Holiday blues

In 2010, despite more favourable economic conditions, some cracks began to show for major players in the holiday and hotels sector and 2011 could prove to be a telling year, especially for the big London-listed tour operators, Tui Travel and Thomas Cook.

As 2010 came to its end, the market had begun to be reminded of what had characterised the bad old days for tour operators - over-supply, plunging profits, and large exceptional costs. Until late summer, both Tui and Thomas Cook had been riding high following their respective mergers with First Choice and MyTravel in 2007. The mega mergers provided both groups with years of cost savings which helped buoy results. What’s more, the concentration of power coupled with the collapse of weaker rivals has constrained supply and limited the sale of cut price holidays in the so called 'lates' market.

However, August saw both Tui and Thomas Cook warn that the UK market was weak and profits would suffer as the groups offloaded holidays in the lates market. All eyes will be on the 2011 summer-holiday selling season. The period could be made extra nail biting due to a recent trend towards later bookings and the new climate of austerity.

InterContinental Hotels is the other FTSE 350 company in the sector that investors are feeling increasingly wary of and highlights the potential pitfalls with a particular industry business model. The group brands and manages hotels that are owned and developed by others. This makes it reliant on developers for its growth and with financing tight, especially in the US which is a big market for the InterContinental, fears are growing about prospects. The market has been pricing in a strong cyclical recovery, so any disappointments in 2011 could seriously hurt the share price.

In general, though, hotel and tour operators are cyclical plays, and the sector also contains many potential success stories for 2011 which should be able to ride the rising economic tide, including Millennium & Copthorne and Carnival.

While the cyclical attractions are not quite so strong, in the UK the budget hotel market is performing well. Chains, such as Whitbread’s Premier Inns, have not only used the recession to win new clients but have also proved capable of hanging onto those customers as economic conditions have improved, which is a trend investors will want to see continued in 2011.

THOMAS COOK GROUP2001,7138.85.4-16.6
TUI TRAVEL2632,93511.94.2-0.2

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