Institutional investors will expect a dramatic rise in profits from industry giants TUI/First Choice and Thomas Cook/MyTravel if their mergers go ahead.
A senior figure at global management consultancy Accenture warned profit margins would have to at least double to attract long-term investment.
Accenture executive partner Guido Haarmann said: “An average 3% to 5% [margin] is not enough. Using other industries as a benchmark, we are talking about a high, single-digit profit margin for the big players.”
If the mergers proceed, both combined groups intend to list on the London Stock Exchange. But their earnings last year fell some way short of the suggested margin.
The TUI group reported profits of €398 million on a turnover of €4 billion for 2006 – a margin of less than 3%.
Thomas Cook’s group profit of €171 million on a turnover of €7.78 billion gave it a margin of about 2.2% last year, and MyTravel reported a similar margin on group operations with a profit of £62 million on revenue of £2.8 billion.
In the UK, only First Choice achieved a margin of 5% with profits of £135 million on a turnover of £2.7 billion.
Haarmann told Travel Weekly: “Many will say 5% is unrealistic. But this industry has to compare with the best practices in other industries in distribution, operations and procurement, not tomorrow, but in three to four years.”
The combined Thomas Cook/MyTravel group would have a turnover of about £8 billion. A 7% margin would require annual profits of £560 million. TUI/First Choice would need to make about 50% more to hit the same margin.
Haarmann warned there is no guarantee of either merger proving a success. “Consolidation alone is not enough to guarantee profitable growth. It is a question of how a merger is executed.”