They're fighting on the beaches

An Airtours bid for First Choice will anger consumer groups and unleash a battle between travel operators. David Brierley reports

This weekend, Airtours chairman David Crossland is mulling over making a pounds 750m bid for First Choice. A takeover would create Britain's largest travel operator. It would also make the uncrowned king of the British package holiday even richer.

Last year, Mr Crossland raised $138m (pounds 85m) through share sales, and spent $12.5m on one of the most expensive houses in Aspen, Colorado. He retains a 10 per cent stake in Airtours worth pounds 250m.

Mr Crossland's designs on First Choice have created a furore in the travel industry. Thomson, Britain's largest travel group, is furious that it could be knocked off the number one spot. Preussag, the German parent of Thomas Cook/Carlson, has not commented. It owns Germany's largest travel group, HTU, and holds 10 per cent of First Direct. But it is unlikely to stand idly by.

First Choice is furious that its planned pounds 1.5bn merger with Kuoni, the Swiss travel company, might be derailed. It is sending out the merger documents next week and a bid is likely thereafter. First Choice chairman Ian Clubb warned of "a reckless gamble". "If one bids then we expect all three to bid," said a company source.

It is certain Thomson will fight. "We have been market leader in the UK for 25 years and have no intention of losing that position," a spokesman said. What that might mean is unclear. Thomson already has 27 per cent of the British market, so a bid for First Choice would have to be investigated. But it might well mount a counter-bid just to force a referral to the Competition Commission.

Meanwhile, all the companies have been hinting darkly about the dangers of price-cutting and bargain-basement holidays for all. Share prices have started to slide.

Unlike the consumer, the stock market is not enticed by the prospect of a price war over market share. Price wars during the 1980s caused profits to vanish. And the ensuing company collapses were not good news for holiday- makers, some of whom saw their two weeks in the sun abruptly curtailed.

"Market share does not matter; our concern is to make profits," insisted an Airtours source.

Since flotation in 1987, Airtours has performed impressively - raising profits, leading consolidation within Britain, expanding in Europe, and moving into cruise operation and hotel ownership.

"Crossland is seen as the driving force behind Airtours' rapid growth. He is highly regarded within the industry," said Anna Barnfather of stockbrokers WestLB Panmure.

The UK package tour business has prospered since a disastrous 1995, when a glut of holidays eliminated profits. Airtours' shares have gained 300 per cent in four years and Thomson Holidays was encouraged to go public in 1998. This summer is looking good: supply is under control.

Meanwhile, consolidation continues apace in Britain and on the Continent. The four leading British groups - Thomson, Airtours, First Choice and Thomas Cook/Carlson - control 80 per cent of the British market and are snapping up smaller rivals. Last year Airtours acquired Bridge Travel, Cresta and Sun International; it moved into telephone selling, paying pounds 81m for Direct Holidays; and it expanded into the Irish travel market. Thomson has made seven acquisitions since floating.

The grip of the big players on the major high-street chains is crucial to their success; around 80 per cent of package holidays are sold in this way. Airtours owns Going Places, Thomson runs Lunn Poly and Thomas Cook/Carlson has the AT Mays travel agent chain as well as Thomas Cook. First Choice is creating its own chain of 650 shops, but currently has a weak presence on the high street.

Jason Holden, of stockbrokers BT Alex Brown, said: "An Airtours takeover would eliminate this strategic weakness. It makes commercial sense to put the businesses together."

Mr Holden estimates up to pounds 30m in cost reductions would follow an Airtours takeover. Mr Crossland would also have the chance to turn Airtours into Europe's leading travel company. But a takeover would give Airtours more than one third of the UK market. For many, this would be a step too far.

"A merger would be detrimental to consumer interests and we would probably seek a referral to the Competition Commission," said Anne Harvey of the Consumers' Association.

As recently as 1997, the Monopolies and Mergers Commission (now the Competition Commission) reported on the foreign package holiday business. Its conclusions dismayed many small companies by giving the industry a clean bill of health. It stated: "Concentration is not at a particularly high level. We have received a great deal of evidence to the effect that competition in the trade is strong, and we broadly agree. Profits are not excessive. Players come and go."

Sun and sand at a low price is the sure way to keep most British holiday- makers happy. This has resulted in a high-volume, low-margin business. Brands barely matter. All holiday-makers recall where they spent their last holidays, yet few can name the tour operator.

Price matters more than anything else. If the Costa del Sol becomes dearer because Spanish hoteliers have increased their prices, the British transfer their custom to Greece or Turkey. Hotel prices in Spain fall the following year.

Margins are so low that Thomson ran a campaign last winter suggesting that spending a little more - the equivalent of the cost of a good meal - might result in a much more pleasant summer holiday.

Analysts estimate that the companies make between pounds 20 and pounds 25 per head on the average British package holiday. It could even be less. Last year, Airtours carried 8.5 million holiday-makers and earned pounds 120m before tax. Profit of pounds 14 per passenger does not seem excessive.

The Monopolies Commission took the view that the demand for low prices ensured fierce competition. And this thought is encouraging Mr Crossland as he contemplates bidding for First Choice. Nevertheless, he can expect ferocious opposition. Many consumers are already concerned about the big firms dominating the high street and fear the contraction of choice.

The Commission's report also suggested that links between retailer and tour operator should be made explicit. But the Government has been slow to implement this.

"There is still nothing to tell the consumer that they are only being offered company products," said Julia Hendry, director of the Association of Independent Tour Operators, which represents 150 smaller firms. She accuses the Government of being lackadaisical:

"We have had three parliamentary questions asked and they have just shilly- shallied," she said.

There is a shortage of impartial advice on the high street. Customer surveys consistently show that Lunn Poly is keen to promote Thomson Holidays, Going Places prefers to sell what Airtours has to offer and so on. Small companies are unable to pay the high commissions demanded by the tied travel agents for shelf space.

The Consumers' Association is convinced the system works to the detriment of small specialist operators and the consumer. Ms Harvey said: "Our surveys show specialists are more likely to meet your needs."

Yet the giants are themselves becoming specialists by buying the smaller operators and muscling into market niches. The Monopolies Commission in effect gave them carte blanche to do so. In recent months, Thomson has acquired Crystal Ski, Chez Nous, Blakes Boating Holidays and Magic Group. It now controls the UK country cottage business.

Such consolidation will continue. But First Choice is more than a specialist. If Airtours bids, it can be sure of a fight.