Thomas Cook turned in results largely in line with (revised) expectations yesterday. The City was underwhelmed and the share price barely responded despite significant volumes of shares changing hands.
There were two surprises. One was a £428 million write-down in balance-sheet assets. This accounted for most of the £398 million loss before tax. It represents a clearing of the corporate deck.
The largest chunk of the downgrade stemmed from a reassessment of the value of the UK business. The slump in that business was made clear by the fact the UK accounted for just 10% of group underlying operating profit in the year to September.
The second surprise suggested a major reason for that slump: mainstream sales provided three-quarters of Cook’s UK revenue and yet it made nothing from them.
The independent UK businesses made money. The group reported a record year in Scandinavia and its best ever in Germany. Why was it so bad in UK mainstream?
The consumer media will repeat its mantras that the package holiday is in decline if not already dead, the high street has passed away and the internet the only future. And elements of the travel sector will also seize on these assertions – which, of course, contain kernels of truth.
Yet Thomas Cook’s online sales in the UK declined year-on-year as a proportion of the total, although the number of web bookings rose. Acting chief executive Sam Weihagen pointed out that the rate of online growth was sharper two or three years ago.
Cook has clearly not got its act together online, but Tui Travel UK mainstream managing director Dave Burling made a similar point barely a fortnight ago. He told Travel Weekly: “There is a tendency to think online growth is faster than it is.”
At the same time, Tui’s results gave cause to believe that, in parts, the package holiday is in rude good health. Weihagen suggested several reasons why the situation at Cook is different. One was the legacy of Airtours and its pile-high-sell-cheap tour operating.
Asked what was wrong with Cook’s hotel offering, Weihagen said: “When Thomas Cook merged with MyTravel, MyTravel came with a lot of two and three-star hotels with the Airtours brand. It kept and traded them.” He subsequently added: “The UK business has to find product people accept.”
Weihagen was similarly open about the way businesses had been bought and brought together: “There were a lot of acquisitions. Maybe the previous management did not give enough attention to the complexity.”
Yet the core of the problem was an emphasis on volume and little control of price. Asked whether discounting in shops had been “out of control”, Weihagen did not demur. He said: “Mainstream UK sales made no money. We had far too much discounting.
“Discounting was done in two places - in head office and in shops. We have not had reliable systems in place.”
Indeed, Cook revealed shops had been heavily discounting peak summer packages months ahead of July and August even when the programme was three-quarters sold. In future, it will limit the discounts shops can offer.
This is not to blame the retail staff, 660 of whom have just learned their shops will close. We must hope Cook can honour its promise to redeploy as many as possible.
However, the problem comes down to this: Thomas Cook UK has had a fire-sale culture. No wonder there has been a fire.
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