Thomas Cook shifts to Eastern Med to ease margin pressure

Thomas Cook is switching capacity from Spain to the Eastern Mediterranean to ease pressure on its margins in the UK market.

Publishing its results for the first half today, chief executive Peter Fankhauser said: "We continue to experience margin pressure in the UK tour operator due to a combination of hotel cost inflation in Spain, currency impact and capacity increases in the market.

"We have taken action to help mitigate this pressure, including taking out holiday capacity from Spain and moving it to the Eastern Mediterranean."

Thomas Cook said its summer 2018 programme is now 59% sold.

Bookings for the whole group are up 13% compared with this time last year, with particularly strong demand for Turkey, Greece and Egypt.

"We’re also seeing a growth in bookings to smaller destinations such as Croatia and Italy, as well as Tunisia which has made a positive start after we reopened it to the UK market in February," it said.

"Bookings to the Spanish Islands from our group tour operator are lower than last year following our decision to reduce capacity for the summer.

"Northern Europe is growing well, with bookings up 7% and average selling price up 5%, driven by strong demand for own-brand hotels and differentiated holidays to Greece, Turkey and Cyprus."

It said excluding its legacy city and domestic hotel-only business, which it plans to transform as it moves over to Expedia, Continental Europe bookings are up 4%.

UK tour operator bookings are up 4%, with pricing up 6%.

"We continue to experience margin pressure as a result of currency impact and hotel bed cost inflation in a competitive market environment. Strong growth to higher-margin destinations in the Eastern Mediterranean, as well as higher web and ancillary sales, are helping to mitigate this impact," it said.

Thomas Cook reported a 5% jump in revenue to £3,227 million, driven by growth to Egypt and long-haul destinations.

It said gross margin was broadly in line with last year, with a strong airline performance largely offsetting UK margin pressure.

Loss before tax improved by £16 million, helped by an £8 million reduction in net finance charges.

But UK losses grew by £8 million to £77 million.

Thomas Cook said the UK business was principally impacted by softer margins to the Canaries, its largest winter destination, caused by strong hotel cost inflation, together with a weaker sterling and increased market competition.

In response, the operator has switched to other destinations, such as Turkey and Egypt, focused on selling its own-brand hotels, and reduced the size of its retail store network by a further 10% to around 600 stores.

At the same time it has grown online sales by 33%, with mobile performing particularly well.

"We expect that continued implementation of these actions will, together, help to return the business to profitable growth," it said.