Thomas Cook issued a profit warning on November 27 two days before releasing its full-year results.
It was the second profit warning in two months – not good for a listed company, especially one which was plunged into crisis in 2011-12 after it issued three profit warnings in 12 months.
Chief executive Peter Fankhauser, an experienced tour operator with a good track record and a charming manner, blamed the long hot summer for the first profit warning on September 24 when Cook reforecast its underlying, full-year operating profit as £280 million.
“Many customers spent June and July enjoying the sunshine at home and put off their holidays abroad,” he said, “leading to tougher competition and higher than usual levels of discounting in the ‘lates’ market.”
That made sense. It triggered a fall in the group’s share price from about 78p to 56p.
The share price had been coming down over the course of the year anyway, but it stayed close to 50p until the second warning when it plunged to below 23p at one point this week.
OK, the share price does not necessarily mean anything of consequence to customers unless it triggers damaging news stories.
Yet the second profit warning, two days before the full-year results, was curious. Why not wait?
My guess at the time was that someone had decided it might be good to get the bad news out of the way in the hope that reassuring words to analysts and investors and a clear strategy to address the issue as part of the results presentation might affect a turnaround.
That was cynical and, let’s assume, not so. Rather, the second warning was a product of the year-end auditing process.
UK ‘particularly disappointing’
It saw the group’s underlying, full-year operating profit revised down again to £250 million or “£58 million lower than the prior year on a like-for-like basis”.
Thomas Cook again cited “discounting in the ‘lates’ market” for the decline in its tour operator performance, with the UK “particularly disappointing”.
Fankhauser noted: “The UK was particularly hard hit with very high levels of promotional activity coming on top of an already competitive market for holidays to Spain.”
Looking ahead, he said: “We will put particular attention on addressing the performance in our UK tour operator where the challenges of transformation remain significant.”
Yet it was not a further decline in tour operator returns that triggered the warning.
On the contrary, £28 million of the additional £30-million write down in operating profit was due to “legacy and non-recurring charges”.
These comprised a £14 million write-down of “historic hotel receivables”, £4 million in flight disruption costs, and £10 million in “further transformation costs”.
All might have been accounted as ‘separately disclosed items’ outside of the operating numbers.
Indeed, in its full-year results, the group noted “costs of transformation” (£121 million) and “airline disruption” (£16 million) among its separately disclosed items.
But once the decision was made to assign the £28 million to operating profit rather than as one-off expenses, Thomas Cook was obliged to inform the stock market.
The problem is that the double profit warning spooked investors, reminding everyone of the group’s near-death experience in 2011-12, and appeared to confirm a widely held belief in parts of the industry and wider business circles that Cook represents a dying model.
Decade of consolidation
It is all too easy to contrast Cook’s performance with that of On the Beach which released its full-year results the same week.
The Financial Times (FT) did so, noting: “On the Beach, an online travel agent that began trading in 2004 and whose revenues are a fraction of Thomas Cook’s, has a larger market value than the company that invented the package holiday more than 170 years ago.
“Even after a decade of consolidation, cost-cutting and investment in technology, analysts and industry executives said the travel sector, and Thomas Cook particularly, face challenges.”
The FT noted: “Thomas Cook admits it made an old mistake. 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 margin-eroding discounts when bookings did not go as expected.”
Fankhauser said: “We want that proportion [of seats] to be less next year.”
That also makes sense, but one could look at it differently. There is overcapacity in the European short-haul market, yet Thomas Cook’s airline group expanded 10% this year to take advantage of Monarch and Air Berlin exiting the market late last year.
The additional capacity became a tour operator problem, reflected in the way the group’s accounts are now segmented, but it could just as easily have hurt the airline’s numbers.
The fact that the second warning was triggered by an accountancy change was noted by the FT’s Matthew Vincent, who wrote: “Those charges were one offs. They could have been classified as exceptional.
“The fact they were suddenly reclassified two days before the results suggests disagreement on the part of the finance director or the auditors.”
‘No one books a package holiday’
I have been asked repeatedly in the past week whether Thomas Cook will survive – including by a national newspaper journalist, an aviation analyst and the head of a university tourism department. Yes, I say, certainly much longer than Theresa May.
The tourism professor pointed out no one he knows books a package holiday. Yet in the 12 months to March official figures show 63% of all outbound air holidays from the UK were Atol-protected, and under the package rules which came into force from July they would all be packages – so somebody is booking them.
I warrant Jet2holidays has had more impact on Thomas Cook’s margins in the past year than On the Beach.
Thomas Cook’s results were disappointing to investors and analysts. The group’s full-year operating profit fell to £97 million and it reported an overall pre-tax loss of £53 million.
Its financial performance in the UK was worse than expected and the UK is important to Thomas Cook, but it is not just a UK company – it has substantial businesses in Germany and the Nordic countries.
Thomas Cook remains a going concern. Indeed, the consensus forecast among analysts is that its share price will rise.
The question remains: why issue that second profit warning given the damage it was likely to cause was out of proportion to the revision?
I have no idea what went on internally, and the departure of Ingo Burmeister to German rival Der Touristik this week and his replacement as Thomas Cook UK chief by Chris Mottershead may be no more than coincidence.
Yet the episode has knocked the group’s reputation, confirming the prejudices of the ‘tour operator is dead’ school, and leaving it little room for manoeuvre in the eyes of investors and analysts.
After all the hard work of recent years, Thomas Cook has something of reputational mountain to rescale.