the Key Note research process.

Secondary data are provided by BMRB International (TGI) and Nielsen Media Research forconsumer/demographic information and advertising expenditure respectively. In addition,various official publications published by National Statistics, etc. are used for essentialbackground data and market trends.

Interviews are undertaken by Key Note for various reports, either face-to-face or bytelephone. This provides qualitative data (‘industry comment’) to enhance the statistics inreports; questionnaires may also be used.

Field research is commissioned for various consumer reports and market reviews, and iscarried out by NEMS Market Research.

Key Note estimates are derived from statistical analysis and trade research carried out byexperienced research analysts. Up-to-date figures are inserted where possible, although therewill be some instances where: a realistic estimate cannot be made (e.g. the number of disabledpeople in the UK); or external sources request that we do not update their figures.

Key Note Editorial Manager, 2008






Market Forecasts: Transport, Travel & Tourism The Key Note Range of Reports

E

Electrical Contracting 8 2006

Electrical Wholesale 5 2009

Electricity Industry 5 2006

Electronic ComponentDistribution 12 2002

Electronic ComponentManufacturing 11 2002

Electronic Games 4 2003

Equipment for the Disabled 4 2006

Equipment Leasing 12 2003

Estate Agents 17 2008

Ethnic Foods 14 2007

Exhibitions & Conferences 10 2008

F

Factoring & InvoiceDiscounting 2 2003

Fast Food & Home DeliveryOutlets 23 2008

The Film Industry 4 2002

Finance Houses 11 2000

Fire Protection Equipment 8 2006

Fish & Fish Products 13 2008

Fitted Kitchens 7 2007

Football Clubs & Finance 3 2005

Footwear 15 2007Franchising 11 2008

Free-To-Air TV 8 2004

Freight Forwarding 16 2008

Frozen Foods 23 2008

Fruit Juices & Health Drinks 12 2008

Fruit & Vegetables 20 2007

Further & Higher Education 5 2005

G

Garden Equipment 12 2006

Gas Industry 4 2006

Giftware 17 2008

Glassware 14 2007

Greetings Cards 24 2008

Title Edition Published

H

Hand Luggage& Leather Goods 14 2008

Health Clubs& Leisure Centres 9 2009

Health Foods 22 2003

Heating, Ventilating& Air Conditioning 9 2002

Home Furnishings 18 2008

Home Shopping 12 2008

Horticultural Retailing 17 2008

Hotels 23 2008

Housebuilding 18 2009

Household Appliances(Brown Goods) 11 2008

Household Appliances(White Goods) 16 2008

Household Detergents &Cleaners 15 2007

Household Furniture 18 2008

I

Ice Creams & FrozenDesserts 12 2007

Industrial Fasteners 8 2001

Industrial Pumps 5 2000

Industrial Valves 8 2001

Insurance Companies 11 2006Internet Usage in Business 8 2005

IT Security 8 2007

IT Training 11 2007

J

Jewellery & Watches 24 2008

K

Kitchenware 6 2007

L

Laboratory Equipment 9 2008

Lighting Equipment 14 2002

Lingerie 8 2008

M

Management Consultants 10 2003

Market Forecasts 1 2005

Meat & Meat Products 19 2008

Medical Equipment 16 2007

Metal Recycling 4 2004

Milk & Dairy Products 22 2008

Mobile Phones 6 2005

Mobile Telecommunications 2 2007






N

Natural Products 2 2007

New Media Marketing 3 2002

Newspapers 17 2008Non-Metal Recycling 2 2008

O

Office Furniture 21 2008

Offshore Oil & Gas Industry 4 2006

Ophthalmic Goods &Services 16 2008

OTC Pharmaceuticals 13 2008

Own Brands 12 2007

P

Packaging (Glass) 13 2008

Packaging (Metals &Aerosols) 12 2003

Packaging (Paper & Board) 14 2008

Packaging (Plastics) 14 2003

Paper & BoardManufacturing 14 2002

Personal Banking 11 2000

Photocopiers & FaxMachines 14 2005

Plant Hire 13 2007

Plastics Processing 10 2003

Poultry 3 2008Power Tools 5 2007

Premium Lagers, Beers& Ciders 7 2007

Printing 13 2008

Private Healthcare 19 2008

Protective Clothing& Equipment 6 2006

Public Houses 24 2008

R

Rail Travel 7 2008

Ready Meals 10 2008Recruitment Agencies(Permanent) 9 2009

Recruitment Agencies(Temporary & Contract) 9 2009

Renewable Energy 2 2006

Restaurants 23 2008

Retail Chemists &Drugstores 15 2008

Road Haulage 22 2009


S

Sauces & Spreads 11 2008

Shopfitting 13 2006

Short Break Holidays 4 2001Slimming Market 8 2000

Small Domestic ElectricalAppliances 11 2007

Snack Foods 19 2008

Soft Drinks (Carbonated &Concentrated) 17 2008

Soup Market 2 2007

Sports Clothing & Footwear 11 2007

Sports Equipment 14 2007

Sports Sponsorship 6 2007

Stationery(Personal & Office) 24 2008

T

Take Home Trade 17 2008

Telecommunications 21 2007

Timber & Joinery 19 2008

Toiletries 21 2008

Tourist Attractions 5 2001

Toys & Games 22 2008

Training 17 2008

Travel Agents & Overseas

Tour Operators 21 2008Tyre Industry 4 2008

V

Vehicle Security 8 2007

Videoconferencing 4 2007

Video & DVD Retail & Hire 8 2005

W

Wallcoverings& Ceramic Tiles 17 2006

Waste Management 9 2008

Water Industry 4 2007

Windows & Doors 19 2008Wine 19 2008

White Spirits 1 2005

Market Reviews

Catering Market 20 2008

Clothing & FootwearIndustry 12 2008






UK Computer Market 11 2004

Construction Industry 10 2006

Contracted-Out Services 3 2007

Defence Industry 7 2003Distribution Industry 9 2007

DIY & Home ImprovementsIndustry 11 2009

Drinks Market 18 2008

Energy Industry 7 2008

Film Market 1 2006

Food Industry 19 2009

Healthcare Market 10 2005

Insurance Industry 9 2007

The Legal Services Market 1 2005

Leisure & RecreationMarket 15 2005

Leisure in the Home 2 2008

Leisure Outside the Home 2 2008

Local Government Services 2 2007

Mechanical Handling 1 2001

Motor Industry 12 2008

Music Industry 1 2006

Office Equipment Industry 8 2006

Packaging (Food & Drink)Industry 1 2003

Passenger Travel in the UK 5 2007Pharmaceuticals Industry 6 2008

Process Plant Industry 1 2000

Publishing Industry 12 2008

Railway Industry 2 2006

Security Industry 11 2006

Sports Market 12 2008

Travel & Tourism Market 15 2008

UK Internet Market 1 2009

Market Assessment Reports

A

ABC1 Consumer 2008

Activity Holidays 2006

Advertising Agencies 2007

All-Inclusive Holidays 2000

Alternative Healthcare 2008

Audio-Visual Retailing 2000

B

Baby Foods 2006

Baby Products 2008

Baths and Showers 2000

Beds, Bedrooms andUpholstered Furniture 2000


Betting and Gaming 2002

Book Retailing on the Internet 2007

Bottled Water 2003

Bridalwear 2002Business Postal Services 2008

B2B Marketing 2008

Business Travel Market 2008

C

Cable and Satellite Services 2002

Charity Funding 2005

Childcare 2008

Children’s Publishing 2008

Clothing Retailers 2000

Coffee & Sandwich Shops 2007

Commercial Dynamics inFinancial Services 2005

Commercial Insurance forSmall Businesses 2002

Condiments and Sauces 2008

Consumer Credit & Debt 2007

Contact Centres 2007

Contraception 2002

Cooking & Eating 2007

Cross-Border Shopping 2000

Cruise Market 2008

Customer Loyalty in Financial Services 2000

Customer Magazines & ContractPublishing 2007

Customer Relationship Management 2008

Customer Services inFinancial Organisations 2007

C2DE Consumer 2008

D

Diet Foods 2007

DINKY Market 2007

Direct Insurance 2007

Direct Mortgages 2008Domestic Lighting andElectrical Products 2000

Domestic Telecommunications 2006

E

E-Commerce: The InternetGrocery Market 2007

E-Commerce: The Internet Leisure &Entertainment Market 2008

Electronic Banking 2008

EMU — The Impact on the UKFinancial Services Industry 2003

E-Recruitment 2006






E-Shopping 2002

Estate Agents and Services 2007

Ethnic Foods 2002

European Electricity Industry 2007European Gas Industry 2007

European Long-Term Insurance 2008

European Oil & Gas Industry 2007

European Renewable 2008

Energy Industry

European Short Breaks 2008

European Telecommunications 2002

European Tourist Attractions 2007

European Trends in Food Shopping 2009

European Water Industry 2007

Extended Financial Families 2005

F

Financial Services Marketing to ABs 2006

Financial Services Marketing to ABC1s 2000

Financial Services Marketing toC1C2DEs 2006

Financial ServicesMarketing to Over 60s 2004

Financial Services Marketing to theRetired and Elderly 2007

Financial Services Marketing to

Start-Up Businesses and theSelf-Employed 2003

Financial Services Organisations onthe Internet 2009

The Fish Industry 2001

Forecourt Retailing 2008

Functional Foods 2008

Funding in Higher Education 2002

G

General Insurance 2008

Generation Y 2007

Global Waste Management 2007Green and Ethical Consumer 2008

Grey Consumer 2006

H

Healthy Eating 2008

Holiday Purchasing Patterns 2006

Home Entertainment 2008

Hot Beverages 2009

I

In-Car Entertainment 2000

Independent Financial Advisers 2008

Individual Savings Accounts 2005


Insurance Prospects 2008

Internet Advertising 2008

Internet Service Providers 2005

Issues and Challenges in the UK LifeAssurance Market 2002

Issues in Higher Education Funding 2006

IT Recruitment 2008

L

Lifestyle Magazines 2008

Low-Fat & Reduced-Sugar Foods 2008

The Luggage Market 2000

M

Marketing to Children 4-11 2003

Marketing in the Digital

Age 2006Medical & Health Insurance 2007

Men and Women’s Buying Habits 2008

Men’s Toiletries & Fragrances 2008

Millennium Youth 2002

Motor Finance 2008

N

The Newspaper Industry 2005

Non-Food Sales in Supermarkets 2008

Nutraceuticals 2008

O

Off-Trade Spirits 2004

Opticians & Optical Goods 2008

Organic Baby & ToddlerCare 2007

Organic Food & Drink 2008

OTC Pharmaceuticals 2000

Over-40s Consumer 2005

P

Pay TV 2004

Pension Extenders 2002

Pensions 2007

Personal Banking 2003

Personal Lines Insurance 2007

Personal Loans 2008

Pet Market 2007

Planning for Retirement 2008

Plastic Cards in Europe 2005

Plus-Size Fashion 2005

Private Sector Opportunities inEducation 2001

Public Relations Industry 2007

Public Transport2001






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Published by Key Note Ltd, Field House, 72 Oldfield Road, Hampton, Middlesex TW12 2HQ, Telephone: 020-8481 8750

R

The Railway Industry 2004

Ready Meals 2001

Recycling and the Environment 2000Retail Credit 2000

Retail Development 2001

Rural Economy 2009

S

Savings & Investments 2007

Saving Trends in the Eurozone 2002

Singles Market 2007

Shopping Centres 2008

Short Breaks 2004

Slimming Market 2009

Small Businesses & Banks 2002

Small Office Home Office Consumer 2001

Small Office Home Office Products 2001

The Soup Market 2001

Sponsorship 2000

Supermarket Own Labels 2007

Supermarket Services 2007

Sweet & Salty Snacks 2009


T

Teenage Fashionwear 2008

Teenage Magazines 2007

Teleworking 2003Trends in Food Shopping 2008

Trends in Leisure Activities 2007

Tweenagers 2005

U

Utilities 2007

V

Vegetarian Foods 2007

Vehicle Breakdown Services 2008

Vitamins, Minerals & Supplements 2007

W

White Goods 2000

Women Over 45 2007

Working Women 2006


Market Forecasts_ Transport, Travel & Tourism 2009

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