Differentiated packages: Tour operators seek ways to expand their size and operations

In such a highly seasonal market the break-even point has been challenging for most tour operators to reach. While tourist arrivals have grown over the past decade, the number of operators has surged and only a handful in the sector are able to thrive on the basis of a four-month high season alone. Although new air links may diversify the type and increase the number of tourists, tour agencies face the issue of vertically integrating – by investing in their own infrastructure – just as they continue to experience difficulties accessing funding.

FRAGMENTED & SEASONAL: Given its harsh winters Mongolia faces the challenge of a very short peak tourist season, lasting roughly from June to September. Tour operators tend to agree that some 80% of leisure tourist arrivals are concentrated in this short span. While a number of agencies may operate at full capacity during this period, only a quarter of this group operate on an annualised basis.

Nonetheless, the number of private operators has grown tremendously since the original liberalisation of the sector and the splitting of the former state-owned Juulchin into two separate operators in 1990. Liberal licensing has resulted in the number of travel and tour operators to mushroom, from a total of 503 licensed firms in 2008 to around 620 by mid-2012, although only an estimated 50 operators are active, according to the Ministry of Culture, Sports and Tourism. The vast majority of tour operators have similar itineraries, adding to a crowded market for firms which do not differentiate themselves. Indeed, a majority of tour operators require alternative sources of revenue in order to survive, such as supply chain and logistics management for industrial and mining clients during the winter.

Operators have traditionally generated fees from a variety of services such as visa application handling, air, bus and train ticket reservations, as well as their mainstay of organising tourist routes. Juulchin Tourism Corporation, a subsidiary of the Tavan Bogd conglomerate which also runs travel agency Air Link Mongolia, is one of the largest operators, with more than 8000 clients in 2011. Mongolia Adventure Tours was the first private operator established in 1992 and handles arrivals from 20 operators in 10 countries. Other established operators created in the 1990s include New Juulchin Group, Tsolmon Tours, Hovsgol Travel and Nature Tours, focused on culture and ecotourism.

Nomadic Expeditions, an early investor in the sector, is one of the largest operators for the US market, while Nomads Tours and Nomadic Journeys are leading operators for German tourists. Mid-sized operators include Great Chinggis Expeditions, Selena Travel and Horseback Mongolia, although their turnover rarely exceeds $1m annually. Larger investors in tourism infrastructure like publicly listed Genco Tour Bureau also have a significant share of the inbound tourism market.

DIVERSIFYING OPERATIONS: High seasonality in arrivals has forced most operators to seek alternative revenue streams. One alternative is to try to cater to the domestic market, particularly for events like the lunar New Year (Tsagaan Tsar) in February, although Mongolian tourists tend to travel on their own domestically. A growing number has also catered to outbound Mongolian tourists, however. “Catering to both inbound and outbound tourism allows some travel agencies to mitigate the troughs of the low season,” U. Batbayar, the managing director of Battour Travel Agency, told OBG.

“Inbound tourism generates the most profit, although turnover from Mongolians travelling abroad generates cash flow during winter months.”

The challenges of operating in a small but highly volatile market have kept the size of most firms small, constraining their ability to cope with larger tours and groups, and adding to the already high cost structure of such tour offerings. “A key challenge Mongolian operators face is lack of capacity: while European tour operators have significant capacity, it can take up to five Mongolian firms to cover a large order,” N. Erdenebat, the vice-president of the Mongolian Tourism Association, told OBG. “With each taking their commission, this has a tendency to push up prices just at a time when European demand is becoming more price-sensitive due to the effects of the economic slowdown.”

IMPROVING INTERNATIONAL LINKS: New air links to Ulaanbaatar and domestic links to provincial centres are gradually reducing Mongolia’s relative isolation. With roughly one-third of international arrivals through the capital’s Chinggis Khan International Airport, authorities hope to boost these generally higher-yielding arrivals. The remaining roughly two-thirds of international arrivals via train and road are mostly independent businesspeople and backpackers.

Growth in air arrivals since the financial crisis has been remarkable, with 155,400 international passengers arriving at Chinggis Khan International Airport in the first half of 2011, representing growth of 141.5% year-on-year. A new airport 60 km from the capital has been in construction since 2012 and is set to open by 2017, with capacity for 1.65m passengers a year, up from roughly 900,000 at the existing site.

While new air links have mainly been established to support business travel, they will likely attract new leisure tourists as well. However, seasonal fluctuations in frequency are as extreme as the weather in the world’s coldest capital, with only skeleton schedules served from November to April. A new direct flight by MIAT Mongolian Airlines to Hong Kong has operated thrice weekly since April 2011, while frequencies have been increased on routes to Beijing, Seoul, Tokyo and Moscow during the high season. Yet despite growing peak-season capacity persistent shortages of tickets on international flights in the summers of 2011 and 2012 point to growing unmet demand.

Since the amendment of the Civil Aviation code in 2003, the government has hoped to develop air links, particularly to Europe. While MIAT Mongolian Airlines’ direct link to Berlin and flights through Moscow have long been favoured routes for European travellers, new connections to the West are planned in coming years. Turkish Airlines inaugurated its first flight from Istanbul in July 2012: with a stopover in Bishkek, the flight provides the only link from Central Asia to Ulaanbaatar. While longstanding plans to establish an Air Astana link to the Kazakh capital were still pending at the time of writing, the Mongolian Tourism Authority (MTA) told OBG in October 2012 that Thai Airways and All Nippon Airlines were planning new charter flights from Bangkok and Tokyo respectively from 2013. In a landmark first direct flight to the US, MIAT Mongolian Airlines plans to open a direct connection to New York in 2013, shaving an expected four hours and around $200 off the 18-hour flight-time via Seoul, according to the MTA.

DOMESTIC CONNECTIONS: Domestic transport links are also slowly developing, with new air routes taking the pressure of higher-yielding tourists off of the dilapidated and limited road network. Despite plans to connect all aimags (provinces) to a national road network by 2020, a more concrete development has come with the launch of a number of domestic airlines. With additional routes from the capital offered by recent entrants like Mongolian Airlines and Newcom’s Eznis Airways, ticket pricing has begun to drop.

Eznis launched pioneering point-to-point services between the major tourist centres of Khuvsgul and Gobi during high season in 2010, raising the frequency in 2012. Tickets could only be purchased through travel agencies rather than airlines directly, generating a captive revenue stream for operators with affiliated ticketing agents such as Selena (through its Solidways agency) and Juulchin Tourism Corporation (through Air Link Mongolia), although airlines have started to accept bookings directly in the last few years. Pressure on pricing competition, however, has also harmonised ticket pricing for locals and non-residents in recent years. Mongolian Airlines meanwhile has reached out to global travel agents directly by partnering in June 2012 with Amadeus, a Spanish software firm specialised in online travel transaction processing. Opening reservations on the airline to some 91,000 agents globally, other airlines are expected to follow suit.

VERTICAL INTEGRATION: “The rise of independent travellers, despite logistical challenges, poses a threat to tour operators as they tend to book directly, through the Internet, and break the value chain we have built up,” D. Altanbagana, executive director of the tour operator Active Adventure Tours, told OBG.

In the face of mounting competition and a fragmented market, a natural tendency has been for the larger operators to invest in their own infrastructure such as ger camps, tourist complexes and new cultural and sporting festivals. Operators like Ar Mongol and Nomadic Expeditions have been the most active in this, and have developed high-end ger camps such as Nomadic’s Three Camel Lodge in the Gobi desert, opened in 2002 as the most luxurious such camp.

All but the largest operators, however, remain constrained by the challenge to access funding. Given that most tour operators do not own significant assets, it is difficult for them to grow, D. Altanbagana told OBG. While non-bank financial institutions have boosted their loan book to handicraft micro-enterprises, financing for asset-light tour operators remains very tight.

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The Report: Mongolia 2013

Tourism chapter from The Report: Mongolia 2013

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