In a sector like travel that is dominated by two huge publicly listed players, worries about their performance can dent consumer confidence and send unsettling ripples through the sector.
Tui Travel and Thomas Cook are very much a barometer of the health of the industry, so this week’s news of planned cuts and redundancies might not appear to
bode well for everyone else.
However, sources close to the big two have suggested they may be as much victims of the optimism they have ramped up in the City as a new pessimism about the overall vitality of the holiday market.
Get the share price right
As PLCs, managing market and investor expectations to maintain your share price and market value can be just as crucial as making sure you are actually making decent profits.
One well-placed source said the story at Tui during what has been the worst recession in living memory is actually one of success – the company has added £30 million to bottom-line profits.
This performance has been borne out throughout the peak late-booking period, as highlighted in Travel Weekly’s Lates Watch weekly market monitor. Official industry GfK Ascent figures used for Lates Watch consistently pointed to a market that was down in volume by 5% for summer 2010, but up in value, with a £41 increase in the average selling price.
August figures from GfK Ascent saw the month end up 2% in revenue and suggested the declines in volume directly related to the stripping out of unprofitable capacity.
GfK Ascent managing director Sarah Smalley said: “August performed pretty much in line with what we thought. The lates has been dropping because of capacity cuts. There are positive signs for winter 2010, although summer 2011 is one to watch. There are different segments of the industry that are having a relatively tough time right now.”
A Thomas Cook spokeswoman said its cuts were not only being driven by concerns over the £10 million drop in group operating profit in the UK but also concerns for the future.
She added that although the average selling price was up by 3% for summer 2010, cumulative bookings were down by 1% and in the past four weeks were down by 2%, in contrast to countries such as Germany that have seen a stronger exit from the recession.
Keeping the markets happy
Sources have suggested the current situation with the big two is not dissimilar to the one the UK coalition government finds itself in: having to be seen to be making cuts to placate the markets.
Insiders claimed this week’s announcement by Thomas Cook of cuts came after it got wind of similar plans at Tui, suggesting a perceived competitive advantage in being seen to move first.
Mark Brumby, sector analyst at Langton Capital, said: “My belief is that things are tough and they are getting a bit tougher.
“They [the big two] are going to be leaking this information about cost cutting to maintain profitability, and at the moment, the City is turning a blind eye to the downgrades.
“The City has probably been a bit over-sold on the idea of synergies, that two operators is better than four and this is the new world and the holiday industry is a growth industry.
“But investors are still probably minded to forgive a few short-term problems.
“If you can’t get your top line going and your margins are under pressure, you cut costs, but it’s a poor substitute for revenue growth.”
Although it might be true, people’s desire to travel is growing, the question for the big two is whether they are able to grab their share of it as choice and competition increases.