TT. Tui Travel

Operating losses widened at Europe's second-largest travel operator, Thomas Cook Group PLC (TCG.LN), in its fiscal first-half as the company was hit by the political turmoil in North Africa and the Middle East, a lack of consumer confidence in the U.K. and the late Easter holiday, and executives admitted Monday they were struggling to pass on higher costs to U.K. consumers.

Chief Executive Manny Fontenla-Novoa said that if high oil prices are sustained, Thomas Cook would raise holiday prices by 2% to 3% on average. However, the company would be unable to raise prices in the U.K. because the hard hit consumer wouldn't swallow the increase, he added.

The company, with operations in many European countries, has been hit by the surge in oil prices because it runs its own fleet of planes and fuel costs have risen sharply. The sharp fall in oil prices seen late last week will have come as a relief, but the impact will take time to feed through to fuel costs.

Fontenla-Novoa said oil prices remain volatile, but the company had managed to achieve better rates for fuel than a year earlier up until the end of January thanks to its hedging. About 88% of its jet fuel needs for summer 2011 have been hedged and 65% of its winter 2011/12 requirements have been hedged but it didn't say at what level.

The CEO said Thomas Cook had already struggled to pass on higher fuel surcharges to its U.K. customers compared with countries like Germany. In fact, the company has been forced to discount holidays in the U.K. to stimulate demand.

The U.K., which accounts for about 30% of Thomas Cook's total revenue, has continued to "face tough market conditions in a difficult economic environment, with negative news on inflation, unemployment and expectations of interest rate rises all hurting consumer sentiment," the company said in a statement.

"Whilst results in our U.K. business are likely to be below last year's levels and the MENA situation remains uncertain, our Continental and Northern European businesses are performing well and summer booking levels are encouraging," Fontenla-Novoa said.

The company said it is therefore "well positioned to make progress this year."

Thomas Cook is in the midst of a restructuring and cost saving programme in the U.K., which it expects to deliver annualised savings of GBP40 million to GBP50 million from fiscal 2012, with an estimated one-off cost of GBP20 million. To date, it has achieved GBP12 million of savings and is on track to deliver GBP30 million of savings in the current financial year which it said will help offset weak trading.

In addition to the weak U.K. consumer environment, it has also faced challenges relating to political unrest in the Middle East and North Africa and has responded by "redirecting our flying programme, cutting costs and continue to focus on our strategic priorities," Fontenla-Novoa said.

The company flies to many countries in the region, including Egypt and Tunisia, which saw regime changes in the first quarter of this year following popular uprisings. Travel to both countries was severely disrupted during the uprisings, with Thomas Cook reporting 120,000 cancellations to Egypt and 40,000 to Tunisia. It estimates the cancellations cost it about GBP17.6 million and repatriations a further GBP4.8 million.

The company expects the ongoing unrest in Libya and other countries nearby to weigh on consumer demand and recovery is "slower than expected, despite significant bed rate reductions."

It expects a further GBP35 million hit on its financial results in the second half of the year, which Shore Capital's analyst Greg Johnson estimates will now push fiscal year operating profit below GBP391 million.

While U.K. consumers were content to swap to other destinations such as Spain, Greece, Cyprus and Turkey to avoid the unrest, French customers initially cancelled their trips. The top three French destinations are Egypt, Tunisia and Morocco, where French is spoken or Thomas Cook ensures french-speaking personnel and entertainment to satisfy those customers.

Fontenla-Novoa said volumes were coming back after negotiating with suppliers and governments on price and security to help lure back demand.

Thomas Cook's net loss narrowed to GBP200.8 million in the six months to the end of March, from GBP211.8 million loss a year earlier as it booked a bigger tax gain, but it pretax loss widened to GBP269.4 million, from GBP252.2 million even though revenue climbed 3.7% to GBP3.43 billion, driven by higher prices and an increase in the number of people buying more expensive trips. Its operating loss widened to GBP165.8 million from GBP130.2 million.

The company, which traditionally makes a loss during the quieter winter holiday period, said profit had also been hit by the late Easter holiday, which fell outside the first half this year.

Thomas Cook said it is reviewing the size of its U.K. airline fleet to reduce its winter flying losses, while broadly maintaining capacity in the summer. It has also reached agreement to close its U.K. defined benefit pension plans to all active members and move to a defined contribution scheme.

Thomas Cook, which maintained its interim dividend at 3.75 pence, continues to focus on its cash flow, which was an outflow of GBP255.2 million compared with GBP235.8 million a year ago. Net debt widened to GBP1.09 billion from GBP951.9 million last year.

At 0848 GMT, Thomas Cook shares were down 4.2%, or 7 pence at 163 pence and was the largest faller of the FTSE250 index.

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

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