Thomas Cook CEO Resigns

Thomas Cook announced this morning on 3 August 2011 that Manny Fontenla-Novoa has resigned from his post as Chief Executive in the wake of recent profit warnings.

The company’s fundamental review of its UK operations, increased debt levels and forecast for lower than expected full-year results have led to increasing scrutiny, with the third profit warning that was reported on 12 July 2011 causing a sharp drop in the company’s share price.

Storm clouds remain

The outlook for Thomas Cook’s full year operating profit remains £320 million for 2011, compared to £362 million last year, with its share price having fallen by over 60% in the 3 months to August 2011. Its quarterly results to June 2011 for operating profit marked a fall from £25.8 million to £20.1 million compared to the same period in 2010, attributed to the Arab Spring and weak UK performance.

In the UK, Thomas Cook faces a tough climate of austerity, with depressed consumer spending, on-going concerns about unemployment, tax hikes and rising prices for commodities and food all impacting negatively on consumer demand for travel.

The Group was also exposed to the political unrest in the Middle East, with destinations like Egypt and Tunisia experiencing capacity cuts which hit the French market in particular.

Investor confidence was also affected by the company’s net debt position which increased by 14% to £902.5m over 2010/2011and the company announced disposals to help mitigate this.

Doubts over merger

Mr Fontenla-Novoa’s shock departure also follows the recent initial approval by the Competition Commission regarding the merger with The Co-operative Group and Midlands Co-operative to form the largest retail network of travel agencies in the UK.

The merger announced in October 2010 included the companies’ high street network of over 1,200 shops, foreign exchange and cruise businesses. and the Thomas Cook tour operating division will remain separate entities. The merger was hailed as means to reduce costs, gain synergies and remove excess capacity from the market in the face of depressed consumer demand.

However, many analysts questioned the rationale behind the deal in the face of the continued strength of online travel sales. Consumers are increasingly choosing to book and purchase travel products and services online, whether through intermediaries such as online travel agents (OTAs), bricks and mortar travel retailers’ websites or direct from hotels, airlines and car rental players. Internet sales already account for over 55% of total sales of hotels, airlines and car rental in the UK, and are expected to reach a penetration rate of 64% by 2015.

Low-key OTA activity

In 2010 Thomas Cook announced its goal to develop a full-service OTA and tap into the online segment, aiming to achieve a top three market position. Thomas Cook’s decided against launching a separate OTA brand to challenge the likes of Expedia, and instead will focus on developing its platform. The company reported that its OTA sales increased by 21% in Q1 2011 on 2010.

The tie up with The Co-operative Group was noted by the company as a means to improve multi-channel distribution. However, the lack of clarity surrounding the company’s OTA division is surprising, considering that the online channel is growing at 5% per year in the UK at the expense of offline sales which are in decline. Furthermore, opportunities for m-commerce via smartphones have also opened up the potential for incremental online sales growth.

Competitive positioning of the Big Two

If full approval of the merger goes ahead, Thomas Cook/Co-operative Travel entity is expected to overtake TUI to become the leading UK travel retailer in terms of outlets. In retail value sales terms, Euromonitor International expects that the gap between TUI in first position (33% share 2010) and Thomas Cook in second will narrow (30% share, combined share including The Co-operative Group).

TUI has weathered the recovery better than Thomas Cook, focusing on building differentiated products for consumers which helped keep it one step ahead of the competition. Thomas Cook has also stated it needs to review its core products to ensure that they meet with consumer preferences post-recession, where lifestyle, experiential and green factors all play a role in the consumer’s search for the best value for money.