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City Insider: Cook results a ‘miracle’ amid high street ‘war’

City Insider - FT journalist David Stevenson on the travel industry

It’s been another one of those grisly weeks, with bad news oozing from every corner.

The lowest moment for me was a lunch with a good friend who’s a renowned expert on the retail trade. As we munched into an economical spaghetti Bolognese at a cheapo Italian opposite his offices, he declared that “retail is on its knees: every day is getting tougher”.

Clearly his mood hadn’t been lifted by announcement’s that week from a raft of large retail giants – “Profits warnings (Dixons), companies going through bankruptcy processes (Oddbins, Clinton Cards), retailers on the edge (HMV, All Saints and some others I can’t talk about)”.

But then as the coffee arrived he ended with a triumphal flourish “And it’s going to get worse…… Good, well run, established retailers are running out of cash and it’s going to be bloody. 

“In clothing, for instance, typical year on year sales are down a scary 10%. If we assume that typical profit margins are in the 5% to 6% region, many if not most of these businesses are technically insolvent.

“Their managements will be seduced into thinking this is just a bad couple of months but it isn’t. When job losses really kick in, benefit cuts flow through and interest rates rise, the s**t will really hit the fan.”

I recount this grim and grisly conversation because it came the day after an intriguing email press release about ISAs from the share registrar company Equiniti. Technically the survey was about savings and investment but the hidden message is, I think, fairly scary for the travel sector.

The researchers discovered that only “37.9% of working under-30s took out an Isa, compared to 80.4% of those aged over 60 and still working”. In sum “only 31.3% of younger British workers have bought into an Isa.

A further 27% are still undecided as to whether or not to put a last minute lump sum into one, while 41.7% have no intention of saving through an Isa in the 2010/2011 financial year”.

Curious at whether ignorance was the main factor behind these dreadful numbers I talked to one financial services executive about the low savings rate. He noted that “these numbers are low because the level of debt is quite astonishing in this group.

“They simply cannot afford to save and the levels of very expensive debt via services like Wonga [an online money advance service] are terrifying. The Twentysomething generation is simply struggling to keep its head above the water let alone plan for the future or save for a nice holiday”.

Given the dreadful macro-economic backdrop detailed above, I’d suggest that the recent trading update from Thomas Cook was actually a half decent affair. We all knew that the numbers would confirm the massive disruption from North Africa (£20m) as well as the strong growth in Germany and presumably places like Sweden and Denmark.

The UK was yet again the poorer relation as “fragile consumer sentiment” hit margins, with cumulative bookings down 5% year on year. With numbers like these it probably wasn’t surprising that Thomas Cook declared that bookings for the coming summer had “slowed noticeably in the UK as a result of continued economic uncertainty”.

Selling prices were up 4% but planned capacity seems likely to come down by 1% with all-inclusive holidays the star yet again. One institutional investor I talked to declared that these numbers were “a minor miracle given the fact that the high street is a war zone”.

Another investor wondered out loud “why Thomas Cook is bothering to spend so much time growing in the UK – it’s clearly not going anywhere for at least another two years. Is all the management time being spent on the Co-op merger really worth the bother?”. 

Personally I thought that the most important piece of news from this trading update was the announcement that the group has received long term corporate credit ratings of BB- from Standard & Poor’s Ratings Services and BB- from Fitch Ratings “with the outlook assigned to each rating is stable”. 

Given the generally sour view of most credit analysts towards the travel sector, this is excellent news and should allow Thomas Cook to raise more money.

But not everyone is having an awful year

One aside points to a more nuanced view of how 2011 will develop – the massive dispersion of outcomes for different countries and even different parts of the UK.

Just as countries like German and Sweden seem to be booming while the UK starts and stutters, so it is with different travel sectors, products and destinations within the travel sector.

All-inclusive holidays seem to be booming and there’s also great news coming out of the hotels sector (although recent numbers from Marriott pointed to a softening in the all important North Eastern US market).

In particular London seems to be booming. Last week I met with one corporate adviser at one of the largest investment banks in Canary Wharf. He was busy putting together an opportunistic pot of money to invest in new hotels throughout Europe and especially London.

His optimism was based on the February numbers from STR Global, a research firm that specialises in this space. Apparently occupancy levels of 57% were up 2% and even Revpar was up at 2.9% in sterling terms.

Jones LaSalle Hotels Hotel Investment survey also reported that Investment volumes for 2010 in the Europe, Middle East and Africa region totalled €7.7 billion (US$10.8 billion) compared to €3 billion (US$4.2 billion) in 2009, according to the Hotel Investment Highlights report by Jones Lang LaSalle Hotels.

Looking at London in particular, year-end 2010 average daily rate and revenue per available room (revpar) rates actually increased year-over-year, to the tune of 9.9% and 6.4%, respectively, when measured in British pounds.

My investment banker friend was clearly delighted by these numbers and suggested that “all the whining about profiteering from the Olympics in 2012 had actually resulted in an increase in the number of calls he’d received.

“Rich sovereign investor’s can barely afford to buy decent property anymore in London, so they’re starting to look at buying up smaller hotels and ‘establishments’ and revving up the chic/boutique sector with new capacity”.

London, he declared, “is still a bargain when compared its proper peers like New York and Tokyo – 2012 is a complete irrelevance”.

Personally I sense a large amount of hubris before the inevitable post 2012 fall, but if his new fund is anything to go by, we’ll soon see spate of new developments of chic boutique hotels.
Sadly what London actually needs of course is more affordable business/leisure accommodation.

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