The switch of media focus may be a blessing while the International Monetary Fund taps up Europe's chancellors for contributions to a $1 trillion bail-out fund it believes will be needed imminently, Greece moves toward the next Eurozone flashpoint when its debts fall due in March and France grapples with a credit-rating downgrade.
Latest UK economic indicators appear contradictory. Unemployment rose to almost 2.7 million or 8.4% in the three months to November, fuelled by job losses in the public sector. However, Office for National Statistics (ONS) figures showed a 2.6% rise in the volume of retail sales year on year in December - despite a fall in spending on credit cards.
KPMG's head of retail told the Financial Times: "Retailers achieved these sales through heavy and prolonged discounting and this has seriously damaged the health of the sector." That would explain the profits warning at Tesco.
At least inflation appears to be coming down, though it remains at least double the rate of earnings growth.
In the medium term, the government now plans seven years of public spending cuts and tax rises. The Office for Budget Responsibility forecasts that by 2016-17 UK output will be 18% lower than if the growth rates of 1997-2007 had continued. Or to put it another way, it could be 2015-16 before a household at the midpoint of UK income distribution attains the living standards of 2002-03.
Bank of England research on the impact of government austerity on UK households found 48% worse off last year than in 2010, and 69% expect to be worse off this year than last.
So what about travel? An indication of the strength of the January market should be emerging following a sluggish first week of the year. Comparisons with January 2011 ought to be tempered by the fact that the start to last year was particularly strong, when subsequent months were not.
The most up-to-date ONS figures show outbound holiday departures down 1% year on year in the 11 months to November, but a 5% decline in the third quarter of 2011 - July to September. That is quite a fall in a peak summer market that was already well down on the heady days of 2007-08.
The big two have already acted as though this is a sign of what is to come. Thomas Cook has cut capacity for summer 2012 by 8% year on year and Tui Travel has taken out 9%. Both could restore capacity, of course, although Tui must be the more likely to.
The past fortnight has tossed several straws in the wind: Flybe issued a profit warning following a sharp decline in traffic in the run up to Christmas; the Guild of Travel Management Companies (GTMC) reported a quarterly decline in air bookings for the first time since 2009; and AirAsia X pulled out of Gatwick.
The Malaysian-based carrier blamed APD and emissions trading yet also pulled out of Paris (no APD) and India (no emissions trading), so we can take it the economy and the price of oil were the major factors on top of the inherent difficulties of operating low-cost long haul.
AirAsia X only moved to Gatwick in October and we may presume founder Tony Fernandes did not take over Queens Park Rangers last August with the intention of withdrawing from the UK. Clearly, the current state of the UK market does not accord with Fernandes' view last summer.
Those predicting an improvement towards the end of this year may be right, but I wouldn't bet on it. If this summer ends well on price, with capacity 8%-9% down on 2011 and without a major failure, it won't have been a bad year - in the sense that it could be so much worse.
]]>An assertion by the head of the accident investigation that the Concordia captain carried out a "clumsy manoeuvre" appears the least of the charges to be answered. But we should wait before drawing conclusions.
The testimony of a former sailor among the passengers that crew members "were incompetent" appears damning, yet there have also been reports of heroism.
One of the last to be rescued was an officer who broke his leg while scouring the decks for passengers. A Peruvian crew member who died was said to have slipped overboard while helping passengers. A cook from the Dominican Republic reportedly made repeated trips in a life raft to ferry passengers to safety.
Amid conjecture that the captain steered the Concordia near to the island of Giglio to salute a colleague onshore, it is worth noting a separate report that "cruise ships are known to sail close to Giglio's small harbour to give passengers a better view". We should also reflect that the captain's action in manoeuvring the listing vessel into shallower water may have saved hundreds of lives.
Yet regardless of the furore there are sufficient questions about what happened to doubt the emergency was well handled.
The first thing to say is that such accidents are highly unusual. The industry carries more than 21 million passengers a year and Europe's share of the sector comprises about 40% of this. It is five years since a cruise ship sank in the Mediterranean, off the Greek island of Santorini after hitting a reef shown incorrectly on charts. Two died. There has not been an incident involving such serious loss of life for 20 years.
The second is the disaster could have been much worse if the stricken ship had gone down in deeper water away from the shore.
This leads to a third and more general point. The Concordia was the largest cruise ship in the world when launched in 2006. It has since been surpassed in size repeatedly, with the largest ships now carrying more than 7,000 passengers and crew. It appears it was the ship's huge size above the water that led it to tilt in just 26 feet of water.
Two concerns follow: that designs have not taken sufficient account of this rapid growth in size, and safety procedures have not kept pace with ships carrying twice as many passengers as a decade ago.
A maritime safety expert suggested the latest cruise ships have a greater tendency to list if in trouble, that they are difficult to steer and vulnerable to high winds (the Daily Mail). Other experts suggested they are difficult to evacuate (The Financial Times).
The maritime union Nautilus insists: "These ships are floating skyscrapers. Alarm bells have been ringing with us for over a decade." Nautilus also queries how the ships are operated, saying: "We believe basic safety principles are being compromised."
Ships officers have expressed concern about training not keeping pace with technology, and Nautilus says: "Core crew are trained to high levels, [but] the passenger staff receive . . . a fraction of the safety training given to airline cabin crew." These are serious charges.
The growing size of ships reflects remorseless economies of scale and the industry is not about to perform a u-turn. Yet the Concordia raises uncomfortable questions. The evacuation does appear to have been chaotic. The charges need addressing.
The business paper the Financial Times suggested: "The terrible loss of life and chaotic evacuation suggest these floating mega-resorts carry significant risks." If that view takes hold among investors it will also undoubtedly be absorbed by a proportion of consumers.
The conclusions of accident investigators will go a good way to shaping the long-term impact.
But the sector already faced its share of issues - the flood of new capacity, the state of the economy and consumer demand, a push for growth in Europe chaffing against the troubled eurozone, the high price of fuel and a squeeze on margins. To these must be added a possible short-term impact on bookings and longer-term challenge of reviewing safety: not least the lifeboats.
It is sobering to be reminded, amid all the talk of technology in travel, that the life-boat system aboard the most modern, giant cruise ships is essentially unchanged since the aftermath of the Titanic which sank 100 years ago this April.
]]>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. 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. Elements of the travel sector will repeat 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 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 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.
]]>The Treasury has listened but turned a deaf ear. It needs the revenue. It believes the industry can absorb the tax (or it won't get the revenue). It considers corporate travel will carry on regardless and the majority of voters won't notice. It believes overseas visitors to the UK will not be deterred by APD more than by other factors (the state of economies, the exchange rate of sterling, the price of oil).
The cost to destinations - particularly the Caribbean - appears to have counted for little apart from sympathy, but remains important.
Four points seem worth considering if the sector is to do better in the next phase.
One, the industry shot itself in the foot by issuing counter claims and arguments. For example, Virgin Atlantic argued for increasing the tax on short-haul flights to reduce it on long haul; easyJet argued short-haul passengers were subsidising the APD of long-haul passengers. Regional carriers and airports argued for a 'levy' on southeast airports to allow for an APD reduction in the regions.
This is not likely to stop, but needs bringing under control. The Axe the Tax group of airlines (BA, Virgin, easyJet, Ryanair) will go some way to doing that (and the Treasury has put the 'short haul versus long haul' argument to bed by making clear it won't penalise short-haul passengers more heavily. After all, there are a lot of them.)
Two, most roads seem to lead to making the economic case against APD - demonstrating the tax is hitting traffic, hurting the economy and costing jobs. This appears common sense, but will be tricky to demonstrate compellingly. There are too many other factors contributing towards these effects.
Three, the industry has argued consistently it faces 'a double tax' from January with the cost of the European emissions trading scheme (ETS). The US Business Travel Coalition was the latest to trot out this line, arguing: "When the EU emissions trading system kicks in . . . the cumulative negative impact on the UK will be orders of magnitude more grim." Sorry, it won't.
It's reasonable to want the cost of ETS offset against APD, although the government neatly sidestepped this early on by declaring APD purely "revenue-raising". But the point here is that the industry overstates its case and thereby loses the impact.
Emissions trading is not a tax - it will raise a small amount for the Treasury, a fraction of the APD revenue. The costs will largely go on carbon credits (to other companies or 'market' traders). These can be expected to grow over time, but should not amount to much in the first years. According to easyJet, the impact "should be below euro2 (£1.72) each way on long-haul fares".
By harping on about ETS the industry risks putting itself on the wrong side of a divide that has polar bears and David Attenborough on the other side. It is not helpful.
Four, I suspect the Treasury has had enough of the APD-bashing press releases. The department certainly appears combative. I've had a couple of calls to dispute industry claims.
For example, Virgin Atlantic made the point - following announcement of the rises next April - that passengers who have already paid to fly after April 1 will have to pay more. Virgin called it "retrospective".
No, said the Treasury: "It's not retrospective, APD is payable at the time you take the flight." What is more: "The rise was well trailed . . . the rises are smaller than the indicative rises given . . . APD didn't go up this year . . . the industry was told it would be a double inflation rise . . . a small proportion of people book so many months in advance . . . [and] it's up to airlines to price APD into fares."
A final thought: might it weaken the case against a £13 APD rate on short-haul flights that Ryanair now levies charges of up to £100 for checked baggage? I know no one needs to pay it, but some do or Ryanair wouldn't make the profits it does.
]]>However, the bank deal does not signal the end of Thomas Cook's troubles.
First, there is the issue of consumer confidence. It is right to stress the strength of the Thomas Cook brand, but the media has done the company no favours.
The furore on Tuesday and Wednesday was played out at the front end of TV news broadcasts and newspapers - item three on the BBC news, rolling coverage on Sky News, page three of The Times, The Guardian and others.
By contrast, reports of the bank deal were buried in the business sections this morning. The story was relegated from page three of The Times on Wednesday ('Thomas Cook on the brink') to page 62 today ('Thomas Cook lives to fight on'). That is a problem.
We know UK bookings were down 30% this week. That is not a disaster by any means. The company would only be taking a few thousand bookings anyway and it insists the problem did not extend beyond the UK. But this cannot continue into January
Second, the company has to deal with the issues that brought it to this point, Acting chief executive Sam Weihagen has acknowledged "management issues" in the UK. Unfortunately, it is a hell of a time for a turnaround - given the state of the economy, government austerity and a depressed market.
Third, the group has to deal with its debt. April 2013 might sound like a good way off to settle accounts, but it is not.
The good thing is the added debt conditions have not come at as high a price as might be expected, despite press reports to the contrary.
A £10 million fee is surely par for the course. A 5% interest rate is well above base rate, but it was bound to be. Inflation is above 5%. The point will be to pay back the cash asap through disposals.
The 4.9% of shares the banks now have an option on (at the current share price) almost exactly equals the portion of shares sold by Lloyds bank following the Tuesday's announcement.
These are not onerous terms - so long as Thomas Cook now gets things right and provides no further shocks.
Sadly there will be losers. Job losses are inevitable - on the high street, at tour operators that changes hands, at Peterborough and at the airline. So this is no time for glee.
But much of the media published obituaries for Thomas Cook this week, and the company is far from dead.
It suffered a crisis viewed through peculiarly UK spectacles which, too often rose-tinted in travel, took on the hue of the undertaker. The reality lies between.
]]>Some perspective is required. The group's troubles stem from difficulties in the real world that were not foreseen by anyone in a position of authority in the government, the Bank of England, the International Monetary Fund, the European Central Bank and so on, to say nothing of the business press that now pronounce on the group's future.
A journalist friend - working in a different business sector - was staggered when I explained Thomas Cook could announce an annual operating profit in the order of £300 million. He assumed the company must be losing money hand over fist to warrant such a trashing.
On the plus side, Thomas Cook has its brand name and history - which count for something but not enough to save a company or its reputation. There are shades of Woolworth's here - a household name that is part of the furniture, a common factor in millions of people's lives. But Thomas Cook is not Woolworth's and should not go the way of Woolworth's.
The company is not tied to the health of the UK market. It is number two in Germany and Scandinavia - the number one and number three outbound markets in Europe (the UK is number two). What is more, it is making money in these markets. More than two-thirds of its operating profits last year came from Europe other than the UK.
The group has been making a healthy underlying operating profit - it was on course to hit around £320 million before the latest implosion. So it should be able to handle an overdraft. Yet it is currently close to worthless on the only measure that matters - its share value.
I hope this goes up because the livelihoods of a lot of people are at stake. In reality the share price is likely to bob around where it is for a time as traders buy at a low price and sell at a somewhat higher one. There was excitement when the share price rose 28% at one point on Wednesday (meaning an increase of less than 3p) before subsiding back to a value under 11p. For the record, the shares closed last night at just above 16p (47% up!). But such movements are largely meaningless.
What matters now are the banks, in whose hands Thomas Cook's immediate future lies. This is a bit like being in intensive care with only patients from the recovery ward to look after you, but let's look on the bright side. It would not be in the banks' interests to bring down the group. They would be writing off money that they have every chance of getting back, when what is required is hardly the stuff of Italian government debt.
I suggest Thomas Cook will pull through. It will announce the facilities it requires within days (the sooner the better) and a plan to restructure. It will slim down its tour operations in the UK to match its slimmed down airline. It will sell off what it can. It will focus afresh on retailing.
Its shares may well be swooped up by an overseas company, consortium or investment group. Why wouldn't a private equity company or a Chinese or Indian investor be interested in an iconic name with a sound base in Europe's major markets? Cook would certainly benefit from being taken off the stock market, which has brought it to its knees.
However, I struggle to see how Thomas Cook can climb back to where it was as a plc. The serial profit warnings under former chief executive Manny Fontenla-Novoa were bad (though there were not three of them in a single calendar or financial year). But there was a slow path to recovery open to a new chief executive - until Tuesday's hammer blow. Now City trust in future announcements will be shattered.
Given what had gone before, the timing of the decision to postpone delivery of the annual results while seeking additional funding is hard to understand.
The explanation that a trading meeting on Monday presented a picture suddenly so dire as to convince of the necessity of doing this barely helps.
If it were true that a sudden 20% deterioration in trading in France and Russia had proved decisive it would suggest: 1) that France and Russia have come to contribute inordinately to Thomas Cook's annual figures or 2) Cook had grossly over-estimated the contribution of these markets or 3) The management team was not paying sufficient attention to the state of trading - surely the worst implication?
If we rule out these explanations, as surely we must, we are left to ponder other possibilities. One is that Thomas Cook continued to talk with its banks over recent weeks after announcing a £100 million extension of its facilities in October. (But then why leave it until two days before the results to announce a delay when the fall-out was predictable? Perhaps there was hope until the last minute that a deal could be sorted.)
I wish Thomas Cook every success. The people working for it deserve better than this. But the company has been badly wounded and faces time on the operating table. It has every chance of emerging in decent shape, though not with every faculty undiminished.
]]>Cook fell back 6.75% and Tui Travel 4%, despite the latter reporting a decent late summer and year-end figures in line with expectations.
EasyJet was one of the few to buck the trend with a 9% rise in value after it forecast record profits and gave notice of a dividend pay-out. Other major carriers fared nowhere near so well. British Airways' parent IAG was down 5%, Air France-KLM plunged 8.6% in Paris, and Lufthansa was down 5.5% in Frankfurt.
The German DAX was down 5%, so no great surprise there. But Lufthansa has had a torrid week - down 18% on last Friday after it issued a profit warning on Tuesday.
Europe's biggest carrier is still set to make substantial profits this year, but the warning was unexpected. The German market had been booming - both business and leisure travel - and Lufthansa had planned to increase capacity accordingly. Not any more: a plan in March to raise capacity this year by 12% fell back in July to 6% and will now be cut again.
Lufthansa had previously forecast profits this year would exceed those of 2010 when it made euro876 million (£765 million). Analysts had expected closer to euro1 billion for 2011. But on Tuesday, the carrier announced: "The target of a further increase on the previous year's figure no longer appears achievable." Small wonder Lufthansa is examining its options for disposing of BMI, which lost £106 million in the first six months of this year.
This may prove tricky - although I'm not suggesting BMI is the reason for the profit warning. Despite claims to the contrary in the travel press, it is nigh-on impossible to see British Airways walking off with all BMI's slots at Heathrow - thereby bagging more than half the total at the airport. Indeed, the fact BA has just bought a handful of BMI slots suggests it recognises as much. (The argument that Lufthansa has a higher proportion of slots at Frankfurt is irrelevant. There are empty slots available at Frankfurt, Schiphol and Paris Charles de Gaulle if a carrier wants to apply for them. There are no slots at Heathrow unless another carrier opts to sell.)
But back to that Lufthansa profits warning. It came on the day BA announced "the opening of a new chapter" - in chief executive Keith Williams' words - and its biggest brand-advertising campaign in a decade. BA believes it has turned a corner - with its spanking new Heathrow terminal, its merger with Iberia, its transatlantic partnership with American Airlines and its painful dispute with cabin crew in the past.
In many ways, undoubtedly, BA has done so. Its plans for capacity growth this year were more modest than Lufthansa's, at 7%-8%, and could be revised down this winter. However, as Williams told the audience assembled for a preview of BA's classy new TV ad, launched on Wednesday: "The industry has been through difficult times, periods of severe disruption, record oil prices and the deepest recession since the 1930s, but BA has emerged from it."
Yet I fear he may have spoken too soon. Lufthansa's profit warning is a symptom of the new phase of the economic and financial crisis we have entered. Germany has since 2009 been pretty much the only economic-success story in Europe. The slowdown in Germany is a symptom of the wider global slowdown. The world's second-largest exporter of manufactured goods - and until last year the largest - Germany is a bellwether for the health of the world economy. So the country's declining health does not bode well.
It is not good news for the eurozone, which requires German largesse. It is not good news for exporters to the euro area - the UK's biggest export customer. It is not good news for UK banks, which stand to suffer collateral damage when Greece defaults on its debt. And it does not bode well for Europe's biggest travel market, which has been the reason Tui Travel and Thomas Cook have done rather better this year than they might otherwise.
All in all, this is one time when it would be better if the Germans won.
]]>The figures for July, released at the end of last week, show something rather different. The ONS headlines were that the number of visits abroad by UK residents increased 3% in the three months to July compared with the previous three months. Spending abroad increased 5%.
These are estimated figures, seasonally-adjusted to eliminate the peaks and troughs of summer and winter that would otherwise distort them. They should thereby reveal an underlying trend.
A more like-for-like comparison comes from pitching the figures for the 12 months to July 2011 against those for the same period to July 2010. This shows a 2% rise in all outbound trips from the UK, but a 1% fall in leisure trips - holidays. That is not so good, because the 12 months to July 2010 was not good.
The year on year comparison with the month of July itself is more telling still, since July sees the start of the summer peak season. Both outbound trips as a whole and overseas holidays were down by 6%, though business travel remained 3% up year on year in the month.
A couple of mitigating factors are worth noting. July this year saw a later than normal start to the school holidays in England and Wales, which is likely to have pushed back the start of the summer peak. July 2010 appears to have seen a mini-surge in outbound leisure following the end of the World Cup before the schools broke up.
The comparison with two years previously therefore may be helpful. It shows a 4% drop in all overseas trips from the UK for July 2011 versus July 2009, and just a 3% fall in holidays. That is somewhat better, but not great - 2009 was a dog of a year for travel and the situation has not improved. In July 2009 we had just seen four consecutive quarters of economic decline (falling GDP), remember. Since then the travel market has shrunk further.
Go back in time to July 2008 and the comparison is more telling still. ONS figures show leisure trips from the UK this July down 17% on the same month three years ago. All trips to Europe were down 18%, to North America down 35%, and to the rest of the world down 7%. This is slightly better than the same comparison in June which showed a 20% shortfall in all overseas trips. But remember the decline in the economy, and in outbound travel, began from mid-2008.
As I noted a month ago, this is the size of the market that has disappeared.
The ONS figures on spending overseas do not improve the picture. They show a 6% decline in spending by UK residents travelling abroad between July 2010 and July 2011. That is in line with the fall in numbers - the figures are for all trips - but it does not allow for inflation.
This spending figure does not include the full cost of trips - the air fares or payments to UK holiday companies - and average inflation in Europe, for example, is below that in the UK. But it suggests people are broadly spending the same as a year ago. They will be getting less for their money and the industry will be taking less.
]]>A rising tide raises all ships, so Thomas Cook benefited from last week's mini-recovery at least up to Thursday. An 8% fall in its share price on Friday still left the group almost 25% up on the week. But don't get carried away: the shares opened this morning at just under 44p a pop.
Thomas Cook remains absurdly undervalued, but its shares probably won't pick up until the group has a decent trading update and full-year results under its belt, along with a new chairman and new chief executive - i.e. by late November at the earliest.
What is going on in the markets? The correlation in movement of the biggest US stocks has, in recent days, been at its highest since the stock market crash of October 1987 - meaning share-buyers are spooked and stampeding first one way, then another. HSBC chief economist Stephen King has suggested this is because: "Investors are desperately trying to find pockets of safety in a world where the financial system appears to be crumbling." (Financial Times, September 9).
The rise in share prices at the end of last week was triggered by a surprise move by central banks to pump money into Europe's banking system on Thursday. My guess is this will prove short term. Those investors who poured in on Friday will cash in and bail out. The central bankers' action smacked of "desperation", according to one analyst. The last coordinated action of this kind came in September 2008 and we all know what happened then.
There is a good deal for central banks to be desperate about. Greece is close to a default on its debt that could trigger a fresh financial meltdown. Indeed, there is a view that the central banks' action last week was to prepare the way for this. The cash injection will be available early in October, timed - it is suggested - to bolster the banks in the aftermath of Athens' default sometime between now and then. Add in a stagnating US economy, slowing German economy and Japan in recession and the world is in a stew.
The current market volatility is captured in these few lines from the Financial Times of September 13 (last Tuesday), the first of those four days of rising share prices. I quote from the introductions to leading articles on three pages: "Investors are panic-stricken about the future of the euro." "Time is running out for Greece." "Stocks in Europe tumble to 27-month lows." Inside, a senior economic advisor to Swiss investment bank UBS, George Magnus, warned: "Our economic predicament is not a temporary or traditional condition. The economic model that drove the long boom from the 1980s to 2008 has broken down."
Two days later we learned of the arrest of a 'rogue trader' at UBS, who is accused of creating a $2 billion hole in the bank's finances. It is not only governments at risk of default. UBS has already technically failed once in this financial crisis and, like so many UK banks, been bailed out. (The austerity measures we must now endure to balance the government books are a major reason Thomas Cook and other travel companies are struggling to sell as many holidays as in the past to strapped UK consumers.)
A gathering of European finance ministers in Poland on Friday received "a scolding" by US Treasury secretary Tim Geithner, who urged them to 'stop bickering' and suggested: "Governments and central banks have to take out the catastrophic risk from markets."
This is pretty rich on two counts. First, the markets took the risks. Why should tax payers bail them out? Second, Geithner was one of the architects of the catastrophe. Geithner was an enthusiastic proponent of derivative trading at the US Treasury through the 1990s where, as an assistant secretary, he opposed attempts to regulate such trading.
His demand for Europe's leaders to show political decisiveness is irrelevant. The indecision is global and stems as much from differing interests as from disagreements about the way forward. China has little reason to agree with, or support, US or European policy needs. Within the EU, German interests are not necessarily those of France and certainly not those of the weaker EU states. The divisions became obvious a week ago with the abrupt resignation Germany's representative on the board of the European Central Bank. In the US, Democrats and Republicans - president and Congress - could barely agree a budget this August and will have to repeat the process next year.
At the same time, there is resistance to the austerity measures that are the universal prescription of governments. This is most evident in Greece and is the reason Athens struggles to impose the loan terms it has agreed with the European Central Bank and International Monetary Fund. Were the spirit of the 'Arab Spring' to enter Europe, it would most likely do so through Greece. In the meantime, at the end of November, something of the spirit of Greece will come to the UK in the form of a one day, public-sector general strike following the Chancellor's autumn budget statement.
The only thing that is certain is that the chorus of demands for quantitative easing (QE) will grow. Since in the UK this would be the second round of QE, it is already christened QE2. Even supporters of the idea point out the first £200-billion injection by the Bank of England (QE1) achieved little other than to fuel inflation. A study by investment bank Goldman Sachs suggested the main impact was to push fund managers into investing in "more risky assets". It had little effect on bank lending, which was supposed to be the point. That might lead you to conclude there is little value in a repeat, but it leads QE supporters to conclude it's worth another punt precisely because it failed first time.
Where does this leave the travel sector? The industry will have to deal with an open-ended period of financial instability and economic stagnation (or worse) involving government austerity, a household-spending squeeze, political uncertainty and social rest. I would say that means organic growth, expansion and IPOs are 'out' and cash control and caution - and the odd distressed acquisition or merger - are 'in'.
]]>Most other targets are static. An assault on a hotel or public transport can cause mayhem and terror - witness the 7/7 attacks on the tube and a bus in London, or the Mumbai attacks of November 2008. But an aircraft in flight can be turned into a missile, threatening not only the passengers onboard. It is both a potent weapon and a symbol - a response, in the minds of some, to the cruise missiles and long-range bombers the US fires from afar at its enemies. It constitutes what, in intelligence circles, is termed 'blowback'.
We should acknowledge that there has been no successful attack on the US since 2001 and that no aircraft flying to or from the UK, continental Europe or the US has been brought down by a bomb or turned into a missile - and this is not for want of groups and individuals trying.
Breaching airport security has become iconic - a declaration that 'the war' is not over - and the authorities are in an arms race with those wishing to do so. Both sides operate in the knowledge that, as the Provisional IRA put it after a bomb attack on a Brighton hotel in 1984 that almost killed Margaret Thatcher: "Remember we only have to be lucky once. You will have to be lucky always."
The Twin Towers attack was carried out using razor blades and sticky tape, remember. The failed liquid bomb plot turned hair dye into bomb-making equipment. The shoe bomber planned to punch a hole in an aircraft with a pair of trainers.
IATA says aviation security has "come at a great price in passenger convenience and industry costs". In the words of IATA director general Tony Tyler: "We spend a huge amount on screening people who do not need it. . . We are putting customers through an immensely complicated and, most of the time, unnecessary hassle and airports are creaking at the seams."
So there is a move towards 'trusted traveller programmes' which use travel records and frequent flyer details to identify 'low-risk' passengers. This sounds sensible, but there are problems with it. One is the issue of profiling, which experience suggests too often degenerates into racial (i.e. racist) profiling. Another is that it can be flouted by groups deploying bombers or hijackers who show 'normal' travel patterns or have fake identities, who are unknown to the authorities or who otherwise defy the expectations of staff trained to spot them.
A leading industry figure told Travel Weekly this week: "It's time for some standardisation. Security measures are often inconsistent." It's a fair point. However, as BAA's Ian Hutcheson pointed out, in a piece in The Guardian (September 8): "It is clear the terrorist is not deterred from planning and carrying out these types of attack. This is partly due to the fact that some of the things we do are predictable."
A proportion of airport staff now undergo training in behavioural detection techniques designed to identify passengers who behave suspiciously. Yet consider, would someone engaged in a bomb plot be more or less likely to behave oddly, to display signs of stress, in the knowledge that they need to negotiate a range of detection points, scans and searches which they have no chance of avoiding? It is in this context that their behaviour might appear 'strange' or that a verbal exchange at check-in or elsewhere might throw up an anomaly. Remove the sources of stress and there may be less to be nervous about.
This goes some way to address the complaint about inconsistency. There are inconsistencies due to a failure to generalise, or even to agree on, procedures. There are inconsistencies due to slack practice. However some of the unpredictability, such as whether passengers are requested to remove shoes, is deliberate.
Ask a proportion of passengers to take off their shoes and everyone will think they may be asked to do the same. This avoids the greater hassle and delay of asking everyone to do it. The secure alternative would be to require precisely that. The inconsistency is for a reason.
Airport security is a pain. But as the head of the US Department of Homeland Security, Janet Napolitano, told a World Travel and Tourism Council summit earlier this year: "It only takes one plane to go down . . . The public will take fewer flights if they feel it is not safe."
]]>The commemorations this weekend will rightly honour the dead. They will also be marked by calls for a revision of the aviation security measures that followed. This is understandable, but requires some scrutiny.
The first thing to recognise is that 9/11 did not lead directly to the current airport security regime. The latter was the product of a process in which other events played a part.
September 11 led to wholesale searches of passengers and hand baggage, slowing passage through airports - a significant inconvenience to frequent flyers, a hassle to those who fly occasionally, and a cause of stress to those performing the searches. It ramped up airport and airline costs, which one way or another have to be passed on to passengers.
But subsequent events had at least as much impact. The attacks led US president George Bush to declare a 'global war on terror', supported by Tony Blair. War in Afghanistan followed almost immediately, launched by the US and UK on October 7 2001.
This not only continues to this day, but does so at an intensified level. By this August there had been 2,613 deaths among coalition forces in Afghanistan - and August saw the highest monthly US death toll since the war began - and an untold number of Afghan deaths. Afghan casualties are untold because no one bothers to count them.
The invasion of Iraq followed in 2003 and this, with Afghanistan, led to an increased terror threat - a fact repeatedly denied by the UK government but subsequently acknowledged by no less than Baroness Eliza Manningham-Buller, head of UK intelligence agency MI5 at the time. She told the House of Lords last year: "Our involvement in Iraq produced a fresh impetus to . . . terrorism."
Fresh attempts to attack airlines and airports led to heightened security - in particular, after the foiled 'liquid bomb' plot at Heathrow in August 2006. BAA head of security Ian Hutcheson said this week: "It was the liquid bombs plot in 2006 that had a greater impact."
There is little evidence to suggest enhanced security has deterred people from flying. The number of global airline passengers in 2000 was 1.8 billion. This year there are forecast to be 2.8 billion, despite the consumer downturn here and in the US, economic hardship in much of Europe, the crisis of 2008, recession of 2009 and so on.
It is hard to deduce from this that security concerns have cost the industry growth in passengers, certainly compared to what further 9/11s might have caused. In the US, the difficulty many prospective visitors to the country experience in obtaining a visa may be having a rather more significant impact on visitor numbers. Certainly, this is the view of many in the US travel industry.
On the other hand, there is undoubted evidence that turning four aircraft into missiles with passengers aboard did deter large numbers from flying. The most stark numbers are these: there were 38,000 commercial flights in the US on September 10 2001 and 252 on September 12.
More generally, US passenger traffic fell 5.9% in 2001 - and the downturn was solely from September, which gives an idea of the sharpness of the decline - and it did not stabilise until 2003.
The impact on traffic elsewhere was minimal, however. Traffic in Germany, France and other European markets declined in 2001 but was already falling year on year prior to September due to recession. Traffic in the UK continued to grow, largely because the UK avoided recession.
Airline association Iata estimates carriers suffered a global revenue loss of 6% following September 11. To put that figure in perspective, they lost 14% between 2008 and 2009 as a consequence of the financial crisis and recession.
There have been beneficiaries of tightening security. One is UK-based Smiths Group, which makes airport security scanners and whose annual revenue has risen over the decade since 9/11 from £130 million to £574 million. Another beneficiary is the defence industry. US military spending has doubled since September 2001 and is now higher - in absolute terms - than at any time since World War Two.
A third beneficiary has been the surveillance and intelligence sector. The US government's National Security Agency and its multibillion-dollar facilities in Utah, in Texas and in Maryland will soon hold one septillion (that is, one million-billion-billion) pieces of information on individuals including travellers to the US. A fourth is the bureaucracy of security, such as the US Department of Homeland Security, which comprises what were formerly 22 separate agencies.
There appears little immediate prospect of scaling back this effort and expense. In the words of one US official, quoted in the Financial Times (September 8): "It is hard to redirect resources because it would entail substantive political risks."
All security bodies appear to accept, in the words of a former US government official, that: "Sooner or later there will be another attack."
]]>In the UK, the PMI figure was below 50, which is generally taken to suggest a contraction in the economy. UK construction industry orders in the second quarter were at their lowest for 30 years, no doubt largely due to government spending cuts.
Yet hopes of private-sector growth and an export-led recovery appeared pie-in-the-sky as recruitment company Hays reported a sharp slowdown in private sector hiring.
The Financial Times warned: "British manufacturing weakened sharply over the summer and conditions appear likely to worsen." It quoted an economist at investment bank Nomura, who noted: "The global economic slowdown is coming at an unfortunate time for the UK. Domestic factors had been depressing growth . . . [now] recovery is being blunted by the bleak external environment."
It was those domestic factors that led to a difficult summer for the outbound travel market - primarily the squeeze on disposable income. Unfortunately, there is no sign of this easing. The Bank of England's Quarterly Inflation Report in August (pdf) noted: "The magnitude of the squeeze in real wages and overshoot of the inflation target are exceptional." The Bank suggested UK households may have further to adjust to falling income.
Martin Wolf, the Financial Times' chief economics commentator, wrote two pieces last week assessing the current situation and gave a perspective few have so far been willing to consider. Wolf is not noted for a pessimistic view of the world's economic prospects, by the way.
In the first of the two articles, last Wednesday (August 31), he referred to the period we are in as "the second great contraction" - the first being the depression of the 1930s. He then dismissed the notion of a "double-dip" recession, saying: "The first one did not end."
The question, Wolf suggested, "is how much deeper and longer this recession might become". He noted: "By the second quarter of 2011, none of the [world's] six largest high-income economies had surpassed output levels reached before the crisis hit in 2008."
Wolf added that, as far as preventing a further downturn is concerned, "the buffers have mostly gone".
He followed up on Friday (Sept 2) with this opening line: "The current UK depression will be the longest since at least the First World War. Without a dramatic surge in growth, it is also likely to generate a bigger cumulative loss of output than the Great Depression."
It turns out "the present depression" (his words, meaning a period during which output fails to recover to its previous level) will need to end by next April if it is to be shorter than the similar period under Margaret Thatcher (June 1979 to June 1983) or the depression of the 1930s (Jan 1930 to Dec 1933).
Wolf suggested the current period threatens to produce the greatest cumulative loss of output of any episode. The cumulative loss of GDP so far, he noted, is 14.5% compared with 17.7% in the 1930s - helpfully pointing out: "But this depression is not over."
Fellow FT economist Alan Beattie did not refer to this assessment but did not appear to disagree at the weekend when, noting the roller-coaster ride on the markets in August, he warned: "September is set to be one of the nerviest months of an increasingly perturbing year." I would say hope for the best, but prepare for something worse.
]]>Still a 1% rise in the FTSE 100 index did not make things any worse and the stocks of the big two travel groups, Tui Travel and Thomas Cook, moved broadly in line with the market.
The big financial news this week - barring unforeseen events - will come on Thursday and Friday in the US when central bankers converge on Jackson Hole, Wyoming. Federal Reserve chairman Ben Bernanke will speak on Friday. His speech last year heralded the second round of quantitative easing (QE2).
The apparent steadying of stocks on Wall Street - at least up to midday Monday - came amid speculation, even the belief, that Bernanke will signal a new round of this: QE3.
No doubt Bernanke will say something to please the markets and all will be right as rain for a day or two. The problem is the impact is unlikely to be long-lasting given it has been tried more than once already. Indeed, the evidence suggests the previous rounds of quantitative easing did little more than stoke commodity prices - fuelling inflation.
So the markets might like it momentarily - since QE means more money to slosh around on the, er, markets - but it will also be likely to mean less money in most other people's back pockets.
Analysts in the City predict "another couple of bad weeks in equity markets" and we will see more quantitative easing in the UK, too - "perhaps even as early as September".
The Fed has already done its bit for market confidence this month, announcing that it expects to hold interest rates "exceptionally low", i.e. close to zero, until mid-2013. That would make it five years when rates have been so low as to make lending at the base rate essentially a hand out.
Yesterday we learned, from the latest Markit household finance index, that almost 40% of UK households saw their finances worsen between July and August and "household finances in Britain are deteriorating at a faster rate than at the height of the recession in 2009" (The Guardian). Also yesterday, the British Retail Consortium reported a 2.6% drop in high street customers over the past 12 months.
Latest retail figures, released last week, reflected the pressure on UK high streets as households struggle to meet already rising food and fuel bills. The Office for National Statistics reported zero growth in the volume of sales year on year in July, with an increase in value of 4.3% - below the inflation rate of 4.4% or 5%, depending on your poison.
The figures look worse stripped of petrol sales, with the value of sales then 2.8% year on year. Strip out food sales and they look worse still - the increase in value on July 2010 reduced to 0.2%.
However, the key figure in the UK alongside those inflation rates and retail figures is that of wage growth - which for 80% of the workforce is below 2%. Household income is falling behind inflation month after month with no end in sight.
This is August remember - the quiet month, the silly season - approaching the third anniversary of September 2008 when all went pear-shaped with the failure of Lehman Brothers and four years since the collapse of Northern Rock triggered 'the credit crunch'.
We are three years into the crisis and western economies are staring at what the Financial Times terms "Japanisation". UK economist Graham Turner warned precisely of this outcome in his books The Credit Crunch (2008) and No Way to Run an Economy (2009). Japan, the world's third-largest economy, went from boom to bust in 1992 and has never recovered - its economy sloping between stagnation and recession for two decades.
In essence, the Japanese government prevented the collapse of the country's financial system at the expense of creating 'zombie banks' propped up with state support. Does this sound familiar?
I don't know if there will be a "double-dip recession", though I suspect there will. Saturday's Financial Times appeared to suggest recession is already upon us, reporting: "A new recession - more accurately a prolongation of the old one - was always likely."
The plummeting value of bank stocks last week betrays the markets' fear that a repeat of Lehman Brothers is around the corner. The eurozone appears only a tremor away from a seismic collapse. The world economy is slowing, led by the US. The markets are subject to panic, and governments have exhausted their neo-liberal armoury of exchange rate cuts and quantitative easing, leading to serious discussion of letting inflation rip to bring down debt levels - a deeply destabilising prospect.
Governments and central banks succeeded in preventing the great financial crash of 2008 turning into a new Great Depression, yet they solved none of the underlying problems. The financial markets have operated for much of the time since as though the worst had been avoided. Increasingly it appears it has not.
]]>The ONS provides inbound and outbound statistics and comparisons. It is important to note these are estimates based on the continuous International Passenger Survey conducted by the ONS, and they are subject to revision. They are also seasonally adjusted. The ONS then makes comparisons not just year on year, but between succeeding quarters.
Let's concentrate on outbound. The ONS reports visits abroad by UK residents increased by 5% to 14.5 million in the three months to June compared with the three months to March.
Remember this is a comparison between two seasonally-adjusted estimates. We may debate its value. It also includes all visits, not just holidays.
The number of visits abroad during the 12 months to June, not seasonally adjusted, was 1% up on the previous 12 months. This might be considered a somewhat more useful comparison. However, the unadjusted figure for holiday trips in the three months to June was up 8% compared with the same three months last year, which appears unequivocally good.
Yet remember, the period April to June 2010 included the volcanic ash crisis (April), the general election (April-May) and the World Cup (June), all of which appear to have depressed outbound travel - at least, that is the view in the industry.
The monthly figures for April and May, issued in the two previous ONS bulletins, look particularly impressive.
The April figures showed outbound holiday trips from the UK up 13% year on year in the month. The May figures showed an 11% increase on the same month in 2010. By contrast, June's figures show a 3% improvement in holiday trips but a 1% fall in all outbound journeys - not quite the picture presented by the press.
Visits to North America were down 7% year on year in the month, visits to Europe down 1% and to other destinations by 1%.
The comparison with June 2009 shows a deterioration in all outbound travel of -3%, with visits to Europe down 5% and to North America down 6% - this was the height of the recession remember. These statistics tell us outbound travel has deteriorated since then in all areas but long-haul travel other than to North America, which is up 16% on June 2009 (despite a 1% fall on June 2010).
The killer comparison, however, is with June 2008. Until April to June this year (Q2 2011), June 2008 (and Q2 2008) was the last time outbound travel showed year-on-year growth - a gap of three years.
The comparison with June 2008 shows June 2011 20% down for all outbound visits and 16% down for holiday trips. Visits to Europe were 20% down on the same month three years ago, trips to North America were down 37% and to the rest of the world 6%.
This is the size of the market that has disappeared and not returned. The ONS figures suggest a recovery from the worst period of 2010 when the ash and other factors made a bad situation worse, but they do not yet suggest a recovery beyond that. Indeed, the latest signals regarding trading suggest the opposite, which would fit the picture of a tightening squeeze on household income and continuing aversion to lending.
Quite simply, it does not matter that many people regard a holiday as essential. Those of them who don't have the money will not travel, or not travel as often or as far or for as long.
That is the reality. The collapse of Holidays 4U is one result. The departure of Manny Fontenla-Novoa from Thomas Cook is another. There will be more.
]]>Manny will have held meetings with those investors over recent days - including with the biggest, Lloyds Banking Group, which holds a 9% stake. The others are asset management, insurance and investment groups and pension funds.
There is an irony here in that we are talking about an investment sector that bears a large responsibility for the current parlous state of the UK economy and the decline in consumer spending that has hurt Thomas Cook.
There is a greater irony in the fact that Lloyds Bank was the beneficiary of a multibillion-pound government bail-out in 2008 - a condition of which was its forced merger with the even more-challenged HBOS (Halifax and Bank of Scotland).
Business news service Bloomberg reports Lloyds is poised to announce a collapse in its first-half profits. The banking group will report a £2.1 billion loss so far this year against a £596 million profit in the first half of 2010. This follows a requirement for Lloyds to set aside £3.2 billion for "miss-selling loan insurance". The bank is 41% owned by you, by the way, or at least by the Treasury.
For the record, Thomas Cook today reported an underlying operating profit of £20 million for the three months to June, in line with its profit warning on July 11 - £5.7 million short of the underlying profit for the same quarter a year ago.
As profit warnings go it was not a fundamental restatement, but the collapse in share price was extraordinary. Thomas Cook has lost two-thirds of its market value over the past year, but much of it haemorrhaged in the days immediately after that warning - the third in the previous 12 months but the first of this financial year.
The share price bumbled along at around 66p-68p into this week before heading further south towards 60p on Tuesday. This morning's announcement saw it bounce back by almost 6% by midday. This is not a sign of fundamental change but an indication of a change of sentiment. The FTSE can be fickle and fad-driven.
The City had it in for Manny, as my colleague David Stevenson who writes the City Insider column has noted. The Times and Sunday Times appeared to have it in for him too, no doubt reflecting the sentiment in the City. These things develop a momentum of their own. In some ways, Manny simply was not slick enough for the City. There were rumblings of discontent on that front long before the profit warning.
The group's institutional investors were not likely to tolerate such a deep loss of value in the share price, and thus their investment, for long. The extent of Manny's personal responsibility for the plunge in share price matters not a jot.
Today's Thomas Cook group statement acknowledged the problem. In the words of chairman Michael Beckett, "The board is focused on restoring market confidence in the group." Sometimes a ritual sacrifice can do that.
That confidence "has been impacted by concerns over debt levels and the poor performance of our UK business". The debt level might not look quite so high without that plunge in market capitalisation, but that is a chicken-and-egg argument. The "poor" UK performance cannot be viewed in isolation from the poor state of the UK economy. One of the strengths of Thomas Cook is that it is no longer dependent on the UK market.
Things may look up at the group subsequent to Manny's going, and they may not. Whether they do may be due to the new figure in the hot seat and it may not. If I have a cold my condition generally improves in seven days if I follow a strict regime of medication, but it can take up to a week if I do nothing.
My guess is Manny's departure will not draw a line under the problems at Thomas Cook because those problems lie both within and outside the company and the key will be what happens outside.