Tough times are here to stay for holiday firms

Tales of holidaymakers being stranded abroad have become a regular part of the summer news schedule since the Great Recession kicked off.

Last week, another group of British tourists was left stuck in Spain, after Birmingham-based travel company Sun4U collapsed. Last month, others were left in Greece and Turkey after Goldtrail went to the wall.

No doubt others will follow. Because life won't be getting any easier for British tour operators for the foreseeable future

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Travel companies have had a difficult year so far

British consumer confidence has taken something of a dive since the start of 2010. And looking beyond the surveys, if you want concrete evidence of just how wary we're feeling as a nation, you just need to take a look at our holidaying habits.

Travel companies Thomas Cook and Tui both warned last week that year-end profits would come in at the low end of City hopes. Some British holidaymakers are ditching foreign package holidays altogether. Others are booking them at the last minute, once prices have been cut. That obviously eats into profit margins, which in the travel industry are hardly massive to start with.

The disruption from the Icelandic volcano shutting down European airspace didn't help of course. Nor has the threat of strike action from various parts of the industry, from British Airways to airport operator BAA.

Consumers are cutting back on expensive holidays

But these are short-term disruptions. The real problem is that the British consumer simply doesn't feel flush enough to splash out on expensive holidays.

Sure, you can argue that Britain is a great place for a holiday. And I'd agree. We live in a beautiful country. And there are plenty of sights to see.

But the fact is that most British people go abroad because they want to see some guaranteed sunshine. Swapping the traditional two weeks in sunny Spain for a drive around the Lake District is too often a triumph of hope over experience as anyone who opted to holiday at home this August probably discovered.

So you can be sure that when the British population as a whole decides to cut back on holidays abroad, it's not because of some newfound patriotic desire to soak up a bit of local history. It's because they're worried about spending too much.

Further proof, if you need it, is the fact that companies who provide cheap holidays aren't suffering as badly. As the FT pointed out at the weekend, travel firm Holidaybreak said that sales at its camping division had held up well.

But "bookings for short hotel breaks and theatre tickets were weak." In other words, people are dispensing with 'mini-breaks' and nights out as they cut back on luxury spending.

Steer clear of travel company shares

Despite all this, the Questor share-tipping column in The Sunday Telegraph reckons Thomas Cook is a 'buy'. And to be fair, some of the numbers do look tempting. The company pays a dividend yield of 6%. And there are signs of improving demand in some parts of continental Europe. German bookings are up by 3% this year, with the German consumer's confidence buoyed by the weak euro.

However, the UK and Ireland still account for more than a third of the company's profits. British consumer confidence is unlikely to recover soon. Public sector spending cuts and higher unemployment are still looming for one thing.

And house prices perhaps the most important influence on the British consumer's state of mind look to be on the turn again. This morning, property website Rightmove reported that asking prices fell in August for the second month in a row, down 1.7% from £236,000 to £232,000. The company put the fall down to a rise in new instructions, which isn't being matched by a rise in demand.

With that sort of grim outlook, I'd be reluctant to buy into any company that is still heavily reliant on UK consumer spending. People might not want to cut back on their annual holiday. But if they lose their jobs, or they start to fret about being in negative equity, then they'll make whatever cuts they can. And that's before you throw in all the unexpected glitches such as strike action and the aforementioned volcano that seem to hamper the air travel industry in particular.

As for ways to profit from the German economy's renewed vigour, there are better plays than tourism. Swen Lorenz picks some of the best ways to make money from Germany in the current issue of MoneyWeek magazine. If you're not already a subscriber, subscribe to MoneyWeek magazine.

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