ANALYSIS-TUI Travel, Thomas Cook can weather downturn

By Matthew Scuffham

LONDON, July 3 (Reuters) - The mergers which created Europe's two biggest travel firms, TUI Travel Plc (TT.L: Quote, Profile, Research) and Thomas Cook Group Plc (TCG.L: Quote, Profile, Research), have given both groups the flexibility to cope with the consumer downturn. The two operators together account for nearly half of the package holidays sold throughout Europe and around two-thirds of holidays sold in Britain, giving them a market dominance which is enabling them to drive through the price rises and capacity cuts necessary to maintain profit margins.

Yet their shares have been dogged by fears they are facing the sort of cyclical downturn which devastated some of their predecessors, as well as rising fuel costs and a strong euro which is making holidays in continental Europe more expensive.

Both companies' shares have fallen by over 30 percent since the enlarged groups re-listed on the London Stock Exchange last year.

That left TUI Travel trading at around 9.1 times forecast earnings for 2008, with Thomas Cook at 9.2 times, compared with a price-earnings ratio for the FTSE All Share Travel & Leisure Index .FTASX5750 of 7.9, according to Reuters data.

However, last year's deals, in which TUI Travel was created from the tie-up of TUI AG's (TUIGn.DE: Quote, Profile, Research) travel division and First Choice, while Thomas Cook was formed in June following the merger of Arcandor (AROG.DE: Quote, Profile, Research)'s travel unit and MyTravel, have transformed the dynamics of the marketplace.

"The tour operating industry has gone through a radical shift whereby two major players have practically doubled their scale to dominate the pan-European landscape," said Citigroup analyst Heidy Rehman.

The trend has enabled both companies to tightly control capacity, knocking out product lines which were either unprofitable or less profitable than others.