The travel sector is by nature highly cyclical and is, therefore, not expected to outperform when consumers are tightening their belts. But holidays are one of the last indulgences that Britons are willing to give up, although they might have to adjust their budgets. Short breaks might be sacrificed if holidaymakers want to save for a big splash in the summer, making the outlook uncertain for small specialist holiday operators.
After years of over-performance from the niche travel agents, the pendulum might be swinging back in favour of large tour operators. Indeed, the mergers this year of MyTravel with Thomas Cook and of First Choice with TUI have substantially changed the dynamic of the holiday market.
"Spending on travel has consistently risen since 1995, even through the early 2000s recession", says Joseph Thomas, analyst at Investec. "But the large tour operators did not get their share of the sun during the decade as overcapacities have depressed profitability. The emergence of two large operators will improve discipline in the industry, providing an opportunity to turnaround the businesses and lift margins". And TUI Travel and Thomas Cook have already started to cut oversupply aggressively in short-haul destination and package holidays. In parallel, both companies are increasing their exposure to specialist holidays formats.
After this year of transition, margins will also receive a substantial boost from cost savings and economies of scale that will gradually start to kick in.
And while the investment case is mainly based on margin recovery, a bit of sales growth won't hurt. In fact, large tour operators appear relatively resilient given their wide customer base in Europe. While British household are financially stretched, German consumers, for instance, sit on huge savings. So, for once, UK shareholders will probably be happy to see them throwing their towels by the poolside loungers to stabilise the stream of revenues.
Add to that historically low multiples and 2008 is set to be the year when large tour operators may finally take off.
