Europe's large tour operators, Thomas Cook and Tui Travel, had been flying with a powerful tailwind behind them through the economic downturn and subsequent recovery, but the sector has just hit turbulence. Trading updates from both Tui and Thomas Cook highlighted a third quarter slowdown.
Tui has been worst hit with a 2 per cent deterioration in UK summer bookings, a move by German consumers to cheaper, lower-margin holidays, and unfavourable currency movements forcing management to warn that full-year results will be at the lower end of expectations. Adding to Tui's woes was news that the volcanic disruption will now cost it £105m, £15m more than previously estimated. Thomas Cook says that while summer trading has been broadly in line with expectations, softness in the UK is hitting margins.
And there are some fairly ominous signs of more trouble ahead, including Tui's decision to "take a more prudent view of the timeline" for delivering margin targets. Some of the slowdown can be explained by the impact of Icelandic-volcanic-ash-cloud disruption on consumer sentiment and unusually good UK summer weather.
"There are some special circumstances [for weaker trading] but not too many," says Wyn Ellis of Numis Securities. "Most of this reflects weakness in the UK economy and the consumer."
The travel industry has benefited over recent years from a number of one-off factors. Mega-mergers by both Tui and Thomas Cook have presented opportunities for massive cost savings. In fact, Tui is hoping to achieve the last of these savings more quickly than previously planned to help mitigate some of the recent declines in its business.
The dominance of the two big players has also increased their ability to restrict the number of holidays on the market and therefore avoid making late, cut-price sales of left-over stock - the position Tui now finds itself in in the UK. The attempt to restrain capacity and build margins has also been helped by many rival private tour operators going out of business.
