Thomas Cook hit by German consumer downturn

Despite continuing price softness in the holiday industry Thomas Cook said it expected its cost-cutting regime would enable full year results to show "material improvement over last year".

A trading update released by the FTSE 250 company just ahead of its year end revealed a downturn in Germany that it blamed on tensions with Russia, but all parts of the group were expected to deliver fourth-quarter results ahead of last year.

Underlying earnings before interest and tax (EBIT) are expected to be between £315m-£335m, equivalent to growth of between 39% and 48%, and net debt will have been trimmed to between £300m-£350m from £421m a year before.

The success of the first wave of chief executive Harriet Green's cost-out and profit-improvement programme, together with the initial benefits from a new product strategy, has given management confident that the UK business will achieve its EBIT margin targets of 3.5% for the full year and 5% for full year 2015.

For the current season, UK summer capacity is 92% sold, the same as this time last year, and continental Europe has sold 90% of capacity commitmennts, similar to the same time last year, but has been affected by the fallout from recent political events in the region.

"Bookings in Germany, which had been strong, have recently moderated reflecting a less optimistic consumer climate due to geopolitical events, as well as a more subdued economic outlook as the EU considers adopting further sanctions against Russia," said the statement.

"As a consequence, our German business has experienced weaker margins in the fourth quarter of the year due to a combination of reduced demand and excess market capacity."

Overall, two years after taking the helm, Green said she was "very encouraged" by the progress made against her chief strategic and performance targets as further cost-cuts and efficiencies were delivered, along with a higher rate of web bookings and rising customer demand for the exclusive Concept and Partnership hotels.

"We expect our operational performance in this second year of our transformation to show a material improvement on full year 2013, notwithstanding the impact this year of economic and geopolitical factors on our customers."

Early winter bookings in the UK were another source of encouragement, with 29% of capacity sold and bookings and average selling prices higher than last year.

Broker Shore Capital calculated that full year 2014 underlying EBIT was now expected to be between £315m-£335m versus previous expectations of nearer £346m, with Airlines Germany appearing to account for £10m of the shortfall.

"Thomas Cook’s update is disappointing given that we will have to downgrade our forecasts, however the turnaround strategy continues despite the impact of recent weak trading in Germany and Airlines Germany," wrote analyst Martin Brown. "Web booking trends are encouraging as is the continued improvement in the exclusive product."

Shares in the company were down 4.5% to 124.2p at 08:12 on Tuesday.