COLIN BAKER LONDON
As the charter industry enters a period of uncertainty, the speed of consolidation and integration appears to have slowed
The rush of consolidation and vertical integration that has been the defining feature of the European travel business over the past few years seems to have reached something of a plateau.
The latest ranking of Top 50 charter carriers continues to be dominated by the large UK and German integrated operators, but there has been little movement recently in terms of merger activity. This contrasts to the situation last year, when German conglomerate Preussag brought the UK's largest operator Thomson and also acquired a minority interest in French operator Nouvelles Frontieres. The latter deal will provide Preussag with access to the Corsair airline, which focuses on long-haul services, while the Thomson deal takes in Britannia Airways.
Meanwhile, at the back end of last year, fellow German operator C&N Touristic, which had itself come close to acquiring Thomson at one point, took control of Thomas Cook, the UK's number two tour operator. This deal linked C&N's Condor with Thomas Cook's JMC Airlines. Since these deals were concluded, things have gone quiet.
Reasons for quiet
There are three factors behind the apparent pauses. Firstly, Brussels has made it clear that it is likely to take a very close look at any further consolidation. The European Commission is concerned that any further mergers will leave too much power in too few hands.
While this acts as a serious potential block to new mergers, few in the industry have much appetite for this type of activity anyway. Only First Choice has much cash to spare following the disposal of its stake in cruise operator Royal Caribbean. Others, such as Airtours, have plenty on their plate already. The UK operator is wrestling with problems at subsidiaries in Germany and North America. P&O Princess, which analysts say needs a European distribution base, is preoccupied with overcapacity in the cruise market.
If there is going to be any bid activity, then Switzerland-based operator Kuoni is the "only one on the block" according to David Pope, leisure analyst at the UK's Brewin Dolphin Securities. Kuoni has been hit by boardroom wrangles, which some analysts say may attract bidders. However, the group has a complicated share-ownership structure, with a family trust appointing the chief executive, who has fallen out with the rest of the board, despite the family backing. Kuoni, which tends to focus at the top end of the market, has been badly hit by the suspension of Concorde flights, although it may benefit as services gradually resume.
While further consolidation may have come to something of an impasse, there have been developments in those groups which have already merged. In September, Preussag, parent company of Britannia and Hapag-Lloyd, launched a new brand for its tourism division that will include the two airlines. The group will be called World of TUI, although brand names will be retained, reflecting the strengths of the likes of Thomson and TUI in their respective national markets. However, in future these names will be joined by the new TUI "smiling" logo. The liveries of Britannia and Hapag-Lloyd will be harmonised so that only the names are different. This will mean the end of the distinctive orange, blue and white logo of Hapag-Lloyd - on aircraft at least.
In contrast, C&N Touristic has chosen to go for the Thomas Cook name. This is apparently because Thomas Cook is seen as a stronger brand, although the vibrant C&N colour scheme will be used. Thomas Cook has also expressed interest in taking over bankrupt Belgian operator CityBird, although whether this deal goes ahead given the recent international events remains to be seen. Earlier this year, British Airways merged its scheduled holiday business into a joint venture with Thomas Cook.
Back in Germany, Swissair Group has abandoned tentative plans to merge its Balair charter airline with regional subsidiary Crossair. Instead, the Swiss group has entered a partnership with tour operator Hotelplan, which will oversee Balair's operations and assume the commercial risk, although Swissair retains ownership.
This deal forms part of Swissair's attempts to focus on core business activities, and the group is also looking to sell out of German charter carrier LTU International Airlines. LTU is owned jointly by the Swiss flag carrier (49.9%) and German bank Westdeutsche Landesbank (10.2%), with tour operator Rewe Touristik holding the remaining shares. LTU has been haemorrhaging cash and Swissair is keen to pull out of the airline, although it says it will inject more capital to help the German carrier towards a planned turnaround by 2004. It is believed that Swissair is looking to sell its stake to partner Rewe.
Swissair is also a shareholder in Italy's Volare Group, which is planning an initial public offering in November, although recent events clearly put this in doubt. Volare Group is also now the parent of Air Europe. Earlier this year, there was speculation that Italian flag carrier Alitalia was interested in merging its charter business with Volare, although this has so far failed to materialise.
Of course, talk of merger activity in the charter sector has been all but overshadowed by the crisis which followed the terrorist acts in the USA. Leisure analysts say it is too early to tell exactly what the implications of this will be, but warn the industry could be hit hard. If this happens, there is likely to be some form of rationalisation.
There is some comfort in the fact that most package tours for the winter season to US destinations from Europe have already been booked and paid for, and are "chock-a-block" according to David Pope of Brewin Dolphin. Observers doubt that insurance companies will be willing to pay out for cancellations. However, analysts warn that fly-drive deals tend to booked much nearer the departure time, and are therefore more vulnerable to cancellations.
The real test will be the summer season for 2002. September, October and November are not big months for bookings, which tend to pick up in January and February. Even so, the industry is looking forward with trepidation. Pope warns that there could be a serious tail off in North American traffic from Europe. This obviously leaves a question mark over what operators will do with their long-haul aircraft.
One possibility, he says, will be to transfer aircraft on to European routes - although he admits that there are plenty of issues to be tackled if this happens. Moving aircraft intended for long-haul use on to short-haul Mediterranean destinations is far from ideal, and Pope says operators will have to try and get four sectors a day to make this worthwhile.
Slots of problems
Slots could be a problem, as carriers may well require earlier (ie peak time) positions in order to get the required number of sectors. The tour companies will also need to ensure that they can get the extra accommodation - providing of course that they can fill the larger aircraft. Pope says that Greece and Turkey are the most likely destinations to offer extra capacity, although whether tourists are willing to travel to the latter in an unstable international climate remains to be seen. Asian destinations may also offer an alternative, and will, of course, be more suited to long-haul aircraft.
As is the case with the scheduled carriers, underlying industry problems are exacerbating any problems related to the uncertain international picture. "Fuel costs problems are coming to a head," notes Pope, as protection provided by hedging begins to diminish.
Despite all this, it is not all doom and gloom. The World Tourism Organisation predicted that global tourism will take a huge blow from the events in the USA, but will still grow this year. "We shouldn't jump to conclusions. We have learned from experience that the tourism industry recovers very quickly from adversity," the inter-governmental group's secretary-general, Francesco Frangialli, says in a statement. The organisation says that in the first eight months of this year global tourism was due to grow by 2.5-3%. Barring a rapid deterioration in the international environment, year-end growth should be in the region of 1.5-2%, the organisation predicts. "Despite all the conflicts we've had in the world over the past 50 years, there has never been one year that experienced a decline in tourism," he notes.
Looking longer term, however, recent forecasts from the World Travel and Tourism Council suggest that the travel sector will roughly double in size over the next 10 years - and should withstand the current problems which have hit the entire travel sector.
Source: Airline Business
