Thomas Cook is switching summer capacity from Spain to the eastern Mediterranean due to “margin pressure” at its UK operating arm.

The disclosure came today from chief executive Peter Fankhauser as the company reported bookings up 4% from the UK with 6% better pricing.

However, Thomas Cook said: “We continue to experience margin pressure as a result of currency impact and hotel bed cost inflation in a competitive market environment.

“Strong growth to higher-margin destinations in the eastern Mediterranean, as well as higher web and ancillary sales, are helping to mitigate this impact.”

The UK tour operating business suffered £8 million deeper winter losses at £77 million despite increased sales with good levels of demand especially for Turkey and Egypt.

Margins continued to come under pressure particularly in the second quarter.

The business was principally impacted by softer margins to the Canary Islands, Cook’s largest winter destination, caused by strong hotel cost inflation, together with a weaker sterling and increased levels of market competition.

As a consequence, while customer demand remains strong, “our UK business has not fully passed on these significant inflationary cost increases through higher selling prices”.

Thomas Cook added: “In this environment, we are implementing a set of actions, in order to help mitigate these market pressures.

“We have continued to rebalance our destination mix towards more profitable, fast-growing destinations such as Turkey and Egypt, and to target further operating efficiencies.

“In addition, we grew sales of differentiated holidays significantly in the first half, by 31% for holidays to own-brand hotels, and by 18% for sales to selected partner hotels, helping to improve the competitiveness of our product offering.

“We reduced the size of our retail store network by a further 10% to around 600 stores, while at the same time growing online sales on a booked basis by 33%, with mobile performing particularly well.

“We expect that continued implementation of these actions will, together, help to return the business to profitable growth.”

The group is seeing strong summer demand for Turkey, Greece and Egypt plus bookings growth to smaller destinations such as Croatia, Italy and Tunisia, which has made a “positive start” after bookings to the north African country re-opened in the UK in February.

Overall group bookings for the summer are up 13% against this time last year with the programme 59% sold.

Online revenue is up by 18% across the group, with particular progress in the UK, which is up 33% year on year, according to the operator.

Overall, mobile bookings have grown by 55%, showing improvement across all source markets.

This came as Thomas Cook closed a further 63 stores in the UK in the half year to March 31 “as customers continue the shift online”.

“We have also accelerated the rebranding of our shops, as we move to a single high-street brand following the end of our joint venture with The Co-operative Travel,” the company added.

Thomas Cook reported that traditional winter pre-tax losses were cut from £314 million to £303 million as revenue for the six month period rose by 5% to £3.2 billion year-on-year driven by growth to Egypt and long-haul destinations.

Fankhauser said: “Thomas Cook has had a good first six months of the year, delivering improved financial results combined with tangible strategic progress.

“The work we’ve done in the past two years to improve customers’ experience of our flights and our holidays is bearing fruit with revenue growth of 5%, and a positive booking position for the summer.

“The improvements in customer satisfaction have come from our focus on fewer, better hotels and our holiday programme for summer 2018 is in great shape.

“Two-thirds of our customers tell us they want to personalise their holidays and we are innovating to satisfy this demand.

“This includes the successful introduction of ‘Choose Your Room’ across 300 hotels for the summer and, more recently, ‘Choose Your Favourite Sunbed’ which we are rolling out to 50 hotels.

“Customer demand for this summer is good in all our markets, particularly in our Nordic region.”

But he added: “We continue to experience margin pressure in the UK tour operator due to a combination of hotel cost inflation in Spain, currency impact and capacity increases in the market.

“We have taken action to help mitigate this pressure, including taking out holiday capacity from Spain and moving it to the eastern Mediterranean.”

Fankhauser continued: “Our group airline performed particularly well in the first half.

“Condor delivered a strong turnaround, and has benefitted from our ability to provide a reliable and high-quality service during a period of disruption and consolidation in the German aviation sector.

“Our booking position for the summer is strong, and bookings are well in line with our capacity growth of 10% to an expanded range of destinations, including 70 new routes across the group.

“The launch of our hotel investment fund with LMEY in March will allow us to accelerate the growth of our own-brand hotel portfolio where we can deliver better quality and higher returns.

“With three new hotel projects underway in as many months, in addition to our first Casa Cook in Spain, we’re excited about the opportunity the fund provides.

“We also have high hopes for our new hotel brand, Cook’s Club, which we plan to roll out at scale for summer 2019 to attract a new generation of design-conscious holidaymakers to Thomas Cook at great value prices.

“In addition, our new partnerships in our complementary business are beginning to kick in: the transfer to Webjet has delivered a five-fold growth in bookings on last year, helping fuel a 51% increase in overall bedbank bookings, in line with our strategy to increase automation in this part of our business.

“Meanwhile, we expect to launch Expedia in Belgium and the UK this summer, paving the way for further improvements in the online customer experience.

“As we enter our busiest period, I see positive momentum across all of our markets to deliver the best possible holidays for our customers.

“Our continued progress on strategy to transform the business, together with the clear desire among customers for our modern, personalised package holidays and flights, mean we are on track to deliver a performance in line with current expectations for the full year, on a constant currency basis.”

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