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In an unexpected move today, Thomas Cook – the vertically integrated tour operator with its own airline – and Co-operative Group announced the merger of their high street travel, foreign exchange and cruise businesses.
This consolidation will create the biggest travel retail market player in the UK, with a large high street network of more than 1,200 shops. The new entity will be split 70% Thomas Cook and 30% the Co-operative Group in terms of ownership.
The deal which is expected to be granted regulatory approval by the European Commission by the end of 2010 allows the Co-operative Group the option of selling its shares to Thomas Cook after five years. Details of the merger also reveal that ThomasCook.com and the Thomas Cook tour operating division will remain separate entities.
Industry consolidation is fierce in times of recession. 2009 saw the unsurprising demise of many independents such as Kiss, Goldtrail, Sun4U, but also the continued steps by operators to cement existing M&A activity, along with new deals in order to build market share.
Many travel retailers struggled with significant reductions in package holiday capacity, as consumers worldwide cut travel budgets. The situation was further aggravated by the ash crisis in April 2010. Travel retailers registered weaker sales, mainly as travel suppliers cut distribution costs to maximise operations in the midst of an unstable economic environment.
The move is expected to intensify the fierce competition between Thomas Cook and TUI in the UK marketplace, with the latter squeezed into second place in terms of value share. TUI will be forced to assess its current market strategies, new product development and consider future alliances in the increasingly competitive environment.
The merger, however, is a logical step for Thomas Cook to decrease its costs, reduce its debt and chase new revenue streams. The maturity of the UK market which was hit particularly hard by the economic downturn influenced Thomas Cook to explore new growth areas. UK outbound travel remains depressed and is expected to decline marginally over 2010.
The partnership established between Thomas Cook and Expedia in 2009 was seen as a strong step on the path of becoming a leading European online travel agent (OTA) to meet its strategic goals.
In addition, last minute bookings by holidaymakers strapped for cash along with strong currency fluctuations led to the sharp increase in the company’s net debt.
Price competition was intense in 2009 and H1 2010, given that travel retail companies were trying to stimulate sales by offering discounts. This was due to intensifying competition especially from the online channel as demand weakened during the crisis and remained depressed in recovery.
The cost savings for Thomas Cook are necessary especially if yields and demand remain depressed. To achieve some of the synergies, redundancies, a hiring freeze and wage cuts will be implemented across the group. Cost cutting strategies undertaken by Thomas Cook will continue with a review of the UK workforce and of its operating divisions.
Undeniably, the merger announced by Thomas Cook and the Co-operative Group will shake up the market with other companies following suit. The industry is likely to be very different within a year’s time.