First Choice stays on course

The Investment Column

Book early or miss the plane is the hard-sell message being put across by the holiday companies. The reality is, however, that 20 per cent of holidaymakers will again leave it until the last moment before handing over a cheque at the travel agency.

The end result is that the industry will face a severe test of nerves, and will have to resist the temptation to panic and slash prices immediately the schools break up for next summer.

If the main goal is to achieve a reasonable balance between supply and demand, then the quoted holiday companies have no choice but to hold firm on prices or suffer a damaging loss of credibility with investors.

First Choice's annual results, well flagged during the recent rights issue, are a further testament to one of the poorest summers the industry has experienced in a long time. Profits before tax for the year to 31 October collapsed from pounds 16.3m to pounds 1.3m.

However, to judge the rapidly changing First Choice by one set of numbers would be unjust. Closer analysis of the figures, which are remarkably transparent for a holiday company, shows a much healthier picture.

According to industry statistics, First Choice increased its share of the key summer holiday market from 11.8 to 13.1 per cent. Bookings for next summer are down by 14 per cent, but the whole industry is sporting a much bigger 25 per cent drop.

The overall industry fall of 25 per cent in bookings holds two worrying prospects if the crucial January-to-March selling season goes badly. If that happens, the tour operators will have cut capacity over and above the 16 per cent of holidays that have been taken out of the system. Moreover, it would spell disaster for travel agencies and raise questions about the logic of vertical integration in the industry.

First Choice can breathe a little more easily than other, smaller rivals if capacity has to be cut again. It has managed to raise prices by around 9 per cent - which is more than the market-leading Thomson.

This ability to push prices above those being charged in 1993 has mainly been possible by improving brand awareness through ditching the tired Owners Abroad name and a cupboard-full of brand names, and by cultivating a perception of value for money through smart and cost-effective marketing moves such as sponsoring weather forecasts on television.

Moreover, First Choice, like Airtours, is gradually erasing the traditional winter loss made by holiday companies by the acquisition of counter-seasonal businesses in Canada, where the populace flies south when the snow starts falling and stays at home in the summer.

If First Choice continues as is, there is every chance it will show taxable profits of pounds 25m this year and earnings per share of 5.5p. The dividend is unlikely to be raised from 3.85p, but a gross yield of 7.5 per cent on the shares, which trade at 64p, has attractions.