Europe’s largest vertically integrated tour operators TUI Group and Thomas Cook are heading into the second half of the year against a backdrop of terrorism and problems in key source markets.

Not only have they had to switch capacity away from the eastern Mediterranean and North Africa and into destinations such as Spain but the recent Brexit vote in the UK has raised the possibility of a recession in one of the continent’s biggest markets.

All signs therefore point to a tough trading environment but the pair appear to be weathering the storm with positive noises coming out of both of their recent third-quarter updates.

Beating the Brexit Blues

German-headquartered TUI is the world’s biggest tour operator with a turnover last year of $22.6 billion (€20 billion).

It reported a pre-tax profit of $131.7 million (€116.5 million) in Q3 – up 35 percent from $97.6 million (€86.4 million) in the prior year.

Crucially, it is also sticking with its full-year guidance of 10 percent EBITA (earnings before interest, taxes, and amortization) growth – although it has revised down its revenue target.

The situation in Turkey has affected bookings. The country has experienced a series of incidents in recent months, including an attack on Istanbul’s international airport, which killed 44 people. Not to mention what may have been an attempted coup d’état.

Bookings for summer 2016 are in line with last year’s performance at 87 percent sold. If the impact of Turkey was discounted they would be up by 8 percent.

There was better news in other areas. The UK’s historic Brexit vote was expected by many to lead to widespread disruption. According to TUI CEO Fritz Joussen, this has yet to occur with “no apparent slowdown in bookings as a result of the EU referendum.”

The City appears to be very happy with the situation. Shares on the London Stock Exchange are up 4.7% this month.

Researchers at Morgan Stanley said that the TUI results “should come as a relief, and confirm that tour operators have been more resilient than airlines in this difficult trading period.”

On the Right Path

UK-based Thomas Cook is still regarded by many in the industry as being behind its rival in terms of product and innovation after going through major financial problems earlier this decade.

It’s results weren’t in the same league as TUI’s but still seems to be in a relatively stable position going into the crucial final quarter, which ends September 30.

The firm reported a widening of third quarter pre-tax losses from $57.4 million (£44 million) to $83.5 million (£64 million). Revenue also declined, dropping from $2.5 billion (£1.95 billion) to $2.4 billion (£1.85 billion).

Thomas Cook placed the blame for the poorer performance on Turkey and also a lack of demand in Belgium, following the Brussels terrorist attacks. The summer 2016 program was 81 percent sold – 3 percent down from last year.

“Our business has been disrupted by various geopolitical events, including terror attacks in Nice, Istanbul, and Munich, and an attempted coup in Turkey, while Brexit has attacked to the general sense of uncertainty. And those are just the major events that have happened since we last reported in May,” CEO Peter Fankhauser said on an earnings call with analysts.

The tough environment led Thomas Cook to warn that underlying operating profits would be down at around the $391.4 million (£300 million) mark rather than up at $404.5-$437.1 million (£310-335 million).

Nevertheless, this is still a big improvement on where it was only five years ago.

Fankhauser added: “It’s important to recognize that Thomas Cook is stronger, financially and operationally, and has a better product range than it has ever had. Our focus remains on executing well on the things we can control by positioning ourselves as best we can for the things we can’t,” he said.

A dying breed

After years of consolidation in the European travel industry, Thomas Cook and TUI Group are the last two listed vertically integrated tour operators standing.

They grew out of the package holiday boom in the 1970s and 80s when Brits flocked to the beaches of Southern Europe. Through mergers and acquisitions they gradually expanded, taking in operations elsewhere in Europe. An equivalent business in North America is Canada’s Sunwing Travel Group, which owns airlines, tour operators and travel retailers.

Tour operators typically recognise revenues after the date of customer departure meaning that even though the holidays may have been booked in advance the money is only counted once they go.

This puts an incredible amount of pressure on their summer months, which for both Thomas Cook and TUI means the final quarter of their respective financial years.

And while geopolitical events have occurred throughout 2016, including an attempted coup in Turkey and the Brexit vote, there is a belief that the impact won’t be seen until next year’s results.

“Things aren’t as bad as they could have been,” said leisure analyst Mark Brumby of Langton Capital.

“As far as comments are concerned TUI has come out an been a little bit more robust than Thomas Cook has. I know they’ve got a bigger differentiated product but I would have thought its much of a muchness really.”

There are a number of reasons why this might be the case.

TUI’s Joussen said that the vertically integrated model employed by his company meant they had the ability to switch destinations and offer hotel beds to customers. The likes of Expedia and Priceline don’t have this type of control.

For Thomas Cook’s Fankhauser, the “volatile environment” gives his company a key differentiator.

“We give the security that if something happens that we take care and this security… has a value for the customer. That is one big advantage what we have now in this situation,” he told analysts on an earnings call.

Looking Forward

Both Thomas Cook and TUI have worked hard to move the holiday destinations that they offer. Something made easier by the fact they both own airlines and hotels, and thus have lots of control.

But with the majority of holidays already sold, we will only know the real impact of 2016’s year of turmoil next year.

The UK accounts for roughly a third of Thomas Cook’s business and around 29 percent of TUI’s. Should the UK fall into recession or experience a crisis in consumer confidence as a result of Brexit, spending on holidays would likely decrease.

Moreover, because of the pound’s fall against the the euro and the dollar, holiday prices are likely to increase next year.

TUI’s Joussen told journalists: “If the pound stays weaker than the prices will go up. I think that’s clear.”

If this happens and then next year is likely to be much tougher. As Mark Brumby says: “The bigger hurdle is going to be can you persuade as many people to go on holiday next year as went on holiday this year.”

Photo Credit: People sunbathe at the Barceloneta beach in Barcelona, Spain. Both Thomas Cook and TUI Group have moved capacity to the Western Mediterranean this summer. Manu Fernandez / Associated Press