Currency shifts, margin pressure prompt tour operators to turn away from Spain

Malaga Spain. Photo credit: mfron//Getty (Landscape view of Malaga City, Spain overlooking the sea)

UK-based tour operator and hotel company Thomas Cook is switching its summer focus from Spain to the eastern Mediterranean due to detriments including margin pressure at its UK operating arm.  

The fall in value of the pound against the euro has increased pressure since the EU Referendum in 2016, with the issue exacerbated by Spain’s hoteliers upgrading their properties in recent years.  

Under (Margin) Pressure

Thomas Cook said that the group was seeing margin pressure as a result of currency shifts and hotel cost inflation “in a competitive market environment.” To help mitigate the impact, the company was switching to higher-margin destinations in the eastern Mediterranean, as well as pushing higher web and ancillary sales. 

“We have continued to rebalance our destination mix toward more profitable destinations," said Peter Fankhauser, Thomas Cook’s CEO. "This includes taking 25 percent of the UK holiday capacity we have in Spain and moving it to the eastern Mediterranean.” 

Spain, he continued, is simply too full. “There are hoteliers who are just using the situation, and who are increasing the price according to the demand. And there are other, smarter hoteliers, [who] were using the situation and were refurbishing their hotels. Now, we have better quality [hotels] in Spain that can mitigate a demand shift.”

Use Caution Ahead 

In a note of caution to Spain’s hoteliers, Fankhauser said that they would follow the demand as well on the downside. “If it comes like that, then the past seven years are over in Spain and we will have seven slimmer years in Spain from next year," he said.

TUI CEO Friedrich Joussen echoed Fankhauser’s comments, describing Spain as “strong,” but added that it is also “high-margin” and that the country's hotels will still be full. "It will be going down a little bit, but not a lot,” he said.

“Is there a limit on how much RevPAR can grow in Spain?" asked Inmaculada Ranera, managing director, Spain & Portugal at Christie & Co. She answered her own question. "It will depend with who we want to compare with. If we take urban markets, as far as those markets are capable of promoting themselves as an attractive destination in Europe and in the world, and are thus capable to attract the high-end traveler, results can still improve. A key element can be to keep attracting international brands to operate in these cities, as has been happening in key places such as Barcelona, Madrid, Málaga and others. 

“On the other hand, in resort destinations, the risk that affects RevPAR margins is more on the side of the recovery of other Mediterranean countries, such as Egypt, Turkey, Tunisia or Greece, which will start absorbing some of the travelers that have been choosing Spain as a secure destination within the last years. Hoteliers made an effort to improve the quality of their hotels, and thus, kept prices up for tour operators, who started to look at other countries to maintain their margins. Again, the key [goal] is to attract those travelers ready to pay higher rates.” 

Spain must fish in richer waters if it wants to maintain growth. 

Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.