Kuoni says Iraq and Sars will cut its profits in half

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The Swiss tour operator Kuoni dashed hopes that the travel market had bounced back after the ravages of the war in Iraq, warning yesterday that people still had a "general reluctance" to travel.

The company, which specialises in upmarket long-haul package holidays, said it expected the fall-out from Iraq and the Sars epidemic to wipe out half of its profits for 2003.

"With the exception of a few positive trends, the international travel sector is still beset by a general reluctance to travel, making it difficult to forecast future developments reliably," the company warned.

One leisure analyst said: "People might travel but they have wanted to stay closer to home. Spain has done very well this year."

Earlier this month, MyTravel, the debt-laded tour operator, cautioned that profits in its second half would be lower than expected. It said the summer was shaping up worse than it had initially hoped despite swingeing capacity cuts. TUI, Europe's biggest travel company, said in July that summer bookings had declined 7.3 per cent from 2002.

Kuoni, tipped as a takeover target, said it expected a "slight recovery" in the second half of the year, with the proviso that "the period remains free of exceptional events". The British Government is still advising against travel to a number of tropical beach paradises, including Bali in Indonesia. Kuoni is urging holidaymakers booked on one of its packages to Indonesia to either cancel or opt for a different destination.

The company's first-half loss narrowed slightly to Sfr44.1m (£20m) on revenues down 17 per cent to Sfr1.38bn. It predicted that full-year turnover would be at least 10 per cent lower, with net profits half of last year's Sfr26m. It said it had benefited from a renewed focus on the premium leisure market, instigated earlier this year. This helped the group to increase its profit margins and narrow its losses in its seasonally weak first half.

It said the first six months of 2003 were marked by "exceptional economic and political events and by the global impact of Sars". The outbreak of hostilities in Iraq prompted a "sizeable decline" in most of its markets in March and April, Kuoni said, describing the recovery in May and June as only "moderate". Although disappointed by the bleak tone struck by the company, analysts were encouraged by its progress in slashing its cost base. "You can see that restructuring is paying off," one analyst said.

Kuoni, which does not split out results for its UK operations, said turnover for its combined UK and US division slumped 16.5 per cent to Sfr343m. It attributed almost half of the shortfall to the weakness of sterling and the dollar against the Swiss franc. It also highlighted "the continuing poor health of the US travel market".

Kuoni's warning failed to make too much of an impression on the UK-listed tour operators. Shares in First Choice slipped 0.25p to 114.75p, although MyTravel clawed back earlier losses to close unchanged at 27.5p.