Thomas Cook can escape turbulence

Under new chief executive Peter Fankhauser, who has been at the group since 2001 and stepped into the top job when it unexpectedly became vacant last November, revitalising the group's operations has remained the order of the day. Central to this strategy has been Thomas Cook's "Cost Out and Profit Improvement" programme, which has exceeded several, but not all, of its targets in the past couple of years. Cost savings has been one of the programme's successes, and by the third quarter to the end of June savings had reached £487m, which puts Thomas Cook well on course to meet a hoped-for £500m by the end of the full year.

The UK business has also made good progress towards its aim of achieving operating margins of 5 per cent from a margin of virtually zero in 2012. By the third-quarter margins were running at 4.6 per cent. What's more, while cash conversion is only expected to come in roughly in line with the 62 per cent achieved last year rather than the targeted 70 per cent, much of the miss can be attributed to the impact on trading from the tragedy in Tunisia alongside Greece's economic issues. Together, these two problems are expected to set profit back by £25m.

There are some undeniable reasons for disappointment, though. The group looks like it will miss its £700m target for new product revenue this year as the sale of lower-margin products, such as city breaks, have fallen short of expectations. The group also expects to miss sales growth and web sales targets, but the reasons behind this are well-flagged, including the fact it has jettisoned "certain low or no profit business lines in order to focus on profits and to reduce business risk". Strategically, there seems to be good sense behind this move as it will mean Thomas Cook will no longer be trying to compete against well-placed competitors such as Expedia in low-margin work, allowing it to focus on more profitable activities, such as own-brand holidays.

Crucially, though, we don't think the disappointments deserve to overshadow the potential for improvement in the future. Indeed, the targets mentioned above have been dubbed 'Wave One' and are well-established, but it is 'Wave Two', now called the 'new operating model', which looks particularly interesting. The new wave has been kicked off this year but more clarity will be added at the full-year results on 25 November as to how Thomas Cook can better use its scale and eliminate duplicate activities through to 2018. This has the potential to reignite the market's interest in the tour operator.

Moves so far linked to the new operating model include a deal with Fosun, China's largest privately held conglomerate, with whom it has established a joint venture to tap into domestic and outbound tourism in the world's second-largest economy. Thomas Cook will own 49 per cent of the joint venture and the deal could prove significant over time. The pair are also launching a hotel investment vehicle to acquire 30-50 hotel and resort properties in the next three to five years.