Thomas Cook warns on weak UK economy as profits tumble

The tour operator Thomas Cook added to the growing gloom about Britain's economy yesterday when it warned that its profits would be at the lower end of expectations. It said it had been hit by bargain-hunters booking their holidays later and the chaos from Iceland's volcanic ash cloud.

Manny Fontenla-Novoa, the group chief executive of Thomas Cook, said that with the possible exception of Belgians, British consumers were the least confident about their prospects in Europe. He also expects 2011 to be just as tough as for the UK holiday market as this year has been.

Mr Fontenla-Novoa said: "Confidence levels are coming back in France, Holland and Germany and certainly northern Europe, but not in the UK."

The update from Thomas Cook followed a similar profits warning issued the day before by its biggest rival, Tui Travel, which operates Thomson Holidays. Mr Fontenla-Novoa said that if Thomas Cook had not reduced capacity for this year's summer and winter holidays, it would have been "absolute carnage" in the market.

Across the consumer sector, companies ranging from the fashion chain Next to the high-street baker Greggs have warned this month of faltering consumer confidence. The Bank of England compounded the downbeat mood yesterday by saying that economic growth would be slower in 2011 than previously thought.

Mr Fontenla-Novoa said that after the "massive impact" of the volcanic ash cloud in the middle of May, its UK business did not recover until August. In the four weeks to 8 August, bookings by British holidaymakers were down by just 2 per cent. Thomas Cook's woes in May, June and July – when it was forced to sell holidays at lower margins – were compounded by uncertainty caused by the aftermath of the election and build-up to and impact of the emergency Budget. Demand for holidays also took a hit from the balmy summer weather.

Thomas Cook now expects to post full-year earnings before interest and tax of between £404m to £405m, compared with the previous consensus forecast of £415m. Mr Fontenla-Novoa said: "The UK market has been softer than we thought it was going to be, even though we had always taken a conservative view."

Thomas Cook estimated that the total financial cost of the volcanic ash cloud disruption would be £81.9m, compared with its initial estimate of £60m to £80m. The company said that because it had cut capacity, its summer programme was 85 per cent sold, which is in line with last year. It has just 156,000 holidays left to sell in August and September before the end of its financial year.

In contrast, rival Tui increased its summer capacity this year and will be forced to offload thousands of packages at reduced prices. For the nine months to 30 June, Thomas Cook's pre-tax losses widened to £368.8m from £306.1m last year.