Can Thomas Cook make longhaul work when Norwegian Airways can’t?

Posted on October 31, 2018 by admin

Norwegian Airways woes are well documented, with a lack of fuel hedging this year further undermining a business model, that is simply not working financially.

Last year Norwegian where ranked second to last in financial results when compared to 75 other global low cost carriers, with an operating profit of -8%.

The short haul low cost formula operated successfully by the likes of Rynair, is to have stage length of 5 hours or less and to operate at airports which allow it to turn its aircraft around very quickly in order to maximise flying hours and its aircraft utilisation.

They also try to operate as few different aircraft types as possible, as this reduces the cost of carrying spares and allows higher utilisation of its pilots and crew, due to the interchangeability a single aircraft fleets delivers.

These unit cost efficiencies, allow low cost carriers to offer lower prices than traditional carriers like British Airways and drive higher average load factors, which in turn yield higher profits.

However, when we move into the Longhaul sector different aircraft types are required and the benefits of turnaround times are mitigated, simply because the aircraft land less frequently.

Secondly, traditional carrier have a major average revenue advantage because of the high yields delivered by their business class passengers. These passengers tend to be locked into the traditional carriers via loyalty schemes, business lounges and the connectivity delivered by their hub networks.

Traditional carriers can therefore more easily fight off competition from supposed “long haul low cost carriers”, by simply discounting seats at the back of the aircraft to similar or lower prices, whilst using the premium cabins to subsidise the average revenues per flight.

Hence, we have seen many long haul low cost carriers go bust since the days of Freddie Laker’s Sky Train and most pundits seem to think Norwegian may be heading the same way.

So given Norwegians struggles, why are Thomas Cook continuing to increase its long haul flying program with new city routes such as New York, San Francisco and Seattle.

The answer appears to be that these routes are just icing on its longhaul cake, with its core destinations remaining beach destinations such as Mexico, Florida and the Caribbean.

Within these destinations Thomas Cook combines their flight seats with holiday hotels, to sell packages on a convenient point to point flying basis, utilising high density aircraft configurations and via a distinctive leisure distribution network.

Beach routes have allowed Thomas Cook to become Manchester’s largest longhaul carrier and to then add city routes such as San Francisco, where it faces no direct competition from traditional scheduled carriers.

Hence, in Thomas Cooks case, if you can’t beat them, simply avoid them and extra profits should come flying in!

The Great Escape

Posted on June 22, 2012 by admin

Once glance at the latest financials from TUI and Thomas Cook tells you how tough 2012 looks, with substantial capacity and reduced sales.

Never before has the lates market been so crucial, but also so tough to predict, as multiple influences such as Euro 2012, the Olympics and not least the recession impact on customer demand.

However, the good old UK weather may still provide the increased demand required for the Great Escape.

The early weather patterns could not have been more favourable to the trade. Bright sunshine before Easter, followed by pouring rain as soon as the kids broke up for school holidays, repeated again over the half term holiday. Genius!!

This created a small surge in peak season bookings as families decided not to risk the UK weather, leaving operators with more manageable peak season load factors.

Combine this with the late appointment of an England football manager and little hype about the team’s chance in Euro 2012, and early season sales have remained remarkably strong. Given that the Olympics do not start in earnest until August and how few people have got tickets, I think we can also discount this as a major threat to peak season sales, leaving July as a the make or break month for the trade.The key issue for tour operators is hedging their costs this year has worked against them, locking in an average £10 cost increase per late holiday, when current exchange rates and fuel prices are more favourable.

This, combined with the need to clear their more expensive ‘differentiated’ stock in the lates market, means operators need a marked increase in late deal prices in July despite the recession.

Will it happen? I guess it depends on how much it rains, but the Great Escape looks like it might be on…

Filling the Commodity Gap?

Posted on May 6, 2012 by admin

Thomas Cook’s recent £1.4 Billion refinancing clearly shows that their banks remain confident in Cooks ability to turn their international business around and implement the strategic review presented by the management team.

In the UK market, Cooks have decided to follow the lead of their biggest competitor TUI and focus on differentiated tour operating product. Since it is virtually impossible to differentiate short haul flights compared to the excellent service provided by the likes of easyJet, this differentiation is focused on the hotel element of the holiday.

First Choice and latterly TUI via their merger, has been focused on differentiation for nearly 10 years via their Holiday Villages, Sensatori and Thomson Gold brands. In doing so they have developed a higher price, higher margin proposition that is in demand and can only be purchased from them. Thomas Cook clearly has a lot of ground to catch up, but given their determination and new financial backing will make rapid progress.

So who is going to fill the “Commodity Gap”?

The birth of Flight Plus ATOL, may also signal the age of “Travel Agent Packages” (TAP’s). For many years we have seen the rapid growth of Online Travel Agents using Dynamic Packaging technology, but high street agents have been slower to adapt. However, as the majors shrink their capacities to focus on differentiated product, they will need less third party agency distribution, which may force evolution.

It is clear that independent agents have a gap to fill and the new Hays Travel packaging site is unlikely to be the only attempt to fill this space. It is likely most agents will use their own Flight Plus ATOL to package holidays using low cost carriers and bed banks like On Holiday Group’s “Holiday Brokers” brand.

The key driver of the “commodity” holiday market is the flight capacity on leisure routes provided by low cost carriers. This summer season has demonstrated that for every seat the traditional tour operators take out, the low cost carriers appear to be adding two!!

Years ago on joining MyTravel from Ryanair, Tim Jeans sat me down and explained how he could fly three Paris routes in the ten hours it took a charter flight to fly to and from Tenerife, creating 20% more revenue. However, as the recession has hit demand for city flights, the reverse argument has set in, with Low Cost Carriers switching aircraft to the Canaries in order to only have to fill one seat, instead of 3 to make the same revenue.

Although Low Cost Carriers would prefer to run their own direct sale tour operations e.g. Easyjet holidays, these have not enjoyed the massive success they expected. Similarly, although Ryanair may not like agents using their flights to package, it is virtually impossible for them to stop it and one day they may even wake up to the benefits.

The “Commodity Gap” is likely to be filled by the rapid expansion of online companies like On The Beach and Travel Republic. However, the advent of Flight Plus ATOL’s should give high street agents and homeworkers the confidence to build their own ATOL bonded holidays to fill the “Commodity Gap” created by the withdrawal of the major tour operators, so don’t write them off just yet.

The “Have’s and the Have not’s”

Posted on January 12, 2012 by admin

I can honestly say I was one of the few people in my circle of travel friends who was confident before Christmas that January would be as strong a booking period as ever. My logic has remained unchanged since the recession started 2 years ago and is based on the premise of the “Have’s and Have not’s.

The “Have’s”
Have mortgages, have kids and most importantly have job’s. This customer segment have never been better off financially, due to the exceptionally low interest rates on their family homes, which historically have tied up a lot of their disposable income. This sector books early and hence its not surprising to me that the current January booking period has remained buoyant.

However, like most companies involved with Online Travel sector, we have been surprised by the sharp rise in online searches this year with On Holiday Groups B2B search traffic running 85% up year on year, with Google reporting a 26% year on year increase in search’s overall for the travel sector. Unfortunately, bookings have not risen at the same rate, as it appears customers are searching around much harder for their online holiday deals. This in itself is not a massive surprise given the recession, but it does mean that yet again the biggest winner is Google who must be rubbing their hands and whilst many OTA’s are seeing margins eroded due to falling conversion levels.

It would also appear that Thomas Cook’s financial woes have impacted both its tour operation whose bookings are rumoured to be running 33% down year on year and its 1,200 strong high street shop network. How much of this is due to the recent negative PR about the Thomas Cook brands or a very passive discounting policy compared to TUI is not clear. However, the increased online traffic has to have come from somewhere and this is an obvious potential source.

“The Have Not’s”
Have not got job security and have not got the same access to credit they had pre-recession. Traditionally a lot of the late holiday market has been funded by credit cards and last year we saw a relatively weak late’s market due to this.

Make hay now, as it may not last.
Sorry to be the harbinger of doom in such a good sales period, but I can only recommend you fill your boosts now, since its likely to be long hard late booking market.
Sales may be great now, but the “Have not’s” have not kicked in yet and this year we have to deal with both Euro 2012 in June and the London Olympics in August. So be warned its still going to be a tough year with the only obvious ray of sunlight being the strengthening pound which will boost holiday makers overseas spending power compared to UK holidays and of course the unreliability of the UK weather!!

If only “Differentiation” was a Christmas Present

Posted on January 1, 2012 by admin

Thomas Cook recently announced a new strategic direction, focused on increasing its “Differentiated” product from a claimed 30% to a healthy 50%. But what exactly is “Differentiated” product??
The tour operators seem to have been slow to define this! My own definition is very simple “ Product demanded by customers, which can only be brought from that tour operator”. The key phase, which makes defining differentiated product hard, is “demanded by customers”. There is little point having “Exclusive” product that you cannot sell, because customers are buying the hotel next door for £50 per person cheaper!!!

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Me too says Thomas Cook…but is that wrong?

Posted on December 18, 2011 by admin

On Wednesday, after a torrid build up, Thomas Cook‘s management team got to announce its new Corporate Strategy….or was it TUI’s strategy they announced?…..Difficult to tell, considering how similar they now are! However, is it wrong to copy the “Right” strategy?

Personally, I think not, with Thomas Cook now clearly heading in the right direction in my opinion. Given the rapid advance of lower priced dynamic packaging, it is essential for traditional tour operators to differentiate their product by adding value to its proposition by investing in hotels, staffing levels and in-resort infrastructure to improve the quality of the holidays they offer. Therefore, the stated aim to increase their differentiated stock from 31% to 50% must be the right direction. However, in a cash strapped organisation this may prove difficult to achieve, since differentiation often equates to the long term commitment of cash and a considerable increase in risk stock and company gearing.