So it came as little surprise to anyone in the City or the holiday industry when Airtours announced a bid last Wednesday for its close competitor, Owners Abroad, headed by Howard Klein. It is the boldest move so far in the career of a company that only came to the stock market five years ago. And this time the upheaval could be of more lasting importance than any that have come before.
The timing of the bid was no coincidence. If Airtours was going to make a move, it had to do so before last Friday when Owners' shareholders were due to vote on a deal to give Thomas Cook, the travel agent, a 10.3 per cent stake in their company. Had the vote gone through, Thomas Cook would have been in a position to scupper any future bid by Airtours.
David Crossland, the chairman and leading light of Airtours, had opened discussions with Owners last summer. He had hoped to take advantage of disquiet both within the company and among the shareholders over its flagging performance. Instead, Owners tied up its deal with Thomas Cook. Unless a rival bid materialises, shareholders will have to choose between this deal and the Airtours offer.
The Airtours case for takeover is very persuasive. Together, the two companies would have about 27 per cent of the package tour market, representing the first genuine competitive threat to Thomson's dominant 32 per cent share. There ought to be substantial economies of scale and potential cost reductions across the airline and package tour businesses. With the extra market clout of 1.65 million customers a year, the combined company could negotiate lower hotel costs, increasing its profits.
There is also a good geographical fit, because Airtours is strong in the north of England and Scotland while Owners is dominant in the south of England.
The financial record of Airtours, moreover, leaves Owners way behind. Over the five years since it was floated on the stock market, its turnover has increased by 41 per cent, earnings per share are up 59 per cent, pre-tax profits up 72 per cent, and market capitalisation has risen from pounds 27m to pounds 300m with barely a recourse to share issues. Tighter cost controls and better information systems than its rival helped Airtours push up its turnover dramatically when the collapse of ILG left a hole in the market. Its share of the market has bounced from 4 per cent to 13 per cent.
Owners, in contrast, has pushed up turnover by 32 per cent and earnings per share by only 5.5 per cent. It did not benefit substantially from the collapse of ILG, partly because it had just bought another travel company, Redwing, and was occupied in absorbing it into its own systems. It also misjudged the market early last year and pitched its prices too high, losing business to the competition. On this record, the Airtours management would seem to have a clear edge.
Owners' shareholders are certainly hoping to get a better price than the somewhat niggardly offer from Airtours, now worth around 110p a share. The aggressor may still have to raise its bid.
But if there is no counter-bid from LTU, Thomas Cook's German charter airline partner, or Westdeutsche Landesbank, which owns 80 per cent of Thomas Cook - and so far there is little sign of one - Airtours could pull off an astonishing deal. Owners' investors may be forced to accept a price that would at best be cheeky, considering the deal would take Airtours to the top of the tour market league in one bound.
This is because they recognise that Owners certainly cannot stand still if it remains independent and that its proposed link with Thomas Cook may not prove ideal. It is already in danger of being left behind in one of the biggest shake-ups in the travel industry in the last few years.
This has been the trend to a more complete vertical integration among the big players than ever before. Both Thomson and Airtours now own a package tour supplier, a charter airline to service it, and a chain of retail travel agents to sell the holidays. Owners has the first two, but no travel agency.
Thomson's Lunn Poly chain has 25 per cent of the retail market, while Airtours' Pickford chain, acquired last year, has 10 per cent. The agencies sell each other's holidays as well as those of other tour operators, but they are above all captive outlets for the products of their owners. The number of Airtours packages sold through Pickfords, for example, has shot up by 34 per cent since it bought the agency. Owners' link-up with Thomas Cook is designed to achieve the same effect.
But it may only do so imperfectly. Because Owners does not own Thomas Cook, its control over how many of its holidays the agency sells is limited. It is also committed to helping Thomas Cook and LTU develop their own package tour operation, which, if successful, could become a rival to Owners holidays in Thomas Cook branches.
Of the big three travel companies, therefore, Owners looks by far the weakest - not just in terms of profits but in strategic positioning.
Not surprisingly, there is substantial support in the City for the Airtours bid. 'The fit between Airtours and Owners is very good,' enthused one leisure analyst.
But not everyone is so sure. On Thursday afternoon, Equitable Life, one of Airtours' largest institutional shareholders, sold the whole of its 6.5 per cent stake to Morgan Grenfell Investment Management for around 260p a share - considerably below the market price.
Even if Mr Crossland wins the bid for Owners, he may be heading into rough waters. It will put him on an equal footing with Thomson, which does not easily brook rivals. A head-on collision could be the result.
Earlier this year, during a bout of competitive price cutting, Thomson declared that it would not allow any rival to gain a market share of more than about 20 per cent. Suddenly, confronted with a new rival holding far more than that, it is anyone's guess what Thomson will decide to do.
Last week, the market leader was already showing signs of responding to the Airtours bid. It began cutting its own administrative costs by closing an office in Birmingham and concentrating operations in London. The next step could be a crushing price war designed to cripple Airtours before it can fully absorb Owners. Like previous price wars that Thomson has won, such as earlier in this decade, profits would be decimated and shareholders left waiting helplessly for better times.
Unlike previous price wars, however, it would prove suicidal this time if pursued to the bitter end. Never before has Thomson been confronted with a rival so like itself. Airtours' balance sheet is just as strong - with plenty of cash and no borrowings - and its market share would be nearly as large. If it came to a slugging match, there would be no clear winners.
If Airtours wins its bid, therefore, the travel industry could be heading for a period of unprecedented stability. But while that will please the industry, is it such a good thing for consumers? Holidaymakers have, after all, benefited from some astonishingly cheap deals over the years thanks to the cut- throat competition between the tour companies.
Airtours is confident that the Office of Fair Trading will not object to its takeover attempt. When Thomson took over its nearest rival, Horizon, in 1991, it created a precedent. It persuaded the authorities that although it had a technical monopoly of the package tour market - more than 25 per cent - this was illusory. Its share of the entire UK holiday market, which was only 11 per cent, was what mattered. Moreover, the barriers to entry into the holiday business were so low that it would be impossible to stifle real competition.
Airtours will use the same argument and confidently expect it to be accepted. But the situation is different from 1991. Two companies with more than 50 per cent of the market between them is potentially more monopolistic than the same market share spread between three companies, as it is now.
As important, however, if Airtours wins its bid, the two biggest travel companies will have an overwhelming strength in retail. Airtours argues that this is not the case because out of 6,000 travel agencies in Britain, only 1,000 belong to Lunn Poly and Pickfords - hardly a dominant position. But that ignores the fact that the lion's share of the bookings go through those two agency chains. For the first time, more than one third of all package holidays will be booked through travel agencies owned by only two big groups.
This would give Thomson and Airtours/Owners a near stranglehold on which holidays are offered to the public and at what price. They would be able to freeze out rival companies by refusing to offer their holidays through the Lunn Poly or Pickford agencies. Meanwhile, they could argue that their own spiralling share of the package market was not monopolistic when seen in the context of the holiday market as a whole. This would swing the equation sharply in favour of the two big travel companies and against the consumer.
For Sir Bryan Carsberg, Director General of Fair Trading, therefore, the competition questions are not as straightforward as Airtours likes to think. But if he recommends a referral of the bid, that would also look unfair because it would appear to protect Thomson's position as the permanent market leader. Whatever his decision, more upheavals in the travel industry look certain.
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