Thomas Cook faces deeper challenges than hot summer and late bookings
Shadow cast over tour operator as it warns on profits amid disruption from low-cost rivals
Thomas Cook has largely blamed its weak recent performance on the unusually hot northern European summer, which meant Brits booked trips later and at lower margins
Thomas Cook has largely blamed its weak recent performance on the unusually hot northern European summer, which meant Brits booked trips later and at lower margins. But lurking deeper in its financial results are hints of more deep-seated problems.
This week a second profit warning in as many months knocked 30 per cent off the travel group’s share price. As well as the slow “late bookings” market, Thomas Cook revealed a £153m profit hit from “separately disclosed items” including charges for restructuring, asset impairments and store closures.
On The Beach, an Aim-listed online travel agent that only began trading in 2004, and whose revenues are a fraction of Thomas Cook’s, now has a larger market value than the company that invented package holidays more than 170 years ago.
Even after a decade of consolidation, cost cutting and investment in technology, analysts and industry executives say the travel sector — and Thomas Cook in particular — faces challenges. In addition to the usual external risks, such as terror attacks, recessions and natural disasters, traditional tour operators face disruption from capital-light online rivals, low-cost airlines looking to add new revenue streams and ever-rising customer expectations.
Sold by Midland Bank in 1992, Thomas Cook passed through the hands of four different German owners before a 2007 merger with MyTravel returned it to the London Stock Exchange. Absorbing Co-operative Travel in 2011 added another 460 high street stores, just as travel was moving online. By 2012, its shares, which peaked at 280p after the MyTravel deal, were down to 13p. Harriet Green was appointed chief executive and undertook a widely praised restructuring, but departed abruptly in 2014. The company’s current Swiss chief executive, Peter Fankhauser, is adamant it “has come a long, long way” in recent years. “Maybe we underestimated the scale of the challenge, he says. “Customer needs are changing so we are having to constantly transform too.”
Thomas Cook has invested in new hotel concepts, which it says generate higher levels of both new business and repeat bookings. But analysts say it is still behind its bigger Anglo-German rival, Tui, which has poured money into buying hotels and cruise ships. Three-quarters of the passengers on Tui’s airlines are going on its holidays, compared with between a third and a half at Thomas Cook. This has created what Simon Cooper, founder of On The Beach, describes as a “walled garden” targeting more affluent travellers.
Tui’s greater scale, stability and diversity is reflected in its superior share price performance. But Stuart Gordon, analyst at Berenberg, points out that in operated package holidays, it too is finding life tough. Underlying profits in its “source markets” business are likely to be around 450m Euros this year, down from more than 700m Euros in 2015.
The internet has revolutionised travel for consumers, who can shop around and compare prices like never before. But it has also disrupted the old business model in operated tours — buying up airline seats and hotel rooms in winter in the hope of selling them in summer. “Doing that gives you exclusivity, but then you are beholden and if you can’t sell those last few weeks in the summer then that’s your profit gone,” says Tamara Lohan, the co-founder of boutique operator Mr & Mrs Smith.
Low-cost airlines now fly to airports such as Alicante in Spain, once dominated by charter carriers, while so-called “bed banks”, such as Webjet, act as wholesalers of hotel rooms. Both make it easier to buy flights and rooms dynamically, facilitating the growth of online tour operators who, in Ms Lohan’s words, “never had the money to take that sort of inventory risk.”
Thomas Cook admits it made an old mistake last year. Its tour operating division bought too many seats on its airline upfront; the two operate separately. That soaked up an increase in capacity at the airline, but left the tour operator needing to offer margineroding discounts when bookings did not go as expected. “We want that proportion [of pre-booked seats] to be less next year,” says Mr Fankhauser.
But even if the company better matches capacity with demand, it still faces challenges. One is the cost of distribution. Just under half of Thomas Cook’s total bookings are made online — but that masks big variations. In Scandinavia the group does not have a single high street travel store, whereas Germans overwhelmingly prefer to book in person. Mr Fankhauser says the group’s 600 UK stores — down from a peak of 1,200 — is “a reasonable number for now”.
But online rivals with no stores can plough proportionately more money into technology and marketing.
Mr Cooper points out that the total number of people going on packagetype holidays is the same as it was 20 years ago. But the number of traditional operators taking them has shrunk drastically, as low-cost airlines and independents have grown.
“The only substantial new UK operator to emerge in that time is Jet2, which has built a tour operator business on top of a low-cost airline cost base,” he says. Jet2, which last year overtook Thomas Cook to become the UK’s second-biggest package operator, with a market value of £1.2bn, is owned by Dart Group.
“My view is that you can either be a high-end, vertically integrated operator like Tui, or you can be a nimble, agile online operator like us. If you’re somewhere in between, then what is it that makes you different?,” says Mr Cooper.
The tour operator has seen its profits pale in comparison to rival Tui as the latter has invested heavily © FT montage