Airtours struggles to get back on course

Britain's biggest tour operator badly needs a deal in Europe to restore growth and profits

Just over a year ago, Airtours was flying high. Then it was the UK's second-biggest tour operator after the long-time leader Thomson Travel. With its share price close to 550p, the group was poised to acquire First Choice, its smaller rival, and looked set to leave the struggling Thomson quivering in its tracks.

Just over a year ago, Airtours was flying high. Then it was the UK's second-biggest tour operator after the long-time leader Thomson Travel. With its share price close to 550p, the group was poised to acquire First Choice, its smaller rival, and looked set to leave the struggling Thomson quivering in its tracks.

Since then the European Commission's decision to block the First Choice deal on competition grounds, and the subsequent £1.8bn sale of Thomson to Germany's Preussag, have left Airtours floundering. The shares have plunged, hitting a low of 239.75p in February after a slump in millennium sales. Yesterday they closed up 25p at 300p on relief that the group's third-quarter results, although poor, produced no nasty surprises.

Although the group has increased its capacity in the UK and now claims to be the country's top-ranked player, continued problems with its overseas operations have raised mounting concerns about its strategic direction and the future of the chairman, David Crossland.

In the three months to 30 June, pre-tax profit after one-off costs plunged from £20.5m to £700,000, dragged down by losses in Germany and the US. Airtours has made a total loss of £74.6m for the past nine months, blaming over-capacity in some core markets and an increase in operating costs, which has forced it to raise prices in areas such as Scandinavia.

Jeremy Skidmore, editor of Travel Weekly, said: "Airtours has reached a crossroads. It needs to do a deal in Europe to compete with Preussag and Thomson's scale and buying power." Another industry source said: "The way the company has grown historically has been through making strategic acquisitions at the right time. But last year, when Airtours lost First Choice, it was like they didn't have a back-up plan."

The industry talk is of a deal between Airtours and C&N Touristic, the German number two which lost out to Preussag in the race to acquire Thomson. A tie-up between the two would console C&N while giving Airtours a strong foothold in Germany, Europe's biggest market where it is currently in the process of acquiring the remainder of Frosch Touristik, the number five operator, which it does not already own.

Tom Byrne, Airtours managing director, says: "We would like to be big in Germany of course and to do that, we'd need to get together with another big player... If an offer was made that we believe would deliver real value to shareholders, we would put it to shareholders."

But a tie-up between C&N and Airtours could hit several stumbling blocks. One analyst said: "The problem is - how would you structure the thing and who would buy who?" First, there is a price issue. Airtours is said to be worth £2bn - well over the £1.6bn C&N was prepared to pay for Thomson and which was already seen as "a major stretch". Mr Byrne says: "There are any number of ways to skin a cat. You could merge or swap paper if the deal is compelling."

Even if the groups do agree to the financial terms of a deal, there remains the more thorny issue of management control. Mr Skidmore says: "David Crossland is used to being in charge. If he does a deal with C&N, he won't have the control he has now."

Mr Byrne dismisses suggestions that Mr Crossland would attempt to block a deal with C&N for personal reasons. He says: "David Crossland is a professional plc chairman. He is also a 10 per cent shareholder."

In fact, there are signs that Mr Crossland, 53, is already accepting the need to step back from day-to-day running of the company and eventually to hand over the reins to someone else.

Having built up the business from a two-shop travel agency called Pendle Travel Services and floated it on the stock exchange as Airtours in 1987, one industry source says: "David used to sit in his house in Jersey at Christmas with his PC, watching the sales go up live in the retail division... But recently, he seems to have stepped back a bit." Although he is still said to be "a phenomenal workaholic" who gets up at four am and goes to bed at nine, he spends an increasing amount of time abroad, leaving Mr Byrne to deal in immediate control. "We share things," Mr Byrne says. "David is the supremo tour operator. I take care of the day-to-day running of the company."

And while some analysts called for Mr Crossland's head on a plate after Airtours was forced to issue a profit warning, blaming the weakness of markets such as Germany, others say what's needed is for him to reassert his control on the group. One says: "David built up a very strong plc team with him at the top with his nose for a deal, Harry Coe [the former managing director] providing the solid checks and balances and Tim Byrne [as the former finance director] contributing the youthful exuberance." He says the departure of Mr Coe last year and the subsequent realignment of the management team has weakened Airtours position as a major player.

Without the C&N deal, analysts say Airtours looks strategically vulnerable. But one said: "I would never under-estimate David Crossland's ability to pull a rabbit out of the hat. Airtours is still a fundamentally strong business and if they do find a way to merge with C&N , they would be in a very strong position."