Some Irish Thomas Cook Group plc (LON:TCG) (OTCMKTS:TCKGY) customers were disappointed when their 2014 brochure didn’t arrive in the mail at the beginning of the New Year. But the firm’s subsequent announcement that it was pulling out of the Irish travel market, where it has been selling package holidays for more than one hundred years, probably came as less of a shock, considering the monumental rise of low cost airlines such as Ryanair Holdings plc (ADR) (NASDAQ:RYAAY) (LON:RYA) and DIY holidaymaking.
Thomas Cook: Is the travel industry taking off?
Yet, the company’s timing is odd. Departure taxes were scrapped in the last budget, the Dublin Airport Authority (DAA) has become more accommodating to airlines flying out of the airport and the Irish economy seems to be picking up. Tanya Airey, chief executive at Sunway Holidays, said its bookings were already up 13% on last year.
Thomas Cook Group plc (LON:TCG) (OTCMKTS:TCKGY)’s decision comes at a time when the firm has a 28% market share in the package holiday market, owning both the Airtours and Panorama brands. Their departure will take 40-80,000 charter seats out of the market – a quarter of the entire market. Ryanair and Aer Lingus will be only too happy to take up the slack, by ramping up marketing on add-on services such as hotel and car hire through their websites.
Last call for Thomas Cook
In a statement, a spokesperson for Thomas Cook Group plc (LON:TCG) (OTCMKTS:TCKGY) said that “the Irish leisure travel market has moved away from charter products over the last six years.”
That’s certainly true. In 2002, charter flights in and out of Dublin airport carried 4.4 million passengers – 30% of all traffic. In 2013, that figure was just 440,000 – a drop of 90%. Most of that decline has occurred since 2008, so clearly the recession has played its part, but it was also during this time that both Aer Lingus and Ryanair began flying to more sun destinations giving holidaymakers the opportunity to build their own holiday packages. During the years of the Celtic Tiger, many Irish bought holiday homes overseas and no longer needed charter packages.
Thomas Cook Group plc (LON:TCG) (OTCMKTS:TCKGY) is still recovering from its 2011 crisis when it was on the brink of bankruptcy. Back then, the share price fell 75% in one day alone during November. Thanks to a restructuring initiative by chief executive, Harriet Green, things look much brighter today. Having been as low as 15p, the share price has recovered to 185p. No doubt, retreat from the Irish market is a core element of this recovery plan.
Where are charter companies going next?
John Spollen, chief executive of Cassidy Travel, believes a market still exists for charter companies:
“There is still a place for tour operators. For those with young families, for those who want the peace of mind of knowing there is always someone there if something goes wrong.”
In Britain, a charter holiday revival in underway, according to the Association of British Travel Agents. 48% of travelers booked a charter holiday in 2012, compared to 37% in 2010 and a survey by market intelligence provider, Key Note, said that out of 38m breaks taken by UK holidaymakers in 2012, 15m were package tours.
One area where package holiday has thrived has been in exclusive and all-inclusive club resorts. One example of this is Sensatori, a new brand from TUI AG (ETR:TUI1) (FRA:TUI1). Packages include competitively priced 5-star apartments where rooms have steps down into a swimming pool. Accommodation is where package companies make the biggest margin. By expanding in these markets, TUI has increased its gross profit margin to 20%.
The way people vacation is changing
But it’s tough for package holiday companies whose prices have changed little in years. Airey says:
“There is no easy money. If you look at the price of a package holiday, it hasn’t changed in a decade.”
Travel agents have weathered the storm better. Cassidy Travel has doubled its number of outlets from four to eight since 2008, taking advantage of falling rents. Travel agents have an advantage in that they are able to offer more flexible packages, such as five or ten day vacations, instead of the traditional one or two week holiday. People with tight working schedules find travel agencies can help them make the most of limited work leave.
Ultimately, the departure of Thomas Cook Group plc (LON:TCG) (OTCMKTS:TCKGY) will leave a big gap – one the likes of Michael O’Leary will be eager to fill, but Ryanair Holdings plc (ADR) (NASDAQ:RYAAY) (LON:RYA) won’t be able to deliver what traditional package holidaymakers want and, most likely, it will be the travel agents that will fill the gap. Overall, however, it should be good for trade. Fewer seats will mean fewer last minute deals, less discounts and better margins for the industry as a whole.