Manny Fontenla-Novoa is relaxed and affable. But then he should be. The Thomas Cook group he heads reported a “robust” UK performance for the three months to December and Fontenla-Novoa says: “We had a very good January.”
First-quarter losses halved year on year, capacity was in line with demand and average selling prices in the UK were up 7% on last year this winter and 9% for summer.
Such strong trading has not offset concern about the deteriorating economy, however. Fontenla-Novoa says: “We are planning for a tough year.” Indeed, he expects a minimum of two hard years. “It was a good start and I’m very pleased, but the first quarter is not the most important. We are far from complacent,” he says. “We are planning for a tough time and 2010 will be tougher. That is in all our assumptions.”
Given high streets are becoming pockmarked with empty premises it may be a surprise to hear Fontenla-Novoa enthuse about Thomas Cook’s 800-plus agencies and argue UK web bookings are close to peaking at around one third of the total.
“Everyone was predicting the death of the high street and triumph of self-packaging. But the high street has proved robust and I’m happy we have such a strong retail network. We have over 30% of bookings online across all product types, but the rate of growth online is slowing. It may be a plateau. It may come back.” Either way he does not expect the proportion to go much higher. “We will end up within a range of 32%-35%. High-street agents remain by far the most popular place to buy a holiday and the most profitable way to a sell a package holiday.”
He insists there are no plans to rationalise the shops as he seeks to take 75% of business in-house, adding: “As a national retailer, you need a presence. It is part of your marketing.”
Naturally, Fontenla-Novoa is pleased with the rises in average selling price on a year ago, but he says increases in costs are close behind. “We are probably near to a 6% rise in costs in the UK for fuel and currency,” he says. “Although we are above that [in average selling price] some of the price increase is to do with changes in product. We have much more medium haul and more four and five-star properties.”
This is reflected in a boom in all-inclusive bookings as consumers seek a cap on holiday costs and in a surge to destinations outside the euro zone. “All inclusive in Turkey is the hot ticket, no question,” says Fontenla-Novoa. “Turkey is good news for us. I would be worried about Spain and Greece. Cyprus is doing OK - hoteliers have been sensible with prices - but Greece had a torrid start [to the season].”
However, he dismisses several widely held views about the current market, insisting: “There is no evidence of trading down, no evidence of selling shorter durations and the proportion of late bookings will not be too dissimilar to last year.” He suggests late booking is confined to those likely to book at the last minute anyway. “People appear to be booking 10-15 days later within the lates market this winter, but Easter is late so comparisons are difficult,” he says.
However, Thomas Cook is likely to delay the UK launch of its summer 2010 brochures, perhaps by two months. Fontenla-Novoa says: “There are a lot of reasons why we may not go in May. One is we are considering [currency] hedging for 2010. A second is we would be asking consumers to commit to expenditure when it may be too early. A third is we want to see how this year is going.
“We would lose a little cash flow, but it could make sense. It would let the guys concentrate on finishing this winter and on summer 2009, we would understand the hedging and [have time] to discuss rates with hoteliers.” He points out: “We used to go on sale in August 10-15 years ago.”
Given the collapse in sterling, hedging currency and holding down hotel rates are among the biggest challenges facing tour operators. “The exchange rate is making holidays more expensive and hoteliers cannot expect consumers to pay more when £1 is buying less than last year,” says Fontenla-Novoa. “We require reductions [in rates] or no increase year on year.
“Probably the toughest economic conditions are in the UK,” he says, adding: “I ignore a lot of what people say about the economy, but there will probably be one million more unemployed in the UK next year and four to five million across Europe. The pound is weaker and we will not be able to continue to hedge at the current level of 1.25-1.30 euros. Fuel costs have come down, but the dollar has strengthened [wiping out much of the gain] and the forward rate [for fuel] will be much higher than the spot rate. It is all bad news.”
Companies face “a real test”, he says. “It is going to be tough for anyone without a strong balance sheet. The market is generally strong for winter, and it is important from our point of view that everyone does OK. But we do not have our heads in the sand. The worst is yet to come. There is a danger of failures.”
However, Fontenla-Novoa believes the biggest companies will emerge stronger thanks to the consolidation in 2007 that brought together Thomas Cook with MyTravel and TUI with First Choice.
“Thank God we consolidated,” he says. “If not, it would be carnage. Capacity has come out [of the UK market] and that has helped everyone. I reckon 25% has come out in the last two years just from us and TUI. Without that, this would be a horrible place right now. Capacity is more or less where it should be, but we have the flexibility to take out more.”
That flexibility will be key. “When there were four companies we competed on price and in guarantees to hotels. Companies would pay up front and take the risk. It was like owning a hotel for three to five years. Now only 10% of our volume is owned or guaranteed and we are not fighting in every area.”
He is seeking a similar reduction in capacity and risk in the German market, which remains bigger than the UK’s and could prove vital in pulling the group through the next two years. Thomas Cook’s most recent figures show a 12% cut in capacity in Germany this winter, where the group is number two to TUI Travel but operates the biggest charter carrier Condor.
“There is still too much capacity in Germany, too many aircraft and too much tour operator capacity,” says Fontenla-Novoa. “Some tour operators are doing pretty crazy things – guaranteeing accommodation [with hoteliers], paying too much for it and trying to pass on price increases to consumers.
“The market works differently to the UK. There is no fluid pricing - tour operators tend to look at their costs, add a margin and pass on the price. But the landscape has changed in the last few weeks. Now capacity is being taken out by everyone, hoteliers have become more sensible, the latest brochures have reduced prices and bookings are coming back.
“They have seen what happens when you are sensible – seen what is happening in the UK.”
* TUI and Thomas Cook may drop ATOL cover on seat-only sales (Travel Weekly, Feb 09)
* Thomas Cook to delay launch of summer 2010 brochures (Travel Weekly, Feb 09)