Thomas Cook Plc - Financial Performance and Growth Strategies - Case Study Example

Introduction and history of Thomas Cook Plc: Thomas Cook is one of the most well-known travel and tour operating companies in the world. From its humble beginnings in the 1800's to the present day, the company has had a long and checkered history. This paper presents an analysis of the financial performance of the company and its growth strategies. Thomas Cook, a cabinet maker from Market Harborough, a village in England planned a train ride for temperance supporters for a meeting in Loughborough 12 miles from Leicester, little did he know that the particular event would be instrumental in the creation of this well known company of tour operators. Thomas Cool was a former Baptist minister and a very religious man and he firmly believed that alcohol was the major factor casing problems among the working class in England. It was with this in mind that the above-mentioned train journey was arranged. The first unofficial tour was this trip in open carriages, which took nearly 500 temperance supporters to Loughborough, and back in July 5, 1841. In 1845 Thomas Cook organized a tour to Liverpool which was accompanied by what must have been the first tour brochure ever printed in the world. His first international venture was to Paris during the time of an international exhibition which was held there. Further tours to other cities in Europe began and an established tour itinerary began to fall in place. A tour to Switzerland and later to Italy was conducted in 1864. With his clientele shifting from working class to middle and upper class passengers, Mr. Cook began to make arrangements with hotels in Europe by using something called the hotel coupon. This enabled tourists to pay for the hotel rooms in advance and to stay at hotels without paying cash. Another innovation was the circular note, the forerunner of 'travellers cheque.' Trips to the US soon followed and later a trip by steamer up the river Nile was also arranged. All this success naturally led to thoughts of expanding further overseas to the US and Asia. Mr Cook himself was part of a trial world tour which covered the US, Japan, China, Singapore, Ceylon and India. This tour went on to become an annual event in the company's tour calendar.. An unexpected move by the then two owners saw the company being sold off to a Belgian tour operator called Compagnie Internationale des Wagons-Lits et des Grands Express Europens in 1928. Certain events during the world war saw the company near collapse and a deal was made where by the ownership changed back to British hands, this time by the government owned railway companies. Even though the company could benefit from the post war travel boom, things began to slow down by 1955 due to the emergence of new and dynamic tour operators. In 1972, Thomas Cook became privately owned once again through a purchase by a consortium of the Midland Bank, Trust House Forte and the Automobile Association. The famous red logo of Thomas Cook was introduced during this time. The company did well during this period and even managed to survive the 1970's depression. The Company came under the sole ownership of the Midland's Bank in 1980 and again sold of to Germany's third largest bank, Westdeutsche Landesbank (WestLB) and LTU group (an airline charter company). Thomas Cook later became the subsidiary of the German bank and soon acquisitions of Sun World, Time Off and Flying Colours took place. In 1999 a merger with Calrlsons Liesrue Group took place. The Company Thomas Cook Group PLC was formed in June 2007 through a merger of Thomas Cook AG and My Travel Group Plc. "It is now part of Thomas Cook Group plc (www.thomascookgroup.com) which was formed on June 19th 2007 by the merger of Thomas Cook AG and My Travel Group plc." (A Brief History). Business Strategy: Corporate growth strategy: The merger of Thomas Cook and My Travel has resulted in a very powerful tour operating company and has a string presence in UK and some European countries. This merger came about so that both the companies could compete more efficiently in a highly competitive market. "The companies estimate they can save 75m a year by combining and will have strong market positions in the UK, Germany, Scandinavia, the Benelux countries, France and Canada." (Seawright 2007). Moreover low cost airlines were making dents in tour operator revenues with passengers opting to fly low cost airlines than depend on a tour operator for travel. Thomas Cook Group plc has outlined the following strategies for long term growth. The operations of the company covers three major areas of which tour operations, its core competency still gets the maximum revenue for the company. The other areas are independent travel and travel related financial services. The operational targets of the company for the years ahead include a group profit of 620 million, group revenues to touch 13 billion, income from its financial services to grow from 250 million in 2006 to 370 million and revenues from independent travel operations to grow from 2 billion in 2006 to 3.3 billion all by the end of 2010. "We now have a clear strategy, which is to improve performance in mainstream tour operating, make significant advances in independent travel, travel-related financial services and emerging markets, and grow overall revenue and profit. We have set four key targets." Thomas Cook Group PLC, Annual Report and Accounts 2007: Strategy. 2007). Focus on its mainstream activity: The Company that was the pioneer of packaged holidays still intends to focus on its mainstream activity of tour operations. But according to the company's annual reports for the year 2007, revenue from this source which accounts for nearly 80% during the last year is expected to fall due to increase in share of other activities. It is expected that by the year 2009/2010 its share would have come down to approximately 72%. Independent tour operations: The Company after studying the travel market has found that more and more people are planning their own holidays. Another independent study that was reported in the online edition of the Guardian reported that longer packaged tours are becoming less popular. For example the fourteen day tour package will become less popular than 7 day tours and only tours that offer six day or fewer packages are gaining popularity. "A separate study released last week showed the popularity of 14-night holidays will fall below that of one-week trips for the first time next year, and that only holidays of six days or under are actually becoming more common." (Robbins 2007). To exploit this growing trend the company is going to give more focus on such travellers. The company owns more than 90 aircrafts and plans to sell seats or a full charter on them. Other plans include selling hotel rooms and overland travel facilities like taxis and train tickets. This will help the company to garner business from travellers who will make use of such facilities but want to travel by themselves. In pursuance of its asset light strategy (which is detailed later in this paper), the company does not intend to increase assets like hotels and aircrafts in a big way. "Thecompany wants to secure a larger proportion of independent travel business without the burden of owning either a low cost airline or hotels, according to Fontenla-Novoa." (Tour Operator: Thomas Cook to Reduce Reliance on Mainstream Packages. 2008). Financial Services: Thomas Cook has a financial services division and plans to promote its credit cards in a big way. Customers who approach the company directly, or though its web site are encouraged to buy the credit cards. Company staffs are given attractive incentives for promoting the cards. For each application for a card the concerned staff will be paid 10 pounds irrespective of the fact that the application is accepted or not. The credit cards can be used to pay for the cost of travel and hence a means of instant credit for the customer. Credit is offered free for the first three months after which the loan will carry an interest of 17.9%. "Thomas Cook has unveiled a new focus on financial services, claiming it wants to help customers pay for their holidays in the current uncertain economic climate." (Tour Operator: New Focus on Financial Services for Thomas Cook. 2008). Acquisition as a strategy for expansion: The Thomas cook group plc having leading market positions in UK, Scandinavia, continental Europe and Canada, focuses on acquiring new firms to expand its business in new geographic areas as well as in those areas it has presence. It also focuses on consolidation as a growth strategy so that the extent of competition get reduced and can focus more on growth than prevention. It has mentioned three significant acquisitions in its annual report published on January 2008. It had acquired majority of share in Thomas cook India Limited, It will acquire between 61.8 percent and 74.9 percent of TCIL's (Thomas Cook India Ltd.) share capital, worth about around 173-214 million euro ($266-320 million), giving Thomas Cook control of the TCIL. (Britain's Thomas Cook to Buy Controlling Stake in Indian Arm 2008). It acquired 100% stake of Thomas cook branded business in Egypt. It also obtained the license for Thomas cook brand in fifteen countries in the Middle East. In order to strengthen its position in independent travel market, it had acquired Hotels4u.com Limited. To strengthen its presence in UK it had acquired Elegant Resorts Limited, which is the number one UK-based travel company. It is estimated that this acquisition will be very beneficial for the company because of the popularity of Elegant Resorts in the travel market. The Resort will be run independently and by retaining the original management team. "The deal is expected to land them with multimillion pound windfall, although the financial terms were not disclosed." (Kollewe 2008). As it has significant cash balance to invest in, Thomas cook plc had clearly mentioned acquisition as strategy to enter into potential markets in the world. It had announced its plan to enter into the Russian and Chinese market. DUSSELDORF - Thomas Cook Group Plc, Europe's second-biggest travel company, aims to buy a Russian competitor as more vacationers in the country book package tours. "We are looking for opportunities in Russia," Chief Executive Officer Manny Fontenla-Novoa said to reporters April 4 at the company's headquarters in Peterborough, England. The travel operator also plans an acquisition in China. "We have a significant amount of money for a major acquisition," the CEO added. (Bloomberg 1993-2008). The asset light strategy: Thomas cook plc operates with a highly flexible business model with low assets, known as Asset light strategy. This strategy helps the organization to stay safely even in the changing environment or at risk. Thomas cook plc had merged its stake in Condor Flugdienst GmbH with Air Berlin as a part of its asset light strategy so that it can enjoy more benefits than operating in the highly competent aviation industry. Thomas cook receives EUR 500 million in share and cash and have an option to get a total of EUR 600 million, Air Berlin receive 75.1 per cent share of Condor from Thomas cook. As Manny Fontenla-Novoa, CEO of Thomas Cooks stated: "The agreement aims at reducing risk and maximizing flexibility. This transaction will create significant value for the shareholders of Thomas Cook and secure the long-term future for Condor. As the biggest shareholder of Air Berlin, we are benefiting from Air Berlins extensive flight offer. Together, we have a significant potential for growth. Furthermore, Air Berlin will remain a long-term strategic partner for Thomas Cook and provide us with flight capacities." (Thomas Cook Merges Conder with Air Berlin 2007). The organization aims to plan strategy with more focus on customers and to increase business profitability with organic growth, introduction of new products, and expansion of business to new geographies, merger and acquisition which supports geographic expansion, better business process and better buying. Since the company has a good financial status it can focus more on organic growth. Thomas cook plc entered into a wide range of diversified business like Global service & Telecredit, Insurance related to travel, Call centers, E-commerce, Credit cards. Company has already set up global services on Lucent Network and set up call centre. Company has launched Thomas Cook Global Credit Card with built in free add-ons like AT&T, 24 x 365 Emergency Services, International Air Passenger association membership, Insurance, etc. which are specific to travelers. (Thomas Cook (India) Limited (TCIL) 2000). In India it is trying to make a collaboration with Indian Railway to develop travel related products and thus to develop the market. It also is planning for geographic expansion in Mauritius, Sri Lanka, Myanmar and other SAARC countries. Thomas is trying for improvement in its business process through tie ups with service providers and attracting highly talented experts to it. A tie up of Thomas cook with Accenture is an example for strategic alliance to improve the process. Accenture will provide Thomas Cook Group plc with application management, technology infrastructure management, and finance, accounting and human resources services under a US$400 million outsourcing agreement the two companies signed recently. This tie up will strengthen the back office operations of Thomas cook plc. (Thomas Cook Group and Accenture Sign Wide- Ranging Outsourcing Deal 2007). E Commerce: In keeping with current business trends, Thomas Cook is an active e commerce player also. It has a comprehensive web site that allows customers to view information and also book on a host of services provided by the company. The site has portals for holiday packages, low cost airline tickets, hotels, cruises etc. The site also offers online facility to buy insurance for customers while travelling. This move is quite appreciable because of global uncertainty with respect to terrorism and natural disasters. Its money page offers travel vouchers and credit cards. The site also prominently displays existing deals offered by the company. The site can be viewed at the following address. (Flights). PEST Analysis of Thomas Cook Group plc: Every organization with plans of expansion especially overseas need to analyze various factors that may affect the performance of the company. One method usually followed is the PEST analysis and the factors considered in such an analysis are Political, Economical, Social and Technical ones. The growth of 6% (52 million new travellers) in international tourism during 2007 exceeded expectations and the situation is expected to follow the same pattern in 2008 also. Political: In spite of increased terrorist threats and attacks, international tourism continues to grow at a robust rate. This trend is good news for tour operators like Thomas Cook. One of the main reasons is that with increased globalization many countries around the world, especially from Asia and Eastern Europe have more liberal international trade policies. Since tourism is one of the biggest industries in the world, there is a tendency for government intervention in the industry. The economy of a country is directly affected by increased on decreased levels of tourism. Politically there is little chance that any government would try and make policies that would be detrimental to the tourism industry. Past history has shown that even when a country has been hit by terrorist attacks the industry had been subdued for a little while after which things returned to business as before. "But the industry and the ever-growing travelling community are proving increasingly resilient to terrorism, natural disasters and political turmoil, as all three are becoming common everyday occurrences." (Greenwood 2006). Some of the political factors that might effect the tourism industry are: a. Visa and passport regulation policies adopted by a country. b. Increased availability of flights between countries through policies like the EU/US open Skies Agreement. c. Airport rules like luggage restrictions and security checks. d. Long term terrorist threats or attacks. Economical: Economical factors can affect the tourism industry and the future expansion plans of Thomas Cook and other companies the most. Some of the economical factors that can affect the industry are: a. Change in price of petroleum products, especially aviation fuel. b. Vale of currency. For example the recent weakening of the dollar could affect US citizens travel due to increased costs. c. Increased number of entry and exit points like airports/ports etc. d. Slowing down of global economy. e. Opening up of new tourist destinations, especially low cost ones like India and Turkey. f. Increased individual income caused by a robust economy. Social: Some of the economic factors affecting tourism are: a. Age of the population. Different age groups have different interests, frequency and destinations. b. Leisure time available. c. Level of expatriation and jobs in foreign countries. An increased level could result in increased travel due to visits by relatives and the expatriates visiting the home country. d. Level of educational qualification and urbanization. e. Social customs. Some customs may prevent a person from travelling abroad, though such customs are growing less and less relevant. f. Religious beliefs. g. International sporting events like Olympics and Soccer World Cups. Technical: Some of the technical reasons that affect tourism are: a. Infrastructure development like roads, accommodation, communication etc. b. The development of internet and E commerce. c. Faster and/or more comfortable modes of travel. d. Lower cost of travel with arrival of high capacity aircraft like the Airbus 380. "some of the positive influences on inbound tourism over the next year" and "Negative influence on inbound tourism over the next year." (Foresight 2007). Porter's Five Forces Model: An analysis with Porter's Five Forces model will show that three forces exist very strongly for Thomas Cook. The market is dominated by buyer power because of the high number of options available for the traveller. Threat of substitutes like low cost airlines and preferences for independent travel also exist. But the company is already planning to focus on independent travel. Rivalry and competition is also very high. Supplier power exists to a certain extent especially for aviation fuel, though it is weak for other factors like hotel accommodation and facilities for overland travel. Barriers to entry are not a threat since more and more economies and destinations are opening up for the company. Bibliography A Brief History: Thomas Cook Today. [Online]. Thomas Cook. Last accessed 13 April 2008 at: http://www.thomascook.com/content/about-us/thomas-cook-history/thomas-cook-history.asp. BLOOMBERG (1993-2008). Thomas Cook may Enter Russia. [Online]. The St. Petersburg Times. Last accessed 13 April 2008 at: http://www.sptimesrussia.com/index.phpaction_id=2&story_id=25615 Britain's Thomas Cook to Buy Controlling Stake in Indian Arm. (2008). [Online]. Silobreaker. 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