TT. Tui Travel

Thomas Cook Group PLC (TCG.LN) Wednesday announced it will shift to Airbus as its sole provider of narrow-body aircraft in a bid to cut costs and said it continued to worry about the outlook for the U.K. market.

The company, which currently operates 93 Boeing Co. (BA) and Airbus aircraft, said it will begin in December 2012 a five-year replacement program for its 71 narrow-body planes. Europe's second largest tour operator after TUI Travel PLC (TT.LN) will reap savings on maintenance costs if all its planes are supplied by the same manufacturer.

To kick-start its renewal strategy, which will consist of A320 and A321 aircraft, Thomas Cook said it had reached a memorandum of understanding with Airbus, a unit of European Aeronautic Defence & Space Co. NV (EAD.FR) for 12 new A321 planes. The order is valued at $1.15 billion at list prices, although Thomas Cook said it had received a "substantial price concession." Final contracts are expected to be inked early in the New Year.

"The deal is self financed," said Thomas Cook Chief Executive Manny Fontenla-Novoa. "We're getting better maintenance rates and better fuel efficiencies, which pays for the additional finance costs."

The additional aircraft will be delivered in 2014 and Thomas Cook has an option to purchase more from 2015.

Thomas Cook will continue to be heavily reliant of operating leases and will finance orders through sale and lease-back agreements with third-party lessors.

It plans to review its wide-body fleet replacement requirements during 2010/11.

Its decision to move to one aircraft provider is part of a wider effort to reduce costs, especially in the U.K., where its performance continues to be a concern.

"The U.K. is by far the most challenging of environments," Fontenla-Novoa said, adding that Ireland and Belgium were also suffering but those markets were smaller and less important to the company. On the other hand, Germany, France, the Netherlands and Scandinavian markets were experiencing various degrees of improvements in trading.

"We are encouraged by a better market environment in our major Continental and Scandinavian markets," Fontenla-Novoa said. "Winter bookings have got off to a good start and, although early in the cycle, summer bookings are developing well."

The U.K. market remained uncertain, he said, adding that he was confident actions taken to streamline its operations and save costs "will help mitigate input cost pressures and any further deterioration in the trading environment."

It will target between GBP40 million and GBP50 million in savings in the U.K. by the end of 2012, which will be achieved through cutting 500 managerial and support jobs, while also renegotiating supplier costs and upgrading its IT infrastructure. It expects to take a GBP20 million hit in costs to implement the changes, which will be incurred in the year to Sept. 30, 2011.

The U.K. most notably has suffered from weak trading especially over the summer but operations have also been hit by the relative weakness of the euro and increases in air passenger duty, or APD.

Consumers appear to be more price sensitive. Spanish hoteliers have successfully attracted demand by reducing prices, Fontenla-Novoa said. U.K. demand for holidays in Egypt fell after hoteliers increased prices and because it is in a geographical zone with higher APD charges compared with European countries.

Thomas Cook, which last month finalized a deal after years of negotiations that allows it access the Russian market, now is targeting China and, eventually, the Brazilian market.

Fontenla-Novoa said it took two years to seal its Russian deal and could take at least that to cement a deal in China.

Revenue for the 12-month period was GBP8.89 billion, down 4% from GBP9.27 billion it reported a year earlier, or down 5% on a constant currency basis. Earnings before interest and taxation fell 5.7% to GBP391.4 million, in line with analysts' expectations.

At 1155 GMT, Thomas Cook's shares traded down 5 pence, or 2.6%, at 181 pence, making it one of the biggest fallers in the FTSE 250 index, which traded up 1.5%. The stock has shed 18% in value since the start of 2010.

-By Kaveri Niththyananthan, Dow Jones Newswires; 4420 7842 9299; kaveri.niththyananthan@dowjones.com

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