The Investment Column: First Choice not out of the woods

These are straitened times for Francis Baron, the flamboyant chief executive of First Choice, Britain's third largest tour operator. Gone are the bikini-clad girls and general razzmatazz that greeted his arrival and First Choice's rebranding three years ago.

"The watchword is caution for this year," Mr Baron warned yesterday as First Choice unveiled narrowed losses in the seasonally weak first half. The pre-tax deficit was pounds 23.4m in the six months to April, down from pounds 23.8m before, although the latest period included a maiden pounds 5m profits contribution from SkiBound, the skiing holiday operator acquired last year.

As ever, the key to the year's outcome depends on what is happening now. Last year, instead of the late rush to get away that took place in previous, recession-hit years, business during the peak selling season fell off a cliff.

The long hot summer in Britain, a weak pound and higher levels of personal taxation can all be blamed. But longer term, structural changes are also at work. For example early bookings, which do wonders for tour operators' cash flow, are increasingly a fond memory as job insecurity grows.

Having accompanied last October's pounds 44m rights issue at 60p with a profits warning, First Choice is clearly not yet out of the woods. Canada, where much of the rights issue money is being spent, is suffering from an airline price war.

Closer to home, capacity has been cut by a tenth and prices on a standard package holiday raised by pounds 60, or 25 per cent, to protect margins. The flip side is that market share had fallen from 13 per cent to 12.3 per cent by the end of May, airline profitability is under pressure and bookings for the key summer season are down 9 per cent on last year.

Last week's decision by rival Airtours to break ranks and publish its summer brochure for next year - the earliest summer launch ever - forced First Choice to bring forward its own. The travel group also has the unwelcome problem that the Thomson-owned Lunn Poly chain, the UK's biggest travel agent, has decided not to sell its holidays for next winter and summer.

Analysts are therefore concerned that First Choice may struggle to make the pounds 16m profits needed to cover a maintained dividend of 3.75p without dipping into reserves. To reach that level, they say second-half profits in the UK and Ireland would have to more than double to almost pounds 40m, compared with the same period last year. In the current adverse climate that seems unlikely. The shares, down down 9p at 68p, are best given a wide berth.