Are Germans now staying close to home for vacation ?

In the colorful world of the vacation industry, Martin Katz, 53, and Dietmar Gunz, 49, stand out as especially dazzling figures—even if at first glance they look more like they might be the steadfas

Are Germans now staying close to home for vacation ?

In the colorful world of the vacation industry, Martin Katz, 53, and Dietmar Gunz, 49, stand out as especially dazzling figures—even if at first glance they look more like they might be the steadfast employees of a commercial law firm.

Katz, a train travel specialist at Ameropa, a German tour operator, has spent years making vacations by rail desirable to customers. In an era when it is cheaper to fly from Germany to Rome than to book a train ticket from Düsseldorf to Dresden, this isn’t the easiest sell. And until recently, his company’s image was dismissed by competitors completely, shuffled off into a category together with Germany’s more bizarre holistic spa treatments, or bus trips that offer the elderly free cake and coffee along with sales pitches for products they don’t need.

Gunz had an even more extreme outsider’s role. An Austrian by birth, he spread himself too thin in the late 1990’s with the many branches of his Frosch Touristik group (FTI), including language, sport, long-distance and club trip offers, and gradually had to sell off the company to a British competitor. He faced a great deal of derision from major German travel companies such as TUI (TUIGn.DE) or Neckermann (AROG.DE). But he didn’t let it get him down: He withdrew from the business by running an inn for a while.

But the jeers from competitors have long since faded. With Germany and indeed all of Europe hit by the worst economic downturn since the postwar period, one-time underdogs have suddenly emerged as heroes and reasons for hope.

Demand for the short trips Katz offers to cities and vacation spots in Germany and its neighboring countries is huge. And Gunz, who reacquired his old company on the cheap six years ago, expects at least seven percent growth this year.

Big package tour operators like TUI or Thomas Cook (TCG.L), on the other hand, are slashing their offers, and they’ll be lucky if they manage to sell off the rest by the end of the summer season. The rise of Katz and Gunz, two outsiders, is by no means coincidental. It’s the result of a fundamental change that has hit the vacation business.

For decades, tour operators enjoyed the illusion of certainty—there were hard and fast rules, which applied even in bad times. The first was: “People always book vacations.” The second: “Spain and Mallorca are the big sellers.”

A third rule made its way over to Germany from Britain in the 1990’s, taken up especially by market leaders TUI and Thomas Cook. The idea was that successful travel companies would keep all services in-house, from hotels and flights to agencies and tour guides on site.

That was the only way—so the mantra went—a company could guarantee a consistent level of quality, and share in the earnings at all levels of the business when sales boomed.

But in 2009, in the middle of the global financial downturn, reality has finally caught up with the tour operators, and those hard and fast rules are turning out to be vain self-deception. Spain as well as the island of Mallorca is full of vacant hotel rooms. Meanwhile, tourism within Germany, long neglected by tour operators, is booming like never before. In times of crisis, Germans don’t seem to feel the allure of the foreign quite as much. And staying within their own borders is looking like a very good deal.

On Germany’s North Sea and Baltic Sea coasts, for example on the islands of Sylt and Rügen, up to 90 percent of hotels are fully booked this year. Some Germans aren’t planning to take a traditional summer holiday at all, but at best will go on a short trip within their own country—much to Katz’s delight.

It’s precisely companies like FTI, Alltours or Rewe, which have no or very few establishments and flights of their own to operate, that are looking comparatively good these days. They’re able to react much more quickly to their customers’ changing desires. “If there’s demand for it, we simply buy up additional plane seats and hotel beds at short notice,” Gunz explains.

Companies offering last minute trips, like L’tur or an FTI subsidiary called 5 vor Flug, are also now showing growth rates of up to 50 percent. Since many of the tourists—especially Russians and British—who usually frequent classic vacation areas are staying away this year, companies that take advantage of airline and hotel remainders are being inundated with low-cost offers, from the Middle East, for example.

The companies then combine the available offers into bargain vacations—a week in Dubai at a five star luxury hotel, for example, including the roundtrip flight, all for just under €800 ($1,140). “Even top-notch hotels normally offered only in the regular package tour catalog, are showing up this year in the last-minute bracket,” reports Boris Raoul, who runs FTI together with Gunz.

So far, most tour operators have taken this and other phenomena as simply a spate of foul weather, something that will hopefully pass soon. But that attitude could prove to be a mistake—and the real test is still to come.

It won’t become clear which companies are best suited to survive in the longterm in this extremely cyclical industry until late this autumn, when preparations begin for the 2010 summer season. By then, the short vacations currently being taken en masse will be winding down, with unemployment rates increasing at the same time. “We’re preparing ourselves for a longer crisis,” warns Klaus Laepple, head of the German Travel Association and tourism representative for the Federation of German Industries. “But we have to get through it.”

But how? It’s clearly high time for travel companies to reexamine their traditional business models and take into account large-scale trends like the predictable aging of Germany’s population, or the tendency toward ever more last-minute travel planning. Most of the companies are still far from doing so.

At the moment, they’re finalizing their preparations for the coming summer season as if nothing has happened. In recent weeks and months, buyers all over the world have rushed out to buy up a stock of plane tickets and hotel rooms with an ocean view—without having any idea how they’re actually going to get rid of them come 2010.

The companies introduce their thick catalogues in elaborate program presentations, and pitch favorable early bird booking rates to their clients. The managers will then decide by spring 2010, based on bookings so far, where they may need to make additional orders, or combine some flights in cases where there’s a lack of interest.

According to Katz at Ameropa, the system once considered foolproof “has long since ceased to fit in today’s environment.” Laepple at the German Travel Association also advises caution. “The days when 80 percent of the summer’s vacations were booked by spring are over,” he says. Nonetheless, the major tourism companies defend their antiquated business model as staunchly as Germany’s nuclear energy proponents cling to the idea of building of new power plants.

Katz is leading the way when it comes to showing that things can be different—and how to make the change. Along with his regular catalogues, the experienced tour operator publishes small brochures each month with bargain train travel offers to cities and regions in Germany and throughout Europe. These bookings now account for around a third of the company’s total sales and are “a damn good product,” in the words of a competitor.

Even the biggest competitors have started to recognize that especially the elderly, with their need for a greater feeling of security, are likely to prefer Binz, a Baltic Sea resort town on the island of Rügen, to the wild parties on Mallorca. But the fact that this idea is catching on among other travel companies doesn’t seem to worry Katz. The tourism potential in Germany is enough that “everyone can make a good living from it,” he says.

The numbers back up what he says. Currently, more than 80 percent of all vacationers in Germany book their trips themselves. Tour operators, however, are often able to work out better deals than individual travelers.

In order to make package deals appeal to their customers, companies have started adding admission tickets, spa offers, or complimentary local transportation to their vacation packages. “There’s enormous potential here,” suggests FTI’s Gunz. He’s planning to release his own travel catalogue focused exclusively on German destinations for the first time next summer.

Other companies looking to benefit from the trend toward vacations at home include a sector that until now has played a minor role—holiday park operators like France’s Center Parcs Group or the Dutch companies Roompot and Landal Green Parks. “Germany’s holiday villages have enormous potential for growth,” says Stefan Thurau, local head of Center Parcs.

Some more highbrow Germans may bemoan the soullessness of such artificial villages and pleasure parks, which tend to be located in remote areas away from large cities. But the fact is, that doesn’t stop families with children from heading off to these created worlds of petting zoos, water parks and playgrounds.

In Center Parcs’ oldest location in Germany, located in the Lüneburg Heath (Lüneburger Heide) in the northern part of the country, Thurau even offers his adventurous guests the chance to spend the night in tree houses or houseboats. They’re more expensive than the usual bungalows, but they are still selling fast.

Even the biggest players in the field, such as TUI, have added these destinations to their catalogues. They’re investing in locations of their own, like a gigantic vacation area called Fleesensee in the northeastern state of Mecklenburg-Western Pomerania, where TUI just opened another hotel. Such local travel offers, which have the additional benefit of being environmentally friendly, should bring the companies needed additional income.

And yet they continue to believe in the future of selling combined flight and hotel packages, although that strategy is increasingly looking like a huge and risky bet. In the end, the winner will be the one who most accurately assesses the customers’ preferences in advance—or the one who can put together new package deals the fastest, and if necessary sell them back off at a loss.