Insight: TUI Travel and Thomas Cook results buck the downturn

TUI Travel and Thomas Cook turned in probably their best ever results just as fears hardened of a deep downturn in the UK and the US confirmed it has been in recession for a year.

The two companies dominate in the UK – as they do in Germany, the only European market bigger than our own and also now officially in recession – so it is reasonable to ask how much longer the trade can defy economic gravity.

In case there is any doubt, analyst KBC Peel Hunt warns: “Tour operators head into the crucial booking season with consumers staring into the abyss. For the UK, the outlook appears particularly challenging.”

Yet Europe’s big two remain in rude health. In the words of the same analyst: “The majors have never been in better shape.”

TUI Travel reported a 43% rise in underlying profit to just under £320 million for the year to September and an underlying operating profit of £398 million – up 53% on a year ago – despite a loss of £266.6 million with the inclusion of exceptional items.

There was a big boost in traditional package sales. UK mainstream holidays delivered £133 million of those profits, almost half the group’s mainstream-holiday total of £277 million.

The company’s margin on UK sales rose from 1.6% to 3.9% – a remarkable result given the deteriorating economic situation over the past year.

Thomas Cook turned in a performance every bit as good. Operating profits rose 50% to £66 million over the period and the margin on sales to 4.2%. The UK provided £143 million in profits, almost double those of the previous year.

No wonder TUI Travel chief executive Peter Long was upbeat. “I have been in tour operating 25 years and seen four or five shocks,” he said. “There is experience of managing in a tough trading environment in our organisation.”

Long is confident of remaining in profit through the downturn, pointing out: “There was 15% less capacity out of the UK this summer and we will see a similar level out next summer. The industry is in better shape and we can add or take out capacity in line with demand. We are not in the same position as retailers with stock to sell.

“As long as people are in employment, they do not wish to forego their holiday. Some who are out of a job will not be able to afford a holiday. But we have taken out 16% – that will more than offset any reduction in demand.”

Long concedes: “We face a tough environment, but it was tough in the aftermath of 9/11. The consolidation and the failure of the third biggest tour operator [XL Leisure] means we are in control as opposed to having to react.”

KBC Peel Hunt supports the view that holidays are among the last elements of discretionary spending consumers will cut. “During the previous major recession [1990-91] expenditure on overseas travel and holidays held up,” it reports.

But the analyst warns: “The current conditions are far more challenging than 18 years ago.”

Since the second week of October, it suggests: “The consumer has stopped spending on a massive scale. Demand for holidays is declining.”

KBC Peel Hunt says the worst is yet to come and warns “the most significant decline” in travel demand will be in the UK.

This goes against the prevailing trade view that the UK is especially resilient. There may be good reasons why this has been so in the past – one being the availability of the cheap credit that has suddenly dried up.

KBC agrees the majors have never been stronger heading into a downturn, but says: “Sterling’s collapse is a major threat to UK demand.”

The fall in the pound is undoubtedly bad news for UK outbound tourism – with sterling suffering its biggest fall against the dollar since 1992 on Monday. But the effects are contradictory for the big two.

The high cost of the euro-zone and the US will mean some holidaymakers switch destinations or trade down. However, although the UK is vital to both TUI Travel and Thomas Cook, the pair make more than half their sales outside this country.

As UK-listed companies that report in sterling, future profits on eurozone sales will be enhanced if the exchange rate stays where it is. Indeed, Long suggests: “Sterling could further weaken significantly.”

Clearly, the health of travel’s two largest companies has implications for the rest of the sector.

Both sell primarily through their own outlets – TUI Travel reporting 75% control over distribution in the UK and Thomas Cook 67.6%. That leaves several million holidays for sale through independent retailers.

However, it also suggests a problem despite Long’s assertion that: “Controlled distribution has probably reached its limit.” The space for the independent sector is shrinking – even more so since the demise of XL Leisure in September.

The new year is likely to see accelerating job losses in the UK, making for a tough start to 2009 – a problem when 50% of bookings typically come in January to March.

“Demand is going to be less than anticipated,” warns KBC. “The late booking trend is likely to be even more extreme.” Expect a tense January.

TUI Travel Group mainstream sales