The UK travel and tourism industry serves three main markets: domestic tourism by UK residents within the UK; outbound tourism by UK residents travelling abroad; and inbound tourism by overseas residents travelling to the UK. In 2006, total expenditure on UK travel and tourism increased by 1.4%, to £70.04bn. A total of 227 million trips were made and 1.35 billion overnight stays were recorded during the year. Between 2002 and 2006, the inbound market was the best performing of the three in terms of the number of trips and bed nights. The performance of the domestic market was more subdued.

The UK Government has recently announced the latest batch of passenger train operating franchises and, in line with its franchise policy, that current incumbents should make way for new operators. Two of the franchises currently operated by National Express and one of the franchises currently operated by Virgin Rail have been awarded to other suppliers. Another pillar of the Government's rail franchise policy is that the farepayer must shoulder a greater share of the running costs of the railway. This decision is likely to result in higher ticket prices in the future.

Consolidation and merger activity has been a key feature of the outbound tourism market in 2007. Mergers have taken place between the leading suppliers, with MyTravel Group PLC joining forces with Thomas Cook AG, and First Choice Group PLC merging with TUI AG (the parent company of Thomson Holidays and Thomsonfly). Competition from low-cost airlines, the trend towards independent travel and the increasing preference among consumers to book their holidays via the Internet are all factors that have contributed to the decisions to merge.

One of the most significant recent developments in the global airline industry occurred in March 2007, when European transport ministers approved an open-skies pact to liberalise the transatlantic airline market. The agreement basically means that any EU airline will be able to fly to any point in the US from anywhere within the EU, while any US carrier will be able to serve Heathrow and internal EU routes. The new agreement will take effect in April 2008 and will replace a number of bilateral open-skies deals already signed between EU member states and the US, including the highly restrictive Bermuda Two agreement between Britain and the US, which allows only four airlines (BA, Virgin, United Airlines and American Airlines) to fly transatlantic routes from Heathrow.

The travel and tourism industry is expected to struggle in 2007. The prolonged spell of wet weather in the summer months could affect domestic tourism. At the same time, only modest growth in the number of inbound visitors to the UK is expected. Outgoing visitor numbers are showing signs of remaining relatively static compared with 2006, although the wet summer in the UK is expected to benefit this market to some extent. In the longer term and up to 2011, the fortunes of the three markets are expected to differ, with the inbound and outbound markets demonstrating growth, but the domestic market continuing to contract.