The fight for the beaches
The rationale behind MyTravel’s desire to buy First Choice Holiday’s mainstream package business is simple. There is overcapacity in a declining sector and the market over the past year has been difficult.
The contrasting strategies of the companies also provide reasons for a deal.
First Choice has been moving away from the traditional short-haul package for some time. A year ago, it revealed its aim of generating at least 66% of group operating profit from its specialist sectors – when, at the time, its mainstream holidays division accounted for 47% of profits.
MyTravel has continued to focus on the package holiday sales on which it was built and would like to remove a rival in the sector and combine operations to cut costs and improve margins.
Industry figures broadly welcomed the prospect. XL Leisure Group managing director for tour operators Geoff Medhurst said: “It’s what the market needs.”
The City also reacted favourably, with the share value of both companies initially improving.
The implications for staff at both companies would be less welcome. First Choice’s mainstream business includes not just its traditional package holidays but its retail outlets, airline and website, so a deal is likely to involve substantial job losses.
However, a sale is unlikely. The approach may have come from MyTravel, but it is First Choice in the driving seat and in the words of mainstream holidays managing director Dermot Blastland: “The mainstream business is very vibrant. We are not under any pressure.”
It is in any case difficult to see how MyTravel could afford the £500 million for a deal. The profit it is likely to announce for the past year will be its first since 2001 and it has warned it will remain in the red in the UK.
MyTravel has consistently cut capacity since 2002. The group closed 120 shops at the end of last year and in June reported: “We continue to focus on margins and not chase volume.”
MyTravel’s survival is one factor driving renewed talk of the consolidation industry leaders have long predicted. By contrast, First Choice has told the City it is “well placed to outperform the market and deliver growth into 2007 and beyond”.
Earlier this year, First Choice sought a merger with Swiss-based Kuoni to create a pan-European rival to TUI and Thomas Cook. In that light, it is hard to see First Choice selling its airline, website and traditional package business, and even more difficult to see it selling to MyTravel.
The players
- First Choice – double-digit growth in profit and turnover for past three years. Increasingly focused on specialist and activity holidays and has cut short-haul capacity while increasing long-haul, reconfiguring aircraft to offer more leg room. Announced it will launch airline in the UK for the groundbreaking Boeing 787 Dreamliner, due in 2008.
- MyTravel – on the brink of collapse in 2002 with debts in excess of £1 billion. Group profit this year will be first since 2001, but continues to be loss-making in UK. Restructured but remains in the hands of its bankers.
The history
As Airtours, MyTravel made a £852 million takeover bid for First Choice in March 1999, at a time when First Choice was seeking a merger with Kuoni.
First Choice shareholders said no to the Kuoni merger, leaving Airtours confident of success. But the European Commission launched an investigation on competition grounds, after prompting by the Association of Independent Tour Operators.
The EC vetoed the takeover in September and blocked a renewed bid, saying it would leave three companies controlling 80% of the UK package holiday market.