Can the travel industry survive the World Cup?

As the nation urges England on in the World Cup, travel agents are cheering through gritted teeth as Britons leave it even later than usual to book their holidays.

As the nation urges England on in the World Cup, there's one group which is cheering through gritted teeth. Travel agents would rather the home side fell at the first hurdle than kept everyone glued to their TVs by going all the way to the final. People are already leaving it ever later to book their summer holidays, creating a problem for the travel industry but it's even worse in World Cup years. During the 2002 tournament, and again during Euro 2004, travel agents found that people didn't decide on their holidays until England had been knocked out of the competition, says John Bevan, travel director of Lastminute.com. This is hitting the top line, with Lastminute's sales down about 15%-20% as a result. Consequently, tour operators such as Thomson, Cosmos and Lastminute.com are slashing their prices to encourage fans to take up deals during the World Cup. Great if you're a potential tourist, not so good if you're a travel agent. But tour operators believe demand for getaways will surge in July once the football is over.

Fortunately, this bout of turbulence comes against a buoyant backdrop for the travel business. Government figures show the British increased their travel abroad by 9% in April this year over the same month in 2005, says Peter Woodman of the Press Association. During the first four months of this year, UK residents made a total of 18.9 million trips abroad, up 3% on the same period last year and this increase is reflected in tour operators' recent results. Thomas Cook's sales in the six months to April rose 1.3% to e2.436bn, due mainly to good Easter business, reports AFX. The firm also reported that bookings for the summer period were up 4.8% from the previous year; bookings for Germany were boosted by the World Cup, rising by 9.3%. Holiday group First Choice, which reported this week, has similar news, with summer bookings up 4% on last year.

The sharp upturn in foreign travel means the industry has put its weak performance in the wake of the September 11th terrorist attacks far behind it, says the Evening Standard. On the back of this renewed strength, Europe's second-largest tourism firm, Thomas Cook, is even preparing for a return to the stockmarket. The firm, which is owned 50/50 by Lufthansa and German retail giant Karstadt Quelle, is aiming for annual growth of between 5% and 10%. After making a small profit for the first time in four years in 2004, it is investing more than £75m in upgrading computer technology to enable it to improve long-term margins and position itself for a market listing in about two years.

Success on the internet is a big factor in the improved performance of the holiday firms. By 2007, the online market will account for some 35% of the whole travel market (up from 23% in 2005) and traditional operators are set to storm ahead with their internet presence at the expense of online agents, says The Travel Trade Gazette. US research firm PhoCusWright estimates that operators' online growth rate will be 27% in 2007, outpacing online agents, whose growth is put at 21%. It means that traditional operators will increase their share to almost a fifth of all online bookings by 2007, while the big three online firms Lastminute.com, Expedia UK and Ebookers will see their share slide to less than a third. That's despite the e300m spent in 2004 by the online firms on building their brands. This slowing growth was behind disappointing quarterly results for Expedia recently and a sharp fall in the firm's shares.

The two holiday firms that shine through

First Choice (FCD, 212p) has coped well with turbulence in the travel industry, and is delivering on the diversification strategy it established in response to the rise of low-cost airlines, says the FT. Wisely, the group has slashed short-haul capacity by 24% and boosted long-haul by 44%, at the same time moving strongly into the US student-travel market. Although it had first half losses of £78m on turnover of £1.02bn, First Choice sells most of its holidays in the second half, and recent price falls leave the share looking attractive. Morgan Stanley analysts agree, pointing to very strong growth in the online division, with summer sales up 51%. The stock is currently trading on a 2006 p/e ratio of 13.1 times Morgan Stanley's forecasts, a 14% discount to its peers, and yields 3.6%. Price target: 240p.

David Stevenson, co-manager with Andrew Kelly of the £35.4m Britannic Cartesian UK Opportunities Fund tells Investment Adviser that he likes MyTravel Group (MT/S, 236p). The firm has been refinanced and is trading at a single-digit p/e multiple. The shares have been the subject of bid talk, with possible suitors including First Choice and Tui, the German owner of Thomson, says the FT. The attraction for a potential purchaser is their sizeable airline business and possible plan to return to paying a dividend. Watch out for My Travel's half-year figures, which were due out on 15 June.

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