Soaring profits won’t guarantee job security

Sunday, 10 Mar, 2006 0

TravelMole Comment by Jeremy Skidmore

When Shell and BP recently announced they were making profits of £35 million and £30 million respectively every day, including Christmas Day, Bank Holidays and Sundays, eyebrows were raised.

If they were so profitable, why couldn’t the greedy devils reduce the price of petrol? many people asked.

Ah, came the retort, we make profits from the production of oil and gas, and really hardly anything from selling petrol on the forecourts.

So what? Surely they could afford to make a loss selling petrol and still report ludicrous profits beyond the comprehension of mere mortals.

Unfortunately, businesses don’t work like that. They want to keep showing improvement in every area and don’t believe in offsetting losses against profits.

And so it is with Thomas Cook. Ok, UK chief executive Manny Fontenla-Novoa may not be in the oil production league, but he isn’t doing badly with a 63% increase in profits to £83 million in the 2004/05 financial year.

In addition, Thomas Cook reached the holy grail (at least for mass market operators) of a five per cent profit margin.

Why, then, the need to axe 325 jobs? Surely the company can afford to keep these people on? In real terms, of course it can, if you analyse how much it costs to pay those members of staff. But in terms of progression, it cannot. In business, the pressure is always to adapt and improve your performance, regardless of what you’ve done in the past.

I expect much more cost-cutting than we’ve already seen, in the form of redundancies, at most of the major travel companies, regardless of whether or not they are doing well. The huge drive towards booking online, once the bane of the tour operating giants, has become a godsend as they look to cut back their staff.

Meanwhile, Manny believes that Thomas Cook has nowhere near reached its potential and, in recent times, has punched below its weight.

I agree with him. Despite all the bad publicity surrounding package holidays in general, Thomas Cook is still one of the most trusted brands around. Do you think people would feel safe buying Thomas Cook house insurance or car rental, or taking out a Thomas Cook loan? I’m sure they would.

Of great interest is the company’s decision to move away from the integrated model. Just as everyone was buying up travel agencies in the late 1990s, so they were insisting that vertical integration was the future, and they weren’t talking about people misbehaving at a conference.

Now, Cook believes it has to be quicker on its feet and does not want to be saddled with lots of assets at a time when prices of airlines and hotels are falling.

This may well be the correct strategy for the Cook team (they haven’t done too badly so far) but it certainly won’t be right for everyone.

Not many will be brave enough to saddle themselves with airline debt, but I believe there is a big opportunity for other, niche, operators to own or operate properties exclusively – provided they have something special to offer. A bog standard villa or hotel in Majorca is not special, but an unusual property in a remote part of the Mediterranean is, as long as you can find a market for it.

As the big guns move away from vertical integration, I think we’ll see lots of smaller companies taking it up, albeit in a very different way, and coupling it with enhanced levels of personal service.

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