Thomas Cook AG in major shake-up after return to profit

Thomas Cook AG has unveiled plans to realign the business away from being an integrated travel group while announcing a return to profit for the first time in four years.

The German-owned company recorded an after-tax profit of euros 105 million, exceeding the previous year’s level by euros 281.8 million. The profit margin was up to a record 24%.

Details of the UK performance – which will show improved profits – are due to be revealed later in the week.

Finance chief Ludger Heuberg said: “All key segments have improved their income position and are reporting profits. Thomas Cook UK & Ireland achieved the best level of profitability while Condor recorded the biggest improvement in earnings.”

The group – owned jointly by Lufthansa and KarstadtQuelle – carried 1.1% more passengers in 2004-05 at 13.2 million over the previous 12 months.

“An enhanced product mix and pricing measures – particularly in the UK market – contributed to group sales (euros 7.7 billion) rising faster at 2.4% than customer numbers,” the company said.

Cutbacks in overheads made a “key contribution” to the improved financial performance, including personnel costs down by 2% and operating expenses reduced by 8.4%.

Earnings before interest, taxes and amortisation of goodwill (EBITA) increased by euros 171.1 million to euros 193.2 million.

Heuberg said: “Our restructuring activities have clearly had an extremely positive impact on our balance sheet structure and financial health.”

Alongside the annual results, new chairman and CEO Thomas Holtrop revealed a “reorientation” of the business guided by changes in the leisure travel market which has seen customers becoming more price-sensitive and booking later. Meanwhile new entrants with innovative business models and rivals are also embracing change.

“All this has increased the pressure on the classic package tour and on the leading operators,” he said. “They have no choice but to respond drastically to the new market specifics in order to convince the customers of the continuing benefits of the products and services they offer.

“Our core business involves offering customers a broad selection of package holidays, components and services that are tailored to meet their individual needs. The products are to be distributed via a variety of channels, both operated by ourselves and in co-operation with others. In order to achieve this we need a highly flexible business model that ties up as little capital as possible.

“As such we are gradually departing from the ideal of an integrated leisure travel group. Not because the model itself was bad but because it has outlived its usefulness.

“It no longer conforms to the needs of a time characterised by excess capacities and falling prices at airlines and hotels. The risk of not using fixed capacities sufficiently now outweighs the opportunity of the enhanced return on investment associated with them.

“Our aim is, however, to reduce risk levels, improve our flexibility and speed, thereby tapping new growth areas – which is one of the key aspects of our strategy.”

He said the company would be focusing its resources on three key areas – access to services, access to customers via all relevant distribution forms and low-cost production. 

A new e-commerce division is to be set up, with Holtrop saying: “We aim to develop our e-commerce actrivities still further. We are ideally placed in the market to achieve this and, what is more, this approach has already shown great promise in both Germany and the UK with the offers of Mix&Travel and flexibletrips.com.”

Despite the planned changes, package holidays would continue to be the “key cornerstone” of the business while classic travel agencies will continue to be the cornerstone of the distribution network, Holtrop added.

“Here, size is an advantage,” he said. “Only large tour operators are able to offer the necessary scope and variety of choice while, at the same time, keeping the promise of quality customers associate with a package tour – affordable prices, assured quality, a high degree of availability, perfectly co-ordinated services, all-round care in the destination countries and, last but not least, tour operator liability.”

Holtrop added that the aim was to “sharpen our brand portfolio still further”.

“We are convinced that we can then achieve attractive margins whilst building on the position we have already established for ourselves in the lesiure travel market,” he said. 

The group forecast further market growth in Europe of at least 2% in the 2005-06 financial year.

Report by Phil Davies