Takeovers to Take Off Developments in the Travel Sector

The travel sector in the past has had an uneasy relationship with the financial institutions of the City and provided mixed results to private equity financiers, particularly in the late 1980s and early 1990s when the industry was badly hit by recession. However, with 14.5 million holiday-makers expected to spend GBP10 billion travelling abroad this year, the UK travel industry is now one of the most significant in the world. It is also one of the most competitive. At present, interest in this sector seems to be undergoing something of a renaissance. This change has come about for a number of reasons, including:

* the attention given to the GBP1.3 billion flotation of Thomson Travel Group. The perception is that post flotation Thomson will focus more on profitability than market share, which should be a stabilising influence on the marketplace;

* the improving quality and spread of earnings from major players such as Airtours;

* continuing strong growth of UK passsenger volumes in both the charter and scheduled markets as suggested by recent statistics from BAA; and

* a belief that the quality of the management of these businesses generally has improved over the last few years. Certainly the new team at First Choice, led by Peter Long, has been warmly greeted by a strong rise in its share price over the last year.

The next few years are likely to throw up a number of interesting opportunities. The Monopolies & Mergers Commission (MMC) Report into foreign package holidays was published in December 1997 and found, contrary to some expectations, that the public was not adversely affected by the extent of vertical integration in the UK. This has effectively given a green light to further consolidation in the UK travel sector, which continues to reflect the concentration of the industry on a global basis.

Global Trends

The last few years have seen a significant amount of corporate finance activity. Tour operators and travel agents have sought to save costs and use their assets more efficiently, protect and expand their distribution channels and develop new products and geographic markets. Much of the activity has been cross border. Carnival Corporation of the US now has a 29% stake in Airtours, Carlson recently acquired Inspirations, and Westdeutsche Landesbank of Germany owns Thomas Cook. Aside from the positive reasons for consolidation, existing players also perceive some threat from operators of other leisure businesses entering their market and bringing new or slicker marketing techniques to bear. The most notable new market entrant is probably the arrival of the Disney Corporation in the cruise market. The main development strategies adopted have been as follows:

Vertical Integration

This has led to a position where many of the major UK and other European operators own their own tour operator, travel agency chain and airline. In the UK, the position is as set out in Table 1.

The integration of an airline has the triple advantage of generating aviation profits, securing long-term supply of high-quality low-cost seats without being dependent on charter or scheduled airlines, and creating value through the ownership of airport landing and take-off slots. The key to successfully running integrated operations is maintaining an appropriate balance between airline capacity and seating demand arising from tour operating. The integration of a retail travel agency chain allows travel groups to minimise commission levels, which otherwise would be paid to external travel agents, and to control their distribution channel.

Geographical Spread

Acquisitions allow the penetration of other markets and benefit from having a recognised selling network already in place. As an illustration of this, in November 1997 Airtours bought the Belgian tour operator Sun International for GBP56 million. Carlson, the US travel business, has reinforced its presence in Europe. After merging with Wagon-Lits a few years ago, Carlson acquired tour operator Inspirations in July 1997 for approximately GBP42 million. In December 1997, Thomson bought Fritidsresor, Scandinavia’s second biggest operator in a GBP260 million deal that gave the group 27% of the Scandinavian market. Further benefits of a widening geographic spread come from reducing dependence on a single market and utilising assets, particularly aircraft, more efficiently.

Widening the Product Range

The best recent example of this is that a number of operators have added cruising to their product portfolio. In May 1997, Airtours joined forces with Carnival to acquire Italian cruise company Costa Crociere. Carnival has also extended its product range into the luxury segment with the recently announced $500 million purchase of Cunard. Such moves bring the additional benefit that niche or specialist travel companies are often able to command higher margins than mass-market products.


These trends are replicated in Continental Europe, where recent corporate activity has been driven both by a desire for closer integration of travel groups and by the regulatory environment. By way of example, Westdeutsche Landesbank announced in March 1998 its acquisitions of Hapag-Lloyd and TUI, the German travel groups. To achieve this goal, the bank has had to agree to sell its stake in LTU, Germany’s third largest package holiday company. Similarly C&NTouristik has been formed to create one of the largest travel businesses in Europe by combining Lufthansa’s Condor charter airline and Karstadt’s tour operator NUR. This necessitated Karstadt’s sale of its business travel operation, Euro Lloyd Reisebuero, which was acquired by Swiss-based Kuoni.

Continuing Concentration

For smaller players, the key to success is innovation and programme differentiation. Despite the dominance of the major players, the market is still open to new ideas and delivery methods. This can be seen from the success achieved by Direct Holidays, which has sold holidays direct to the public since it was established in the early 1990s. Ultimately, however, the trend is likely to be towards increasing concentration. The stringent regulatory regime in the UK ensures that successful travel businesses that involve air travel need to retain or raise increasing amounts of capital in order to expand. Tour operators wishing to hold an Air Travel Organiser’s Licence (ATOL) to fly passengers need to comply with financial requirements imposed by the Civil Aviation Authority (CAA). Before delivering the licence, the CAA requires operators to have a balance sheet with sufficient “free assets” as proof of their financial stability and to have in place adequate bonding to ensure that funds are available to return passengers to the UK in the event that the company collapses. Deloitte & Touche Corporate Finance has practical experience of this process through its successful involvement with the u112 million management buyout of Shearings Holidays from Rank and the management buyout of Crystal International Travel Group from US-based Viad Corporation. In practice, tour operators owning aircrafts, hotels or other capital assets find it easier to meet the criteria. Companies without a strong asset base have to bridge the gap by third party guarantee, by obtaining insurance or by seeking further equity funding. This ongoing equity requirement tends to mean that smaller companies eventually need to be part of larger, better funded groups to develop.

1998 Outlook

We believe that the forces driving the industry will provide owners of independent travel businesses with a strong hand in extracting value from potential bidders. A handful of vertically integrated groups focused on global expansion is likely to continue to dominate the UK market. The MMC Report has done nothing to alter this fact. We would expect that this process will continue and that the main players will seek to strengthen their businesses and deal with any gaps in their distribution channels and product offering. The UK will continue its integration within the European travel industry. In the short term, the Thomson float will be significant, possibly triggering a wave of corporate activity as Thomson flexes its muscles and as competitors seek to gain advantage by making acquisitions in the run up to its listing.

Happy holidays!

Table 1: Vertical Integration within the UK Travel Sector

Tour Operator Travel Agent Airline

Thomson Travel Thomson/Skytours/ Lunn Poly Britannia

Portland Direct Airways

Airtours Airtours/Aspro/Eurosites Going Places Airtours


First Choice First Choice/Eclipse/ – Air 2000


Thomas Cook Thomas Cook/Sunworld/ Thomas Cook Airworld

Time Off

Carlson Inspirations/Skiers Worldchoice/AT Mays Caledonian

World/Blue Ridge Airways

Source: MMC Report December 1997