Tour operators claim consumers won't ever give up their vacations, but some analysts fear the hurt will come next year
The package tour industry is in surprisingly bullish spirits despite the weakening of consumer spending across Europe. The big travel operators believe they can ride out the credit crunch unscathed, as customers will still refuse to give up their holidays abroad. Some market experts are not so sure, predicting a period of pain in a year's time should the economic problems continue to spiral.
This week the two largest travel agencies to the UK market, TUI Travel and Thomas Cook, have reported solid results for the past six months and predicted more to come with summer sales looking rosy.
Despite much of the population tightening its belt as the economy worsens, holidays remain a priority, leading some industry figures to claim the business is "recession proof".
Yet although the data now may be pointing to a good year, some analysts fear the hurt will be felt next year if the fears of significantly worsening market conditions materialise. "Consumers have had easy choices on what to cut back on this year, maybe it won't be quite so easy next year," one travel analyst said.
Manny Fontenla-Novoa, Thomas Cook's chief executive, yesterday said that the mainstream travel industry has proved robust "for a number of years" and would cope with the current economic conditions. Even in years affected by the terror attacks of September 11, 2001, the Tsunami of December 2004, and the advent of Sars the year earlier, a stable average of 19 million people went on package holidays, he said. "All of us look forward to a break, with a chance to spend some uninterrupted time with the family. It's more than just two weeks it's an important event in the calendar. People are unwilling to give that up."
The analyst said: "All the evidence going back to 1990 shows that holidays are one of the last things consumers cut back on. Things have got to get really bad for that to happen."
Yet not everyone is convinced the industry will be sheltered from the economic storm. Andrew Fitchie, an analyst at Collins Stewart, is particularly bearish. "Travel demand lags consumer expenditure trends by six to 12 months, so we have never expected 2008 to show any deterioration; we believe 2009 will be a different market," he said, adding that tour operators were geared to a slowdown.
So far, there is little evidence to support this theory. Yesterday, Thomas Cook, the second largest travel agent in Europe, reported that its losses had reduced from €267.6m (£212m) last year to €193.6m with especially strong trading in the UK. It said the business was on course to hit operating profit of €620m by 2010.
"Trading for summer 08 continues to be strong in all major markets with robust consumer demand," it added. The group said that European consumers place "a high priority ... on their major foreign holidays".
There were similar noises coming from Thomas Cook's biggest rival in the UK market earlier this week. TUI Travel reported that it had cut pre-tax losses to £294m from £339m, calculated on a pro-forma basis, from the year before. If the losses look alarming for both companies, one analyst said, it is because the companies make all their money in the second half of the year, which includes the summer revenue. "There are linear costs for the whole year, such as planes, shops, staff. The trick is about minimising your losses in the winter and maximising your profits in the summer," he said.
Peter Long, TUI's chief executive, said at the results presentation on Tuesday: "We see no evidence of deteriorating consumer sentiment in our booking patterns, in the average holiday duration booked, average selling price or cancellation rates." TUI said its UK business was particularly strong, with sales up 9 per cent over the past six weeks.
Mr Long was more bullish than his rival, calling the sector "recession proof, I don't believe the industry is cyclical" and said it was set for a "renaissance back to all-inclusive packages". Both companies pointed to already-strong sales of holidays for winter. The industry faces two significant problems as it aims to shrug off the downturn. The first is the rise in oil prices, although this has been felt worse by competitors in the low-cost airlines.
Another significant factor facing in the UK is the pound, which is about 15 per cent down on the euro this year. The companies have also shrugged this off.
Analysts added that the big players in the package industry had taken out "aggressive hedges" to bear the worst of the fuel costs. Thomson is fully hedged while TUI has hedged 90 per cent of this summer's and 65 per cent of next summer, although some believe it could become more challenging to offset the increased fuel costs next year.
Joe Thomas, an analyst at Investec, said the company would still have to raise its charges and estimated "that holiday prices will need to be increased by 1.5 per cent to 2 per cent to offset the £10m higher fuel cost next year". He does not believe that would be a problem: "The fuel cost is only 9 per cent of revenues, whereas it's 30 per cent for the low cost airlines; it's harder for them to pass on costs and still claim they are a cheap no frills service."
The death knell had been sounded for the industry with the rise of the low-cost airlines. This forced the consolidation of the sector, with the four players in the UK market merging last year to form the two rivals. As the airlines feel the heat of the fuel costs, the package tour companies are benefiting.
Simon Larkin, at ABN Amro, said Thomson had produced a "strong set of numbers which demonstrate the merits of the industry consolidation that occurred and the robustness of the annual holiday. For sure, there are forward challenges, but the group is well hedged on currency and fuel, capacity is being managed and cost synergies are coming through." Another analyst said: "If the Bank of England's bearish predictions are accurate 2009 could be painful."
Stocks that are standing firm
Package tourism is not the only industry to stand firm following the onset of the credit crunch. Beyond "defensive" stocks, there have been few industries to emerge relatively unscathed.
The latest company to update the market with a bullish statement was Cadbury. The confectioner has endured a difficult 12 months as it attempted to divest its American beverages business, but yesterday said it was expecting a solid performance in the first half of its financial year, to be announced in July.
It said yesterday that revenues from the first six months are expected to beat the company's previous goal. One industry that has performed strongly despite consumers keeping their hands in their pockets is UK supermarkets. Last month, Tesco reported record results, while smaller rival J Sainsbury posted a slight bump in full-year sales on Wednesday.
Defensive stock in a time of recession are cigarette companies such as Imperial and British American Tobacco, which earlier this month posted a 14 per cent jump in revenues in the first quarter of the year. Some analysts also picked healthcare companies to ride out the market turmoil.