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Babalu Apartments, Gran Canaria, Canary Islands (photo: Thomas Cook Group)

Tour operators “must rethink pricing model”

As Thomas Cook (Ving, Globetrotter, Spies, Tjäreborg) confirms its losses, analysts says something must be changed in the tour operating business.

A few days after issuing a second profit warning, Thomas Cook Group has confirmed its poor results for the financial year to September 30, with pre-tax losses of £53 million (€59.6 million) – a sharp reversal from profits of £43 million last year.

Losses after tax for the UK-based operator with subsidiaries across the Nordic region stood at £163 million for the year, against a profit of around £9 million a year ago.

The figure was driven largely by a heatwave in northern Europe this summer that persuaded many potential holidaymakers to stay at home.

Underlying earnings before interest and taxes fell from £326 million to £250 million. Revenue rose 6% to £9.58 billion, boosted by growth in the group’s airlines.

In the Nordic countries, Thomas Cook Group includes the tour operators Ving, Globetrotter, Spies, Tjäreborg, as well as Thomas Cook Airlines Scandinavia and the chains Sunwing Family Resorts, Ocean Beach Club and Sunprime Hotels. The group sells around 1,500,000 trips a year in the Nordic region.

For 2019, Cook promises to improve its underlying earnings and reduce exceptional items, leading to “substantial progress” on operating profit. But bookings for this winter season are down 3% so far, year-on-year.

Costly Canaries
It was a “disappointing year”, admitted chief executive Peter Fankhauser, with a “larger-than-anticipated decline in gross margin following the prolonged period of hot weather in our key summer trading period”.

“We delivered a strong first six months of the year, achieving improved financial results and going into the summer with a positive position. As a result, we were confident of filling all our committed hotel accommodation and flight capacity at good returns,” Fankhauser explained.

But the spell of long, hot weather which began in late May resulted in poor demand for the Canary Islands in particular.

Yet demand rebounded for Turkey, Egypt and Tunisia “as customers seek alternatives to high hotel prices in the Canaries”.

Great expectations
Thomas Cook needs to rethink its pricing model, according to the data and analytics company GlobalData.

“Thomas Cook’s reasoning for their disappointing results illustrates the need for a rethink of their pricing policies. At the moment, travellers believe they can get a great holiday for a cheap price if they wait long enough and they can,” says Nick Wyatt, head of tourism at GlobalData.

“Heavy discounting in recent years has altered consumer expectations on what the cost and quality of their holiday should be and skewed value perception.”

He says that what consumers now demand from a package holiday far exceeds what they expected ten years ago, as well as the cost of providing it. Thomas Cook and other retailers and operators have fallen victim to this trend, which is putting a huge strain on margins.

“The inevitability of discounts has created a brinksmanship whereby consumers no longer book early and ‘wait it out’. It would be a risk to move first, but introducing greater pricing discipline and reducing discounts would help the company to improve margins. Thomas Cook can change this market dynamic and alter the balance of power, but it is yet to be seen whether it will it be brave enough to do so.”

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