Thomson’s acting chief executive Roger Burnell summed it up in a concise but understated way as he delivered his report into the ailing operator’s half-year performance.
“Well, what can I say?” he began. “It’s proved to be a very tough and challenging year.”
As far as the UK was concerned, this was as good as it got. Poor summer trading, discounted millennium holidays and general overcapacity were all blamed by Burnell for a gloomy profits forecast which saw shares tumble yet again.
In the six months to June 30, Thomson lost £5.1m against a profit of £5.7m in the same period last year, despite a strong performance in the Nordic region and Republic of Ireland.
The results prompted the market leader to announce its second profits warning in six weeks.
“The UK has deteriorated further,” confessed Burnell. “Profits will be significantly below the level expected at the time of the last trading update.”
The City, which had already cut profit forecasts from £135m to £110m, now estimates they may not even hit £85m.
But where has Thomson gone wrong and how can it lift the storm clouds gathering over Greater London House?
Arguably, distribution has been one of the core reasons behind its dismal performance. Burnell traced the start of Thomson’s problems back to the 1997 investigation by the Monopolies and Mergers Commission which effectively gave the green light to directional selling.
“Before the MMC report, we could pay the lowest commission to travel companies while Lunn Poly was receiving higher commission from tour operators for distributing their product. It worked extremely well,” said Burnell. “But the report signalled a shift towards directional selling. Going Places became more aggressive while Thomas Cook sought to protect its long-term interests by pushing its in-house operators.”
Along with a move by independents to sell away from the vertically integrated companies, it resulted in Thomson paying increased commission to third parties while Lunn Poly lost overrides from other operators.
Sales through Thomas Cook, meanwhile, slumped. In 1997 it was the largest outside supplier for Thomson, accounting for 14% of its business. Now it delivers just 5%.
City analysts said Thomson was slow to react to the changing market conditions.
“Everyone could see Thomas Cook was flexing its muscles except, it seems, Thomson,” said one. “There was also an arrogance in that Thomson thought its brand was enough to see it through. It wasn’t.”
Burnell said it was imperative for Thomson to increase control of its distribution from the current 60% to 75% – a figure exclusively predicted by Travel Weekly on May 24.
“We must also ensure there are no further cost incentives paid to third parties,” he said.
Burnell denied there is a fundamental flaw within the company but admitted to ‘internal problems’. A complete review of the business has already begun to reverse the companies fortunes, a move that could mean job cuts. The review is certain to mean a further integration between Lunn Poly and Thomson to reduce costs.
“I am not happy with our competitiveness,” said Burnell. “We will focus on all our costs and what I call our margin-generating activities.”
During his presentation, Burnell was at pains to point out that, under his leadership, its priorities have shifted. He stressed on at least half a dozen occasions that volume is no longer the number one objective.
“There have been concerns that we have been pre-occupied with volume. But volume is not the be and all and end all,” said Burnell.
Thomson partially blamed overcapacity for its problems in the lates market – Airtours raised capacity by 3% and Thomas Cook by 15% – but Burnell added: “Perhaps others have managed it better than we have.”
Thomson’s acting chief executive Roger Burnell summed it up in a concise but understated way as he delivered his report into the ailing operator’s half-year performance.
“Well, what can I say?” he began. “It’s proved to be a very tough and challenging year.”
As far as the UK was concerned, this was as good as it got. Poor summer trading, discounted millennium holidays and general overcapacity were all blamed by Burnell for a gloomy profits forecast which saw shares tumble yet again.
In the six months to June 30, Thomson lost £5.1m against a profit of £5.7m in the same period last year, despite a strong performance in the Nordic region and Republic of Ireland.
The results prompted the market leader to announce its second profits warning in six weeks.
“The UK has deteriorated further,” confessed Burnell. “Profits will be significantly below the level expected at the time of the last trading update.”
The City, which had already cut profit forecasts from £135m to £110m, now estimates they may not even hit £85m.
But where has Thomson gone wrong and how can it lift the storm clouds gathering over Greater London House?
Arguably, distribution has been one of the core reasons behind its dismal performance. Burnell traced the start of Thomson’s problems back to the 1997 investigation by the Monopolies and Mergers Commission which effectively gave the green light to directional selling.
“Before the MMC report, we could pay the lowest commission to travel companies while Lunn Poly was receiving higher commission from tour operators for distributing their product. It worked extremely well,” said Burnell. “But the report signalled a shift towards directional selling. Going Places became more aggressive while Thomas Cook sought to protect its long-term interests by pushing its in-house operators.”
Along with a move by independents to sell away from the vertically integrated companies, it resulted in Thomson paying increased commission to third parties while Lunn Poly lost overrides from other operators.
Sales through Thomas Cook, meanwhile, slumped. In 1997 it was the largest outside supplier for Thomson, accounting for 14% of its business. Now it delivers just 5%.
City analysts said Thomson was slow to react to the changing market conditions.
“Everyone could see Thomas Cook was flexing its muscles except, it seems, Thomson,” said one. “There was also an arrogance in that Thomson thought its brand was enough to see it through. It wasn’t.”
Burnell said it was imperative for Thomson to increase control of its distribution from the current 60% to 75% – a figure exclusively predicted by Travel Weekly on May 24.
“We must also ensure there are no further cost incentives paid to third parties,” he said.
Burnell denied there is a fundamental flaw within the company but admitted to ‘internal problems’. A complete review of the business has already begun to reverse the companies fortunes, a move that could mean job cuts. The review is certain to mean a further integration between Lunn Poly and Thomson to reduce costs.
“I am not happy with our competitiveness,” said Burnell. “We will focus on all our costs and what I call our margin-generating activities.”
During his presentation, Burnell was at pains to point out that, under his leadership, its priorities have shifted. He stressed on at least half a dozen occasions that volume is no longer the number one objective.
“There have been concerns that we have been pre-occupied with volume. But volume is not the be and all and end all,” said Burnell.
Thomson partially blamed overcapacity for its problems in the lates market – Airtours raised capacity by 3% and Thomas Cook by 15% – but Burnell added: “Perhaps others have managed it better than we have.”