Feeling the heat

Thomson Travel, the best-known brand in holidays, was one of the City's hottest stocks when it floated. The offer was hugely over-subscribed and the price soared. But after a series of self-inflicted disasters the investors ran for cover and the shares dived. Now, even its position as market leader is under threat...

"IT IS an offer that has caught the public's imagination." So said Paul Brett, chief executive of Thomson Travel, when the holiday company came to the stock market almost a year ago to the day.

Back then the sun was shining on Britain's number one package holiday operator. Its shares had been priced at the top end of expectations. The issue had been five times over-subscribed and proved hugely popular with small investors, who had been lured in by the 10 per cent holiday discount to members of its so-called "Founders Club".

The pounds 1.7bn float had become like a privatisation with Thomson's well- known consumer brand name dragging in investors not normally enticed into the world of stocks and shares. Initially they must have been pleased with their investment. On their first day of dealings, the shares rose from their issue price of 170p to close at 193p. But since then little has gone right for the company, or its army of Ambre Solaire-wielding smaller shareholders.

Indeed the honeymoon period lasted only days. No sooner had the company reached the market than there was an inquiry over the bungled intermediaries' offer which led to thousands of hopeful investors not receiving their application forms.

A few months later things got worse when Thomson issued a warning that exceptional charges related to the closure of a Scandinavian business would be higher than previously expected.

Then last month the roof fell in. Responding to Airtours' pounds 800m hostile bid for First Choice Holidays, Thomson threatened an all-out price war in order to preserve its market leadership. Institutional investors howled in anger. Several called for the head of Paul Brett, Thomson's chief executive.

As the shares sank lower and lower, the company was forced into retreat, issuing a "clarification" statement last week. Instead of the bellicose remarks about flooding the UK market with cheap holidays, the tone was changed to more moderate talk of a million extra holidays over two years. Instead of an outright price war, there will be a budget brand specialising in one-star hotel accommodation, more flight-only holidays will be offered, and Thomson will sell more lower-priced holidays through the Internet.

A spokesman said: "This is not a price war. It is not a question of adding a million extra holidays to the market. It is accepted in the industry that a combined Airtours-First Choice group would lose around 5 per cent of its holiday capacity due to overlaps. Thomson is simply planning to grab that share."

But the damage to the company's stock market reputation has already been done. Thomson shares have underperformed the market by around 35 per cent in the company's first year as a public company. Investors are bound to feel wary about a company that can inflict so much damage on its own share price, putting pursuit of market share over profitability. Some go so far as to suggest the company came to the stock market on a false prospectus. Many feel Paul Brett will be lucky to keep his job. On the "three strikes and you're out" rule, he is already living on borrowed time.

Thomson finds itself in a difficult position. If the Airtours-First Choice deal gets the green light from the competition authorities in Brussels - as the market increasingly believes possible - the new company will control 34 per cent of the UK holiday market, well ahead of Thomson's 27 per cent share.

A couple of years ago, it could have written off years of profits to fund a war of attrition it would probably have won. The difference is that, back then, Thomson only had one shareholder, the Canadian Thomson family, whose Thomson Corporation's interests range from newspapers to online information services for investment banks. Now it has City fund managers to answer to and it is expected to deliver short-term, as well as long-term, profits.

This is a dilemma that publicly quoted companies face the whole time. But to face it so starkly in the first year as a listed company was very definitely not in the script. David Crossland, chief executive of Airtours, says: "In a sense they have reacted in the old Thomson way. They have adopted a very aggressive stance every couple of years so their comments were not much of a surprise in the travel industry. It just surprised the City."

Thomson Holidays was spawned as part of the sprawling Thomson Corporation, run by the secretive Thomson family. Founded in Canada by Roy Thomson, the business has gone from strength to strength under the current chairman, Ken Thomson. Now 75, Lord (Ken) Thomson is ranked as 7th on Forbes magazine's list of the world's working rich with a fortune of more than $14bn (pounds 8.8bn). Yet he still goes into his Toronto office virtually every day.

It was Ken who transformed his father's collection of newspaper and radio businesses into an international publishing company famous for its high margins. It was also Ken who founded Thomson Travel 34 years ago, when he bought Brittania Airways and SkyTours in Britain, and helped turn it into the market leader.

The Thomson family may have a virtually subterranean public profile but it still looms large in the affairs of Thomson Travel. It is still the company's largest signal shareholder with a 19.2 per cent stake held through its Woodbridge Investments vehicle. Michael Brown, Thomson's chairman, is a long-time Thomson family executive. Also on the board as a non-executive director is David Thomson, Ken Thomson's son and deputy chairman of Woodbridge since 1990.

As one senior fund manager says: "When they made those initial remarks about cutting prices, launching a new budget holiday brand and increasing capacity, they must have had the backing of the Thomson family. It was Paul Brett who was getting all the stick, but questions have to be asked too of Michael Brown, the chairman, who is supposed to represent the interests of shareholders."

According to travel industry insiders, Thomson may find it harder than it claims to find buyers for its million extra holidays. Experts say that most of the decent three- and four-star hotels in major Mediterranean resorts have already been signed up on long-term contracts.

Much of the available accommodation is in one- and two-star hotels that were operated by British travel firms 10 years ago. More recently a great deal of this accommodation has become controlled by Russians. The collapse of the Russian economy last year meant up to 500,000 bookings disappeared almost overnight. This capacity was being offered around the travel firms last year, but most major operators turned it down. "The hotels are in off-peak locations and we don't think people would stay in them just to save pounds 50 on their holiday," one industry insider said.

Going forward, analysts believe Thomson will have to adjust to being a close number two in a market it has dominated for 20 years. But as one analyst points out, losing market leadership need not be the end of the world: "Thomson is still the single biggest brand name, its profits stream would be unaffected, and it still has a good distribution network through Lunn Poly."

Industry experts say two things may change to help Thomson adapt to life as a public company. One is change in the boardroom. Paul Brett, chief executive, has born the brunt of criticism for Thomson's recent investor relations fiasco. However, in the industry he is viewed as a good tour operator. If there are changes then, they are more likely to be at the level of chairman.

Analysts believe the appointment of a new, properly independent non-executive chairman with no emotional ties to the family would give greater balance and guidance to the board. An early decision would be appreciated by fund managers. But judging by Thomson's comments this seems unlikely. "We have had a very successful year as a public company. In the light of this performance there are no plans to change the composition of the board," it says.

The second change may be the sale of the remaining Thomson family stake. The sale of the bulk of its holding in the flotation last year showed that Thomson Travel is no longer a core asset. The recent investor backlash may convince them that the time is right to sell out completely. Thomson, however, describes Woodbridge as " a long-term and supportive shareholder".

One analyst said: "It would be a good thing for Thomson as it would mean the company was properly independent. It would also be a good thing for the whole travel industry as it would calm matters down and mean that none of the big operators are likely to rock the boat on capacity and prices."

For the time being, the boat has been rocked. Thomson has thrown down the gauntlet to the rest of the industry, which now faces the mother of all marketing battles in the war for our holiday money. If the Airtours- First Choice deal does not go through, the market is likely to return to something approaching its normal state.

If it does, the structure of the industry will be shaken to its foundations. Smaller operators could face bankruptcy. Consolidation will accelerate as the few remaining operators with reasonable market shares are swallowed up. One thing is certain: there will be blood on the sand by the time it's all over.

The Rival

IF AIRTOURS' pounds 800m bid for First Choice Holidays receives clearance from the competition authorities in Brussels, it will make the company Britain's biggest package holiday group and mark a personal triumph for its chief executive David Crossland (right).

Mr Crossland, 52, left school aged 16 with three "mediocre" O-levels. He started stamping brochures in a travel agency in Pendle, near Burnley. Then in 1972 he bought his first travel agency. In 1974 he bought Airtours. The company never looked back. Floated on the stock market in 1987, Airtours' big break came in 1990 when International Leisure Group went bust. Airtours was able to sign up many of the doomed company's contracts.

Airtours bid for First Choice in 1992, when it was called Owners Abroad, but was foiled when Thomas Cook took a blocking 10 per cent stake. Now, with First Choice shareholders on his side, only the competition authorities stand in his way.