Thomas Cook has forecast full-year profits are likely to be at the lower end of expectations following the UK heatwave and increasing competition in Spain.
In a third-quarter trading update the travel giant said margin pressure in its UK tour operation accounted for a 3% decline in gross profit to £433 million.
It said a return of demand to high-margin destinations like Turkey and Egypt has not offset continuing competition in the UK’s most popular destination Spain.
However, Thomas Cook saw third-quarter revenues increase 10% to £2,479 million and the firm is 79% sold for the year, a similar level to this time last year.
Thomas Cook said the recent period of good weather in key source markets like the UK has led to a delay in bookings “restricting our ability to drive margins in the ‘lates’ market”.
For summer 2018, total bookings were up 11%, due to strong customer demand for Turkey, Egypt and Greece and pricing across all segments is higher than last year.
But average selling prices are 3% lower overall for the season, reflecting a higher mix of short/medium-haul destinations.
In the UK, bookings were up 1% for summer 2018 with pricing up 7%, largely reflecting higher bed cost inflation to Spain, Thomas Cook said.
Northern Europe bookings were up 2% while prices were up 4%.
In a statement to the City this morning, the firm added: “We continue to experience margin pressure due to a highly competitive market for Spanish holidays.
“While we have seen good growth to higher-margin destinations such as Turkey and Egypt, this has not been enough to fully offset the margin pressure which has largely impacted holidays to Spain to date.”
Peter Fankhauser, chief executive of Thomas Cook, added: “We have grown revenue strongly in the third-quarter as more customers chose Thomas Cook for their holidays.
“I’m pleased to see that the improvements we’ve made to our holidays are paying off through strong growth in both new and retained customers, at 12% and 5% respectively so far this year.
“Bookings for the summer are up 11% overall, fuelled by strong growth in our croup airline, in line with the planned increase in capacity, particularly in Germany.
“This has helped to offset a slowdown in package holiday bookings in recent weeks with customers across our European markets delaying decisions about their summer holidays as they enjoy the record temperatures at home.
“It’s clear that we remain in a competitive environment, particularly in the UK where the growth in popularity of higher-margin destinations like Turkey and Egypt has not fully offset the continued pressure on margins to Spanish holidays.
“Based on our current view, we now expect growth in full year underlying operating profit to be at the lower end of market expectations.
“I am pleased by the strong strategic progress we have continued to make in the past few months, including the successful opening of our new Cook’s Club brand in Greece and the launch of our Expedia alliance for customers in the UK and Scandinavia.
“We are confident this will lead to further profitable growth over the medium term.”
Thomas Cook announced underlying EBIT up for the quarter up 8% to £14 million, while gross profit of £443 million was £15 million lower than last year.
Gross margin of 17.9% represents a decline of 240 basis points over the same period last year.
Group operating profit (pre-exceptionals) improved by £1 million on a like-for-like basis to £14 million.
Group airline operating profit grew by £5 million, helping to offset a £6 million reduction in operating profit for Thomas Cook’s tour operator.
Corporate costs were £2 million lower, mainly due to the timing impact of head office items.
EBIT increased by £8 million to £21 million, reflecting the costs incurred in setting up the new Airline Operator Certificates and disruption in the UK and Germany following the insolvencies of Monarch and Air Berlin.
Net debt at June 30 was £468 million, an increase of £64 million compared to the same period last year.
This included non-recurring payments totalling £58 million to The Co-operative Group in connection with exiting the UK retail joint venture.
On a like-for-like basis, excluding non-cash items and the effects of currency changes, net debt improved by £73 million.