Thomas Cook shares fall as political turmoil in tourist spots hits profits

Shares in Thomas Cook have fallen sharply after its UK profits were hit by political upheaval in the Mediterranean, food poisoning fraudsters and Hurricane Irma.

The string of setbacks meant underlying profit in the tour operator’s UK arm fell by £34m in the year to the end of September despite a 3% increase in revenue, with the effect felt across the group as its overall profit margin declined 23.4% to 22.1%.

Investors seized on difficulties in its UK operations as a reason for pessimism despite an otherwise strong full-year profit statement from Thomas Cook.

The key factor affecting investors’ confidence in Thomas Cook was the fallout from political upheaval in popular tourist spots, which made the crowded Spanish holiday market more competitive than ever.

Profit margins, traditionally tight in the travel sector, were eroded as Spanish hotels hiked their prices in response to an influx of tourists choosing to steer clear of rival Mediterranean destinations.

Egypt and Tunisia have suffered terror attacks while political turmoil in Turkey has also affected its sizeable tourism industry. As tourists flocked to Spain instead, competition with rivals such as TUI limited Thomas Cook’s ability to pass the increase in costs through to customers.

Shares in Thomas Cook fell nearly 9% in early trading, making it the biggest faller on the FTSE250, while TUI’s stock also fell, albeit by a more modest 1.2%, as investors bet that it would report similar pressures in its full-year figures due next month.

“With destinations in the eastern Mediterranean out of favour following political unrest, holiday providers are dashing headlong into Spanish resorts,” said Nicholas Hyett, equity analyst at Hargreaves Lansdown.

“The increased competition is a double whammy for Thomas Cook, pushing up the cost of beds while piling the pressure on pricing as well.

“The group is making efforts to control costs, and holidaymakers are starting to return to destinations such as Turkey and Egypt that have struggled in recent years.

“But margins in the travel agent sector have always been tight, and news that they’re being squeezed even further is far from welcome.”

Thomas Cook’s UK business has also been hit by fraudulent illness claims, where holidaymakers pretend to have suffered food poisoning or other ailments and seek refunds or compensation from the company.

The company said the number of claims had fallen recently, after it tightened up its compensation procedures and started taking legal action against fraudsters.

It also suffered increased costs as it tried to meet the needs of 10,000 customers caught up in Hurricane Irma, which devastated parts of the Caribbean earlier this year.

Stripping out items such as foreign exchange movements, pre-tax profit was up 8% to £46m in the year to the end of September, on the back of revenues that were 9% higher at £9bn.

The chief executive, Peter Fankhauser, cited progress in the group’s continental Europe and Nordic businesses, while the Thomas Cook airline has enjoyed increased profits in a difficult year that has seen European carriers such as Air Berlin, Monarch and Alitalia go bust.

The tour operator’s prospects could also be boosted by improved sales of its winter holidays, with bookings up 3% and the average selling price also 3% higher.

While bookings for summer next year are in the early stages, the company said it hoped pressure on the Spanish market would be eased by signs that tourists are returning to Turkey and Egypt, with trips to Greece and Cyprus also showing signs of strong demand.

Those investors who kept some or all of their Thomas Cook shares will be rewarded with an increase in their dividend, which is rising by 20% from 0.5% to 0.6%.