Why Most Travel Group Mergers Destroy Value Instead of Creating It

One of the great assumptions in business is that bigger businesses are always more efficient than smaller ones and that once you acquire several companies, the obvious next step is to consolidate everything into one central operation.

It sounds logical, it looks impressive on an organisational chart, and it usually produces an attractive spreadsheet for the finance director, but after spending nearly forty years in the travel industry I have come to the conclusion that this thinking has destroyed more successful travel brands than almost any other management fad.

I first encountered this dilemma when I joined International Leisure Group (ILG).

Like many fast-growing travel businesses during the 1980s, ILG had expanded by acquiring a collection of different tour operators, each with its own personality, management team and loyal customer base.

Lancaster Holidays occupied one position in the market, Global Holidays another, while they had massive crossover with the largest Intasun brand, with all fighting for their own customers despite sitting under the same corporate umbrella.

At the beginning of every season, each division received its own allocation of airline seats and was then expected to compete independently, even though many of them were selling the same destinations, the same hotels and, in some cases, almost identical holidays.

This became even more obvious once the late sales season arrived, because every division had built its own department dedicated to clearing unsold holiday stock. Instead of working together to maximise the Group's profitability, they frequently ended up competing directly, discounting the same flights and accommodation until prices collapsed unnecessarily. From the outside, the Group looked united. Internally it was often fighting itself.

Because I became the first finance executive to work across two separate divisions, I found myself sitting on several internal working groups examining where consolidation genuinely created value and where it simply damaged successful businesses.

Some decisions were wonderfully straightforward. Finance, IT and other administrative functions were obvious candidates because customers neither knew nor cared where payroll was processed or which computer system produced the management accounts. Centralising those activities removed duplication without affecting the customer experience in the slightest.

The more interesting discussions centred on the commercial side of the business because that was where personalities, politics and profits collided. One proposal I strongly supported was to merge the buying function and require each division to specify exactly which hotels it wanted, what quality standards it expected, and the rates it was prepared to pay.Instead of multiple contract managers negotiating against each other, one experienced Group Purchasing Director negotiated on behalf of everyone.

I remember my divisional managing director, Hugh Morgan, throwing coffee cups and sourcers at me from his office once he discovered that I had led this betrayal of his authority as he saw it, and him being deeply pissed off about surrendering this authority to Len Mooney, the new Group Purchasing Director, but commercially it made perfect sense. Purchasing power increased, supplier relationships improved and, most importantly, the individual identities of the brands remained intact.

We reached a similar conclusion about overseas operations. There was little point in employing several resort managers at the same destination when one senior manager could oversee operations, yet we deliberately retained branded representatives in their own uniforms because customers had chosen Lancaster, Global, or another brand for a reason. The cost of keeping separate customer-facing teams was tiny compared with the value of preserving each brand's personality. This time it was Lancaster's MD Nigel Wallington who hit the roof with me, as this was one of his favourite aspects of the business and I had just removed his excuse for galivanting around the Med visiting his staff in resort. Maybe I should have thought more about the human aspects if I expected a successful career!

Then, while I was travelling the world on a sabbatical, something happened that completely changed my thinking about group consolidation.

The late sales departments were merged into one central operation, led by my best man from my first marriage, Laurence Assocks, who had previously run Global's late sales operation. On paper it looked like another masterstroke. Instead of divisions competing against one another during the final three months before departure, unsold seats would simply pass into one central operation and be sold under the Group's largest brand, Intasun.

Unfortunately, whoever designed the system forgot about one thing. Human nature.

When I returned, I discovered Global had quite rationally kept hold of all the profitable Saturday departures and peak-season holidays while passing back the unattractive off-peak capacity that had become someone else's problem. Their brochure profitability improved dramatically, but only because another division was left carrying the burden of selling the difficult stock. The Group hadn't become more efficient at all. It had simply encouraged behaviour that distorted performance and rewarded the wrong decisions.

Years later, when I returned to MyTravel, I watched almost exactly the same story unfold again. Direct Holidays, led by savvy Duncan Wilson, naturally selected the most profitable flying programme while leaving Airtours to clear the remaining capacity through late sales, creating misleading comparisons and facilitating the story that this was best for the group because Direct Holidays was the most profitable division based soly on the distortion that thye did not have to sale late stock. Different company. Different decade. Exactly the same mistake.

That is why I have always believed that successful travel groups should consolidate only where customers never notice the difference, whilst fiercely protecting the entrepreneurial spirit of every individual brand. Finance, IT, purchasing and senior overseas management can often be shared successfully, but once head office begins removing genuine commercial responsibility from divisional leaders, the energy that made those businesses worth acquiring slowly disappears. The spreadsheets may look better for a while, but the brands become weaker every year until they eventually fade away altogether.

Looking back, ILG taught me one lesson that I have carried through every acquisition, merger and restructuring I have witnessed since. In travel, two plus two rarely makes five. More often it makes three, because nobody ever seems to put a value on the entrepreneurial culture that disappears when everything is centralised.

Sadly, judging by many of the mergers I still see today, I am not convinced the industry has learned that lesson even now.