Re-icing the Thomas Cook cake

This week’s Thomas Cook interim results looked very impressive with the company identifying £390m ­of savings, forecasting a return to profitability for the full year and most importantly laying out a robust solution to its debt mountain.

So clearly Harriet Green has quickly got to grips with the financial issues and has laid the foundation for a healthier future. However, there are still a large number of fundamental issues that need addressing if Thomas Cook is really going to be able to take on TUI head to head.

To understand these issues, its probably worth reviewing the consolidation that created these two travel giants. Thomas Cook’s tour operation was originally formed by the amalgamation of Sunworld, Flying Colours and Inspiration in the late 1990’s. Sunworld and Flying Colours where relatively new start ups, which were acquired and merged together over a 6 months period and immediately added to by the acquisition of Inspirations/Caledonian Airways. So you can imagine the pain of trying to put all three together in a very short period of time.

Further growth by acquisition occurred 7 years later with the purchase of the highly distressed MyTravel Group of companies, which was rapidly relocated to Peterborough, with a 95% redundancy level. To complete the melting pot 400 Coop Shops where acquired just before Thomas Cook started to implode.

Thomas Cook’s tour operating, retail and airline infrastructures have all been created by acquisition and offer relatively weak foundations, compared to its main rival’s TUI.

Most commentators viewed the merger of the strongest brand in terms of quality e.g. Thomson’s, with the industries best management team lead by Peter Long at First Choice, as the dream ticket.

Firstchoice started the process of creating differentiated Hotel product with the launch of Firstchoice Holiday Villages and Sensatori hotels over 10 years ago. They planned and ordered the Dream Liner aircraft that are only now coming into service with TUI, 8 year ago.

These decisions were key in creating the “differentiated” product that is proving so profitable for TUI and driving their current strong financial performance.

Harriet Green has not yet put a foot wrong, however she does not have a “Magic wand” that can short cut 10 years of planning and financing required in order to create large volumes of differentiated product.

I must admit to concerns about the process of driving overhead savings by abandoning the old brand silo structure and moving to centralised buying, commercial and finance functions. This is likely to rip the heart out of most of Thomas Cook’s secondary brands like Airtours, Hotels4U and Club 18-30. Although this may be a sacrifice which has to be made, there are numerous examples in travel where 2 plus 2 can quickly amount to only 2 e.g. lose the brand and lose the volume/profit.

So although I understand the logic of what Thomas Cook are tying to do and cannot fail to be impressed by the share price rise, I think I will continue to invest my money in TUI. For me its still a gamble that the “Re-iced” Thomas Cook cake, will not start crumbling in the next few years as it has to cover the hard yards required to take it back to substantial profits.

 

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