Consolidation in the European travel sector - particularly amongst German and UK travel groups - is taking place at a breathtaking pace

Imagine a world in which cross-border air transport mergers are the norm; where Europe is dominated by around four major groups backed by successful vertical integration strategies. While this scenario remains a pipe dream for airline executives, it is rapidly becoming a reality in the European travel industry. Given the sheer volumes of passengers involved, there are clear implications not only for the shape of the region's increasingly competitive airline market, but also for those near neighbours who rely on a flow of tourist traffic from Europe.

Most of the major groups have already extended their reach, creating integrated businesses which reach from the tour operators and captive charter airlines, through to the high street travel agencies. Over the past eighteen months, initial manoeuvring, has given way to a frenzy of proposed mergers and acquisition among the main groupings. Led by moves within the dominant German and UK markets, players have been falling over themselves to ensure a place among what now looks like becoming only a handful of true travel giants.

The catalyst for this latest bout of activity was an attempt by Swiss travel group Kuoni and the UK's First Choice to join early last year. The proposed deal would have given Kuoni 52% of the joint company, but the two management teams would have been left more or less in place. There was little overlap between the two companies and David Pope, analyst at investment house Brewin Dolphin, says the proposed deal was "very sensible."

However, it was not destined to be. Airtours, another of the UK's big four, saw the deal as a threat and decided to trump the move by putting in its own, higher bid for First Choice. This succeeded in scuppering the original deal, but fell foul of the European Commission, which decided that the 34-35% market share that this would have given the combined group was too much to bear.

Once this deal had hit the Brussels competition wall, Kuoni turned its attention to other acquisitions. By then, going back to the original First Choice agreement was no longer feasible.

In the meantime, First Choice has itself begun to expand into continental Europe through the purchase of travel agent Ten Tours. This specialises in destinations in North Africa, mainly Tunisia, to customers in Germany, Switzerland, France, Belgium and Austria. First Choice has traditionally focussed on European Mediterranean destinations for UK customers, so the Ten Tours deal provided an opportunity for expansion into new market areas.

At the same time, Thomson Travel Group, floated off from its former Canadian parent Thomson, was looking vulnerable. The UK's largest travel group had seen profits dry up and soon became a potential takeover target. Earlier this year a predatory approach duly arrived from Germany's C&N Touristic -itself not long formed from an earlier round of consolidation in 1997 when Lufthansa pooled its Condor charter business with Karstadt Quelle's Neckermann Touristic tour operation.

However, in a move with echoes of the earlier Airtours/First Choice/Kuoni triangle, Germany's largest travel group, Preussag, trumped the bid. It triumphed and, following competition clearance, Preussag emerges as the world's largest travel group.

C&N instead turned its attention to another UK operator, Thomas Cook, which is "cleaning itself up" as one analyst put it, in preparation for a sale. A small stake in First Choice has been sold and the company is actively seeking a buyer for its financial services arm.

C&N could again miss out here. US travel group Carlson has a 22% stake in Thomas Cook and also has pre-emptive rights on a 51% stake held by Preussag, which the latter has to relinquish as part of the conditions set down by Brussels for the deal with Thomson. One analyst said that it looks likely that Carlson will take up this stake, although he didn't discount the possibility that the latter was looking to get another bidder into the process. With European Union rules preventing an outsider owning a majority stake in an EU airline, Carlson is faced with a problem should it decide to take up the Preussag option, given Thomas Cook's ownership of the charter airline, JMC.

This could bring Kuoni back into the picture, with a three way split ensuring that Carlson has no more than 49% of the company. However, one analyst said that Kuoni "has had its fingers burnt" by the First Choice saga and was unlikely to go back into the market. He also opined that Kuoni, which has a very high quality product, would think twice about a move into a mass market company such as Thomas Cook.

So, while C&N Touristic could still form a relationship with Thomas Cook, some analysts are touting a tie-up with Airtours as a possibility, although one points out that Airtours "doesn't necessarily need a partner."

The competition for C&N has increased significantly with the recent partnership between LTU Touristik, the tourism arm of the SAirGroup, and travel agent Rewe, creating Germany's second largest travel group (see p11). First Choice remains another possible partner for C&N, although it has recently secured a number of new shareholders itself. Spanish hotel group, Barcelo, which now has a 20% holding, brought part of the Thomas Cook shareholding in the company. In addition, cruise operator Royal Caribbean has injected £200 million ($317 million) of capital into First Choice, which may be turned into an equity stake at a later date.

Cruise links

Establishing closer links with the cruise industry, which is one of the fastest growing sectors of the travel industry, has, in fact, been another noticeable feature of the travel industry. In addition to the First Choice-Royal Caribbean link, US cruise group Carnival has taken a 25% stake in Airtours.

Behind this spate of mergers and link-ups lies a desire to expand out of saturated home markets, where regulators are loathe to allow deals which give operators more than 30-35% market share. For instance, the UK companies with links to cruise companies will be able to sell those holidays to a much wider audience than if they were purely selling to UK customers.

Also key is the opportunities for economies of scale. This doesn't just apply to efficient use of hotel space, but also includes the charter airlines which most of these travel groups own.

A perennial problem is the seasonality of the industry, which means that while charter operators may have to lease a few more aircraft for the busy summer period, in winter they are faced with the problem of massive under utilisation.

Traditionally, many European operators of charter airlines have tended to put their aircraft in the North American market over the winter period. This is known in the industry as "counter seasonal business". While this makes sense, given the large number of North Americans heading for sunnier climes (mainly Florida and the Caribbean) in the winter, the problem is that too many charter airline operators have the same idea, and thus rates are very low.

However, the current spate of acquisitions and mergers may open up new possibilities. One example is the relationship between First Choice and Spain's Barcelo. Barcelo has a subsidiary in Argentina that offers destinations from Brazil up to the Caribbean. Pope says that these Latin American operations provide First Choice with an opportunity to earn higher revenues from its charter fleet, Air 2000, over the winter period. "The only problem is getting the charter planes [from Europe] to the destinations," he says.

While this operation may be on a relatively small scale, it proves that more opportunities for travel group-owned charter airlines may open up. Preussag and Thomson, for example, are known to be looking at more efficient ways of deploying their respective fleets, namely Hapag-Lloyd and Britannia.

However, analysts emphasise that the counter seasonal market is a difficult one in which to increase revenues. One argues that with healthy profits to be made in the summer season, operators will only go for counter seasonal traffic "if it makes overall sense" rather than to find a winter home for their charter aircraft.

While this may be the case, there is no doubt that the present spate of mergers provides the major travel groups with an opportunity to review the way they do business, and changes to all areas of the industry can be expected.

Source: Airline Business