Taylor on Travel

The latest trading statements from Tui Travel and Thomas Cook have seen the pair swap positions since posting interim results in August.

Two months ago a profit warning by Tui triggered a tumble in its share price, a bashing in the business pages and media reports of a glut of late bargains. Thomas Cook caught some of the flack but fared better by comparison.

Now the positions are reversed. Thomas Cook's profit warning last week disappointed investors and sent the group's share price to its lowest level since December 2008. Tui, by contrast, reported an improvement in trading and expressed confidence its "full year results will be in line with previous guidance" - that is, with its August profits warning.

In reality, neither company has undergone a sea-change in outlook at either time. Thomas Cook is £10 million short of its expected full-year operating profit, about 2.5% out. Analysts and shareholders may not like that, but it is hardly a disaster in the economic circumstances. Unhappily, Thomas Cook staff and suppliers will pay the price for the shortfall. The group promises "substantial cost savings in the UK".

Tui got its warning in early. Its figures do suggest the group is in better shape than its rival - although this is no surprise given the respective strengths of the companies when they crystallised out of the big four in 2007. Tui's headline UK summer trading figures don't look bad at all. Mainstream sales for the season to September 26 were 2% up on 2009 and average selling prices 10% up.

It is worth noting the comparison with the cumulative figures for Tui UK's mainstream business up to August 1 - when the group reported season-to-date sales at +2% on 2009 and average prices at +10%. The only figure in this key area to change since August was the total value of transactions - up one percentage point to +13% over 2009.

Tui reports "good recent trading" for this winter with underlying capacity flat, and says summer 2011 "has started well in the UK". It also reports a reduction in debt thanks to strong forward bookings, an increase in deposits, earlier payment of balances, renegotiated contracts with suppliers and a "focus on cash". Nonetheless, it warns of "additional charges for restructuring costs" - which we can take to mean redundancy payments - as it reviews its cost base "across businesses and central functions".

The Tui results triggered an immediate 2% rise in the group's share price on the London Stock Exchange, when in August a similar set of figures triggered a day's fall of 9.97%.

Do Thomas Cook's trading figures confirm the case for job losses, the unilateral reduction in payments to hoteliers and the gloom in the financial press? Not really. The company reported UK trading for the summer season at -1% on bookings, -1% on capacity and +3% on selling price compared with 2009 - exactly the same as in August. It reported "an encouraging start" to the winter, with bookings 4% up year on year. The only change is the £10 million bill in unspecified costs incurred by the UK airline.

However, the group notes its cost savings "should help to offset the uncertain economic backdrop that continues to prevail in the UK". This is a legitimate concern and one Tui also has to face. What a shame the City appears to operate in the belief that consumer spending can defy gravity and previous conditions of growth are just around the corner even as it exhorts government and business to slash costs. But then that is a major part of the reason why we are in the current situation . . .

The merger between Thomas Cook retail and the Co-operative Travel makes a lot of business sense, but the job cuts are likely to be substantial.

The commercial case is clear. First, the shops are barely making money. This morning's announcement to the City reveals the Co-operative Travel's retail business will deliver an operating profit of £0.1 million this year, less than 0.1% of turnover before additional costs.

Thomas Cook expects to report a retail operating profit of £12.4 million for the year to September 30 - not a fortune on revenue of £264 million (about 4.7%), but a contribution in group terms. However, add in the other costs of a retail estate and the margin - if there is one - will be miniscule.

The benefit to Thomas Cook comes in the shops selling package holidays, on which the margin can be considerably higher, and the company foresees selling more holidays in-house through the expanded chain of outlets - boosting in-house sales to 80% and adding £10 million a year in profit.

Second, the deal promises savings of £35 million a year within two years, following a lay-out of £30 million in the first year, and allows the pair to rationalise their outlets - eliminating competing stores and closing those that were struggling.

Third, the merger costs nothing up front, apart from redundancy and closure costs. Thomas Cook will split any retail profits 70/30 with its partner and make up the shortfall if the Co-operative Group's share comes in under £40 million over the first four years. So, for the Co-op, the deal promises to deliver £10 million a year where it currently makes next to nothing.

Fourth, the deal undoubtedly strengthens the position of UK number-two Thomas Cook "should market conditions in the UK remain weak", which appears likely, and will bolster its share value after a difficult period. Thomas Cook's share price was up almost 3% by late afternoon on the day of the announcement, despite a small fall in the FTSE overall. Thomas Cook has the option to buy out its partner from the fifth year on, should that suit both.

The deal represents one of the few remaining mergers possible in UK travel retail. However, it is hard to see it as good news for head office staff at Co-operative Travel - other than for those who would welcome redundancy or relocation to Peterborough.

It must be similarly bad news for a significant number of agents at both companies. A reduction from 1,200 shops to below 900 must be on the cards - and the addition of 100 Midlands Cooperative shops will exacerbate the uncertainty for staff. Expect a formal consultation with head office staff - principally at the Cooperative Travel - to run into the New Year, and shop closures through a large portion of next year.

The news will undoubtedly disturb independent tour operators, who risk losing a large slice of their high-street distribution, but it appears rather better for the agency consortia, who will now offer the only high-street outlets independent of the big two.