Wish you weren't here?

British holidaymakers are cutting back, with shorter trips abroad and, yes, staycations. James Thompson reports

Bosses at the UK's two biggest tour operators, TUI and Thomas Cook, have always claimed that a summer holiday abroad is sacrosanct for the British. In August 2008, just before the financial crisis erupted, Thomas Cook said UK consumers would cut spending on cars, home improvement, clothes and weekend breaks before they would consider axing their two-week summer holiday.

But that argument appears to be crumbling like one of its customers' sandcastles at the beach after Thomas Cook posted dire interim figures yesterday.

The tour operator said its UK full-year results were "likely" to be lower than last year, as its underlying UK losses widened by £42.4m to £158.7m over the six months to 31 March. In short, Thomas Cook is having to offer UK customers cheaper deals to tempt them abroad.

Nick Batram, an analyst at Peel Hunt, said: "The problem is they are having to entice people into the market." While the tour operator's UK booking volumes were flat for summer 2011, its margins were lower.

But Manny Fontenla-Novoa, Thomas Cook's chief executive, was sticking to his guns. He said: "A summer holiday is still very much a priority for British people. A large proportion of people are still looking to book a holiday for this summer."

Not everyone is convinced, however. Mark Brumby, an analystat Langton Capital, said: "Despite protestations to the contrary from the tour operators, there appears to be some tangible evidence that UK consumers are giving up their holidays."

This will surprise few, given the pressure on discretionary spending from soaring petrol prices, stubbornly high inflation and recent tax increases. Last week, Roger Bootle, one of the UK's best-known economists, warned that the typical household would see its disposable income fall by 2 per cent this year.

In fact, Thomas Cook's results seem to mirror those in the retail sector, where those selling big-ticket items such as furniture and bathrooms are suffering the most.

But the real picture of UK spending on holidays is more nuanced than people scrapping their trips to the Maldives in favour of two weeks at home or on a caravan park in Great Yarmouth.

Slightly shorter holidays are one change afoot at Thomas Cook. Mr Batram says: "People are not going for 14 nights. They are going for 11 nights and clearly that has an impact on the business."

He added: "People are still going abroad but not in the numbers they were." This view is supported by the Office for National Statistics. It found the total number of visits overseas by UK residents fell by 6 per cent to 12.9m over the three months to February.

Indeed, Thomas Cook admitted there had been a "marked" shift in the destinations chosen by Brits, with the Balearics, Greece and the Canaries in vogue. This partly reflects a trend for UK holidaymakers to stay "closer to home" as they seek cheaper deals and avoid countries affected by political unrest, such as Egypt and Tunisia.

Thomas Cook said its UK summer 2011 bookings were up 14 per cent to the Balearics (primarily Majorca, Minorca and Ibiza), by 9 per cent to Greece and by 8 per cent to the Canaries. Mr Batram said: "Spanish and Greek hoteliers have priced their hotels pretty well this year and with the unsettling geo-political developments in certain locations people have looked closer to home for their holidays."

In a further sign of UK travellers wanting to limit their expenditure, Thomas Cook said all-inclusive holiday bookings were up 14 per cent, with demand for Turkey particularly strong. But overall, the margin hit on UK summer bookings, the later Easter this year and the unrest in the Middle East and Africa contributed to Thomas Cook's overall first-half losses widening by £35.6m to £165.8m. It suffered 160,000 cancellations from the travel restrictions to Egypt and Tunisia, which resulted in a £22m hit: £5m in repatriation costs and £17m in lost margin.

In the UK, however, tour operators will be praying for a sustained uptick in economic activity – because without one more people will continue to holiday on these shores.

While the so-called UK staycation has been much parodied, there now appears to be too much evidence to dismiss it as a flash in the pan.

Furthermore, April's balmy weather will have convinced many Brits to holiday on home soil this year, although they will pray that a wet summer does not materialise. Mr Brumby said: "It was only meant to be a one-year trend but now we are into the second, third or fourth year – depending on when you started counting – so it looks like the staycation is here to stay and has become embedded [in the public psyche]."

Irrespective of how Brits choose to spend their holiday, any slowdown in tour operators' sales volumes can have a negative impact on their bottom line.

Following Thomas Cook's results, Panmure Gordon slashed its operating profit forecasts for this financial year by £17m to £380m.

And unfortunately for tour operators such as Thomas Cook and other companies that rely on consumer spend, they are unlikely to see much upside until the UK economy is out of the woods. That said, the goods news is that when sustained growth returns most Brits will revert to their two-week jaunt overseas, as opposed to risking a potentially rain-soaked fortnight in Cornwall or Wales.

Mr Batram says: "I still think it is economic and geo-political led. Holidays are still a very important part of people's lifestyle and I don't think that is going to change."

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