• Travel agencies may club together

Bricks and mortar travel agents and tour operators have faced a battle to maintain and redefine their roles since the general public worked out that the internet gave them access to booking bargains.

The recent travails of Thomas Cook and rumours around both it and TUI Travel have raised the prospect of asset sales and mergers and all points in between. And this week saw Thomas Cook agree a new deal with its lenders in an agreement which will buy it an additional year to work out its issues.

The new arrangement with lenders came a week after the company warned that that rising fuel costs, the downturn and the Arab spring meant that it would see full-year operating profits at £60m less than expected, at around £320m. 

Following the announcement, Morgan Stanley issued a note reading: "Traditional package holidays seem to be seeing an accelerating market share loss to independent holidays, aided by the internet and low cost airlines. Legacy business models with high fixed-costs, stretched balance sheets, and a number of other concerns mean significant forecast risk."

CFO Paul Hollingworth said: "We continue to perform well on cash flow, with circa £900m of available cash and committed facilities. We are focused on reducing our debt and strengthening our balance sheet and we have a number of initiatives underway to deliver progress on this including the disposal of certain hotel and surplus assets."

Speculation suggests that the group could be planning to sell assets worth around £200m, including several hotels and a European office, as well as its stake in the air traffic control service NATS.

Despite the move, rumours persist that another player in the sector could yet bid for it or that it could re-shuffle its senior management. Mark Brumby, analyst at Langton Capital, said: "Thomas Cook could cut costs, push ahead with its Co-op purchase and recover its profits but, with the shares having fallen not only on the day of its profit warning last week but for several days thereafter, the money seems to be on further change."

One of the more interesting potential moves to be mooted for Thomas Cook has been a merger with TUI Travel, which has itself been in the news recently, with its own possible merger with parent TUI AG.

Morgan Stanley said that a merger between Thomas Cook and TUI Travel could strengthen the positions of both parties and that the competition which has grown up to challenge them could mean that any such deal would not attract the attention of the competition authorities (which are about to rule on Thomas Cook's merger with Co-operative Group).

One of the main concerns for Morgan Stanley was that Thomas Cook would come close to its debt covenants, something which it has since acted to address. However, with consumers taking increasing control of how they buy their travel, the demand for a hand-holding booking agency will continue to fall. Thomas Cook, or a merged TUI and Thomas Cook, must show that they can offer value not only in terms of price, but also in terms of products which other companies cannot provide and the consumer, particularly in the leisure market, would find hard to source themselves.

With value as a driver, there has been speculation that Thomas Cook would do well to tie up with one of the budget airlines, which are currently suffering as costs and taxes increase. The company continues to position itself as primarily a source for cheap family holidays, with ski-ing and cruising additional offerings. TUI Travel, in contrast, has focused on a number of specialised products under different brands, offering, for example, ‘activities and experiences' through its Exodus brand, aimed at independent travellers, families and schools looking for something off the beaten track.

 

HA Perspective: The massive concentration that has mean going on in the travel trade is in stark contrast to the fragmented hotel market. Back in 2007 the top four European tour operators struck separate merger deals to become two: Tui acquiring First Choice and Thomas Cook blending with MyTravel.

These moves led to Germany, the world's biggest outbound market, dominating Europe's tour operations. Further concentration would surely pour misery onto an already struggling resort industry as the tour operator goliath would be a position to dictate terms to its already boxed-in hotel suppliers.

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