Thomas Cook Group will get beyond this mess

The conventional wisdom, until recently, was that consumer services had been blown out of the water by the advent of the internet.

Why would anyone go to a high street insurance broker to sort out his car insurance when he could log onto the internet and get a get a quote directly from Gocompare.com or Moneysupermarket.com?

Similarly, the pundits told us, why would anyone go to a travel agent to book a holiday? We can book air tickets from the comfort of our home. Then, we can book the hotel of our choice on a website such as Booking.com, lastminute.com or Trivago.com.

We can also book our favourite hotel directly, using its own website. Simon Calder, the Independent’s travel guru, reckons that this normally secures a free upgrade.

So the travel agencies and the package tour operators, who largely own them, were expected to go the same way as the insurance brokers. But they didn’t. True, the number of travel agencies in the high street has dramatically declined, as has the number of bricks and mortar banks. But travel agents and banks are still in business.

In fact, the number of package holidays booked in the UK is, if anything, rising; though the figures are a little obscure. (If you book a flight and a hotel on the EasyJet website, is that a “package”. Probably not, but you get my drift).

Why would sensible people like our readers want to go on package tours?

I’ll give you six reasons.

First: peace of mind. Package holidays are covered in the UK by the ATOL (Air Travel Operators’ Licence) Holiday Protection Scheme. ATOL is a kind of insurance scheme supervised by the Civil Aviation Authority (CAA), the UK’s aviation regulator. All tour operators in the UK are required by law to hold this licence. If an airline, hotel or car hire company, whatever, is unable to deliver, the traveller is indemnified. And once at the destination, tour operators offer customers a local representative, who can be invaluable if things go wrong.

Second: convenience. Package holidays provide off-the-shelf leisure products for the time-poor though often not cash-rich. When we trawl the internet for hours, combining the flights with hotels without any specialist inside knowledge, we usually have to pay for transfers, local guides and insurance. Unless we really know what we are doing we are unlikely to get a better deal than the professionals.

Third: demographics. A growing band of our tribe is in retirement, pre-retirement, semi-retirement, having paid off their mortgages and no longer with dependent children. This band can travel at almost any time they wish, and normally seek to escape at least part of the ghastly British winter for sunnier climes. Such people often buy several package holidays a year, often at short-notice, and seek out value deals. And they often develop strong brand loyalty with particular operators. Another important demographic is parents with young children. They seek something for all the family, and good tour operators know how to please them.

Fourth: price clarity. If you want to know the bottom line, go on a package holiday. Especially since the rise of all-inclusive packages (all you can eat – and, increasingly, all you can drink!). Jet off on your own steam, and you had better forget the credit card bill that will be awaiting your return.

Fifth: sophistication. Once a package tour meant a week’s bed and breakfast in Benidorm or Torremolinos; and, let’s not be snobbish. Torremolinos has some great restaurants and (despite the dreadful TV spoof) Benidorm is fun. But these days a package tour might be a guided tour of Ming Dynasty China, involving a cruise down the Yangtze River; or horse-riding in Iceland; or a trek in the Atlas Mountains. Cruises are packages, and they comprise the fastest-growing sector of the leisure travel market.

Sixth: economies of scale. Hotels prefer to work with good operators who can fill capacity, in return for which they discount. On the demand side, the more customers, the lower the fixed costs per customer. Good tour operators can offer keenly priced deals in all segments of their product portfolio.

So package holidays are here to stay, even if many sophisticated travellers prefer to cook up their own itineraries.

Thomas Cook Group (TCG) is the oldest, biggest and best known tour operator but its share price has been a roller-coaster ride over the last few years. Last year it suffered from the departure of a high-octane CEO; and just this last month it has had a public relations disaster, largely of its own making. But its key strengths will see it through. These are brand recognition, product breadth, distribution reach, customer service, and (my usual favourite) cash flow.

Thomas Cook is one of the world’s leading leisure travel groups, with sales of over £9 billion in the year to 30 September 2014 and more than 22.3 million customers. The group has nearly 23,000 employees and offices in 17 countries. It has over 3,000 retail outlets and operates a fleet of 88 aircraft[i].

But there has been a problem. Like, they have been losing money (in boring old accounting terms at least). The accounting loss for the last full financial year was £115 million on turnover of over £8.5 billion. Finance costs of £180 million were part of the problem. In the previous year the loss was £213 million on turnover of £9.3 billion.

Thomas Cook’s name has been a unique brand in leisure travel since 1841. Its history is a business school case study in corporate evolution. The modern TCG we now know emerged in June 2007 with the merger of Thomas Cook AG (successor to the historic Thomas Cook & Son) and MyTravel Group plc. Listed in London, it became a constituent of the FTSE-250 Index.

In October 2011 TCG merged its UK high street travel agencies with those of the Co-op to create the UK’s largest travel agent. Then, in October 2013 TCG unveiled its new unified brand and the Co-op brand name was discontinued.

Years of growth by acquisition brought about accumulating debt. In November 2011 TCG’s shares lost about three quarters of their value over doubts about its ability to refinance its debt. Subsequently, they recovered somewhat thereafter.

In May 2012, Harriet Green was appointed CEO. Ms Green is credited as having taken TCG back from the brink. Her highly driven management style (typically clocking in at 04:00 hours after a session with her personal trainer), combined with improving market conditions, enabled the company to improve performance and to reduce its debt pile.

In November 2014, Green left suddenly, swiftly succeeded by Peter Fankhauser. Shares in the company plunged by 17%. Conspiracy theories abounded, but turn-around CEOs do not often last long. Once a company escapes the abyss, management (and investors) prefer normality.

The underlying financials are improving.

On 20 May TCG issued its six monthly results to 31 March 2015. Group revenue increased by £37 million, or 1.2%, to £2,742 million (in H1 2014 it was £2,705 million), as a result of new travel products and long haul sales. The Group’s gross margin was maintained at 21.3%, as improved yield management and cost efficiencies compensated for continued competitive pressures. And there was a significant improvement in profitability. Losses from operations improved by £66 million, or 23%, to £220 million (in H1 2014 it was £286 million), helped by a 50% reduction in extraordinary items[ii]. The direction of travel is positive.

TCG has expanded its web presence to a point where one can foresee that the expensive bricks and mortar travel agencies could be reduced to premium locations such as up-market shopping malls, like Bluewater. In the 2014 financial year 38% of its holidays were booked online against a target of 40%. That is likely to continue to rise.

The naysayers will argue that this is a fiendishly competitive market and that TCG has found it more difficult to increase its prices than its arch-rival, Tui (the tour operator formed in December out of the merger of London-listed TUI Travel and German majority owner TUI AG. TUI has annual sales of $20 billion compared with TCG’s $13 billion).

But focus on margins. Since taking over, Peter Fankhauser has shined a laser beam on costs and we can expect manpower to reduce further with better IT systems. And look at goodwill tied up with millions of customers who make repeat purchases every year.

In February there were rumours that TCG was considering selling its airline business[iii]. This would help to reduce debt further but would probably be revenue-neutral.

On 12 May a rumour began that Fosun International could double its existing stake to 10% as a prelude to a bid. The Chinese investment group, which bought France’s Club Med some months ago, paid £91.8 million in March for a 5% stake at a price of 125.59 pence per share. The shares spiked to 160.6 pence.

Then, just a few days later: a PR disaster. A coroner ruled that the two British children who died of carbon monoxide poisoning in a Greek hotel, whose family were on a TCG package tour, were victims of a breach of duty of care by TCG.

It got worse as it emerged that TCG had received ten times the compensation from the tragedy than the unfortunate family. Only later did TCG announce that that money had been donated to charity. There was outrage on Twitter, and traffic to TCG’s website fell by a reported 20%.

TCG did not have to have this public relations disaster. The stone-faced lawyers had remained in charge while CEO Peter Fankhauser avoided the airwaves. A critical leading article appeared in The Times on 19 May and questions were even raised in the House of Commons on 28 May. The shares sagged and, at time of writing, languish at around 139 pence.

Without minimising the human tragedy behind this setback, TCG’s share price should recover. On 12 May, Credit Suisse reported that it could foresee a potential upside in the stock price this year of 17% from its then level of 158 pence. That could be an underestimate – though others disagree. Ask yourself whether you would ever buy one of their packages. If so, this share might be worth a punt.

[i] All figures from Thomas Cook Annual Report 2014, available at: http://annualreport2014.thomascookgroup.com/

[ii] See : http://www.thomascookgroup.com/wp-content/uploads/2015/05/H1-RNS-master-FINAL.pdf accessed 18/06/2015.

[iii] Evening Standard Business, Monday 23/02/2015.