Spain's hotel strength affects Thomas Cook's margins

Thomas Cook Sentido Cala Vinas in Majorca. Photo credit: Thomas Cook (Thomas Cook Sentido)

With the growth of higher-margin destinations like Turkey and Egypt failing to offset the pressure on Spain’s margins, Thomas Cook Group offered a cautious full-year forecast.

The company said it was continuing to upgrade its offering while performance growth in Spain showed signs of faltering. 

“We continue to experience margin pressure due to a highly competitive market for Spanish holidays,” said CEO Peter Fankhauser. “While we have seen good growth to higher-margin destinations such as Turkey and Egypt, this has not been enough to fully offset the margin pressure which has largely impacted holidays to Spain to date.”

For the third quarter the company reported revenue up 10 percent on the year, with gross profit down 3 percent to £443 million and underlying EBIT up 8 percent to £14 million.

Spain's Growth

The results came as STR and Magma Hospitality Consulting reported the market was continuing to see investment into the country’s room stock. “Investment into Spain's hotel sector has been largely driven by strong international tourism demand, even during the financial crisis,” said Albert Grau, founding partner of Magma Hospitality Consulting. “Increasing holiday tourism, as well as 'bleisure' travel, have set the market up for numerous development opportunities, with several operators currently working to improve their products and services to meet this increasing demand.”

The study found that, although hotel performance remained on a strong upward trend, with Spain having recorded 37 consecutive months of RevPAR growth between March 2015 and March 2018, there had been regional shifts in recent months. 

“Resort markets, such as Gran Canaria, have seen year-over-year declines as tourism demand has returned to competing destinations in markets like Turkey and Egypt,” said Javier Serrano, STR's country manager for Spain. “Hotels in several Spanish markets benefitted from shifted demand from these markets throughout 2016 and 2017 as they struggled with security concerns.”

Thomas Cook's Hotels

Thomas Cook has been looking to take greater control of its inventory, launching a £150-million fund earlier this year to allow it to grow its own branded hotels. The company, which was working with Swiss hotel development group LMEY on the investment platform, planned to have 10 to 15 hotels in the fund by 2020, with a further update expected soon. 

There were other factors at play for Thomas Cook. The company warned that “the sustained period of hot weather in June and July has led to a delay in customer bookings in the Tour Operator, restricting our ability to drive margins in the 'lates' market. Based on our current view, we now expect growth in full-year underlying operating profit to be at the lower end of market expectations.”

The group said there was no change to its outlook beyond 2018, commenting that it was taking a number of strategic actions to improve the quality of its holiday offering, investing in its online proposition and targeting efficiencies.

The pressure on the UK market as a result of the weaker pound following the EU Referendum has been an issue for Thomas Cook, with demand weakening. After March next year, it is hoped that there will be a clearer view of what Brexit looks like, with potential for the pound to recover. But should next year see a similarly hot summer, Thomas Cook and its rivals may find themselves with greater issues than the political machinations of their customers. 

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