Capacity cuts boost Thomas Cook’s profit margin

Thomas Cook Group’s profit from operations was up almost 50% to £365.9m for the year to September 30.

Operating profit margin for the period rose from 3.1% to 4.2%.

But excluding the impact of translation and acquisitions, group sales were flat year on year due to capacity cuts in the UK and North America.

Group revenue in the UK and North America fell due to planned capacity cuts, but were offset by an increase in Northern Europe.

Unveiling its financial results, Thomas Cook said planned capacity cuts, cost savings, fuel and currency hedging and operational flexibility, together with the merger synergies, would give it strong foundations for the current year.

It said its actions, and those of its competitors, has seen a 25% reduction in capacity in the UK market.

Looking ahead, Thomas Cook is expecting to achieve operating profit of £480m for the 2009/2010 financial year.

Chief executive Manny Fontenla-Novoa said: “Whilst it is still early in the booking cycle for most of our markets, current trading is in line with our expectations.

“Recent research and the high load factors we are currently experiencing give us confidence that consumers remain intent on taking their holidays.

“We believe our strong financial position, together with the increased synergy savings and contingency measures we have put in place, will enable us to sustain a market-leading performance throughout a challenging 2009.”

The group said it has revised its target for synergies from the merger with Mytravel from a previous estimate of £155m to £215m by 2010.

Thomas Cook said it has developed contingency plans to cut overhead costs further should tougher market conditions prevail.

It said it was taking advantage of its buying power to manage accommodation costs, which represent over 30% of revenue.

“We are confident that negotiations with our suppliers will result in prices no higher than last year’s levels across the Group this year, despite adverse movements in currency,” it said.

In the UK, it said 27% of total bookings are now made online.

Thomas Cook said its future strategy will focus on four areas:

– maximising the value of mainstream travel
– independent travel
– travel-related financial services
– extending the business through mergers, acquisitions and partnerships, with a particular focus on emerging markets of India, Russia and China.

It said in the UK, a switch of focus from short-haul Euro-zone destinations to medium haul has helped it offset the impact of sterling’s decline against the euro.

“Our strong positions in Turkey and Egypt give us considerable advantage. We are also benefiting from the shift to higher-margin all-inclusive resorts,” it said.

Talking about the winter 2008/2009 season, Thomas Cook said UK average selling prices are up 4% with bookings down 4%, but ahead of planned capacity reductions of 6%.

“We are 53% sold for Winter 08/09, one percentage point ahead of the same time last year. Overall we have 8% fewer seats to sell than at the same time last year.”

The group said it has reduced capacity significantly in the more competitive short-haul routes and the higher risk long-haul routes rather than in medium-haul routes which are higher-margin.

“We are now beginning to benefit from our policy of selling the less attractive shoulder months early and the average price for short haul is 12% ahead of last year, with medium haul 8% ahead and even long haul 3% ahead,” it said.

“We entered the winter lates season with 39% less long haul to sell than last year which should result in higher prices for the rest of the season.

“Our strategy to focus on medium-haul resorts is proving helpful as these destinations offer our customers the option of avoiding the effects of the relatively strong Euro in the short-haul Euro-zone resorts. “

For Summer 09, it has sold 24% of capacity in the UK, broadly in line with last year’s level.

“Bookings are down 8% year on year but in line with planned capacity which is down 11%. Average selling prices are robust, up 8%.

“We are monitoring changes in behaviour to ensure we can bring to bear the considerable flexibility we have in terms of capacity and costs.”

It said pricing in the UK is 8% ahead of last year and bookings are ahead of the reduction in planned capacity.

“Since we last reported at the end of September, we have reduced capacity by a further 5% to anticipate the uncertainty in the market. Overall we now have 12% fewer seats to sell than at the same time last year.”

By Bev Fearis