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

The Star (St. Lucia) - Business Week - - FRONT PAGE - BY JONATHAN ELEY, FT COR­RE­SPON­DENT

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

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