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Capacity cuts lift Thomas Cook

Created:

30 November 2009

Written by:

Algy Hall

Thomas Cook saw shares push higher as the tour operator beat analysts' full-year expectations and said it was encouraged by recent trading. Underlying revenue before currency movements fell by a percentage point, but, after adjusting for £217m of exceptional items, EPS climbed 10 per cent as the benefits of capacity reductions took effect.

But, despite expressing confidence in its prospects for 2010, the drivers behind the improved profits could soon start to run their course. Margins have been boosted by the significant cost savings that have been achieved since the merger with MyTravel in 2007. In 2009, £205m-worth of savings were realised, but this has brought the group's major cost-cutting plan to within a whisker of its £215m target.

The other benefit of the merger coupled is that, along with other industry consolidation and recent business failures, it has concentrated control of holiday capacity in relatively few hands. Over- capacity is one of the banes of the travel industry and reigning in supply has been a major factor in pushing up holiday prices and driving up group operating margins by 7 per cent to 4.5 per cent. But further capacity reduction may not generate similar levels of pricing improvement if underlying demand does not improve further.

That said, the group said it had seen a noteworthy improvement in demand over the last two months, while a recent YouGov survey suggests that UK consumers still plan to holiday abroad next summer, despite economic hardships. Acquisitions are also benefiting performance and the group has ambitions to expand into promising emerging markets, such as Russia and China, as well as sell more online.

But ballooning borrowings are still a worry - full-year net debt surged from £292m to £675m, and its massive €1.8bn debt facility needs to be refinanced in a year and a half. The appointment of a new finance director, Paul Hollingworth, should help sentiment on this front, though, and management has said a rights issue is unlikely.

Broker KBC Peel Hunt forecasts 2010 pre-tax profits of £325m and EPS of 27.4p (£308m and 26.2p in 2009).

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