Storm clouds linger over MyTravel

Selling sun, sea and sex is no longer enough for the tour operator facing meltdown

For a brief moment this week the sun shone brightly on the package holiday business when First Choice announced record profits and rising bookings. But the clouds soon gathered again to spoil the fun, and yesterday a violent storm broke as MyTravel, the company we used to know as Airtours, announced record losses of £910.9m - the biggest announced by any package holiday company.

The contrast could not be greater, but MyTravel is not alone in its misery. Thomas Cook, Tui, which owns Thompson Holidays, and Club Méditerannée are all suffering poor trading. MyTravel is simply the worst of a bad bunch.

The details of MyTravel's annual statement contain some eye-popping disclosures from a company that has staggered from one financial disaster to another and is being kept afloat thanks only to its creditors, owed £1.3bn, and the indulgence of the Civil Aviation Authority (CAA), which regulates the industry.

The company's dire problems are partly of its own making, largely down to incompetent management, but partly symptomatic of a wider malaise affecting tour operators.

Sun, sea and sex might still be crucial ingredients for many people's summer holiday, but travellers are becoming increasingly picky about where they go and how they get there.

Traditional package holiday companies are under attack from a combination of online travel firms and low-cost airlines which allow consumers to indulge their rapidly changing travel demands. Faced with more sophisticated consumers, the package holiday companies have found their enormous fixed costs, such as airlines and hotels, have made their businesses inflexible and unable to change. Rather than rely on tour operators to package up a holiday, tourists are doing it for themselves.

Brent Hoberman, the chief executive of Lastminute.com, the online travel company, said: "We bought a business called Medhotels last week and that company's astonishing growth is to do with the trend to self-packaging. We have been developing our own dynamic packaging software. It allows a consumer to go online and select each component of the package holiday. You can select dates and choose a flight and pick from one of 50 hotels completely independently. You do not see each component price, you only see the price of the combined package. So you are tapping into tour operator rates but with the extra choice."

Mr Hoberman's confident predictions of a boom in do-it-yourself package holidays is in stark contrast to the words yesterday of Peter McHugh, the former PanAm director now in charge of MyTravel.

"2003 has been an extremely poor year for MyTravel, resulting in an operating loss of £358.3m before exceptional items and goodwill. This very disappointing result was due to a combination of factors," Mr McHugh said, also revealing that bookings for summer 2004 are down on this time last year, reflecting the wider industry downturn.

"The group's structural issues prevented us from responding effectively to an extremely tough trading environment," Mr McHugh said.

More shocking was his admission that the company had lost control of its management systems in the UK, its core market from where it takes 6 million people on holiday every year. These systems were put in place before Mr McHugh arrived as chief executive last October. This was the main justification he gave yesterday for staying on at MyTravel in the face of enormous losses and worsening sales.

The company announced last week that Duncan Wilson, the chief executive of its UK business, had been relieved of his duties. Now we know why. The UK business made an operating loss of £325.4m, an untenable situation even in the short term and one Mr McHugh promises is being addressed.

Mr Wilson's resignation was just the latest in a string of personnel changes at the top of the company. Tim Byrne was forced to quit last year after delivering three profit warnings and an accounting scandal (the company has announced two further profit warnings this year). Under Mr Byrne's tenure, MyTravel had to own up to a £70.6m black hole in its finances and suffered the humiliation of having to restate its accounts.

Mr McHugh said yesterday: "I don't walk away from responsibility for some of what's happened but I don't think the business is on a knife edge. The losses have been significant but we are making real progress in turning the business round."

A prerequisite for that turnaround has been to refinance the company's crippling £1.3bn of debt. That has been accomplished and its banks and bondholders have agreed to let the company carry on trading as the best way of recovering their loans.

But at the heart of MyTravel's problems, and those of nearly all the other package holiday companies, is an old fashioned business model that integrates airlines, hotels, high street travel agencies and a huge processing operation.

This vertical integration means high fixed costs that cannot be reduced easily if demand starts to fall. The analysts call it "high operational gearing". The net result is extremely thin profit margins that can be eroded rapidly when things start to go wrong.

But one tour operator seems to have got it right. First Choice has managed to introduce more flexibility into its cost base - it pays for aircraft only when it flies them, for example, rather than financing long leases - and has combined mass market package holidays with operations selling more specialist, up-market trips which are far more profitable.

Peter Long, the company's chief executive, said: "Holidays are being built around lifestyles these days and consumers want to dip in and out of different experiences. I think it's clear that there is too much vertical integration in the industry. But identifying the problem is one thing, being able to deal with it is another."

But is there any real evidence that putting together a package holiday yourself is cheaper than using a brochure? Unfortunately for the likes of MyTravel, the answer is yes.

Goldman Sachs, the investment bank, has carried out some exhaustive research in the area and found that 70 per cent of the time it is possible to buy your own package cheaper, at an average 26 per cent less than the brochure version.

The company gives lots of examples, including a six-night package in La Manga, Spain which cost £785 through MyTravel's brochure but only £349.80 by using Hotels.com to book and Ryanair.com for the flights. The saving in this case was 55 per cent, highlighting the structural decline the package holiday business is facing.

Stock market analysts openly discuss the positive implications of MyTravel going out of business. It has a 15 per cent market share and should it disappear that would be good news for the profitability of rivals such as First Choice.

However, the company seems to be struggling on, kept alive by creditors determined to get some of their money back.

Mr McHugh yesterday promised that the company would be back in profit in 2005. If he achieves that, given the enormous problems he faces, he will probably need the holiday of a lifetime to recover.