Holiday stocks still come with baggage: CNBC’s UK Exchange newsletter

This report is from this week’s CNBC’s UK Exchange newsletter. Like what you see? You can subscribe here.

The “Carry On” series is one of the most successful U.K. film franchises of all time. Between 1958 and 1978, 30 of the low-budget comedies were churned out (a revival in 1992 flopped), attracting millions of viewers worldwide.

Steeped in the tradition of the bawdy British seaside postcard, they were best-known for their puns and double entendres, but there was always a satirical element too.

The latter was prominent in “Carry On Abroad,” released in 1972, in which the regular cast members — Sid James, Kenneth Williams, Joan Sims and Barbara Windsor — embark on a package holiday to a half-built hotel in the fictional Spanish resort of Elsbels.

It could not have been more topical. Although group tours date back to 1841, when the Baptist preacher Thomas Cook organized a rail excursion for members of the Leicester Temperance Society, it was in the 1960s and 70s that they exploded in popularity.

By the early 1970s, package holidays were how millions of Britons took their holidays — usually to Spanish resorts on the Costa del Sol — thanks to their convenience and affordability. The bundling of flights, transfers and accommodation opened up foreign travel to less well-off consumers who previously could only holiday at home.

From an investor’s perspective, though, package holidays were not so dependable. Just two years after the release of “Carry On Abroad,” with the package holiday sector still apparently booming, Court Line — owner of Clarksons Travel and Horizon Travel, two of the sector’s biggest names — collapsed, stranding nearly 50,000 tourists overseas. 

This came to mind when, last week, Jet2 — now Britain’s largest package holiday operator and hitherto a darling of stock market investors — issued a profit warning that sent its share price down by as much as a quarter.

It said that, due to a “less certain consumer environment,” it would be cutting 200,000 seats from its winter services to popular destinations like Gran Canaria, Tenerife and Lanzarote. It also warned that the trend of consumers booking their holiday closer to the departure date was becoming more pronounced.

It was a bolt from the blue but a reminder that, in this sector, operators must be constantly on their mettle to match supply with demand.

The irony is that, after a tough couple of decades, the package holiday sector had recaptured the imagination of investors once more.

In the late 1990s, U.K. stock market investors had plenty of choice if they wanted exposure to the sector. Three of the four biggest players — First Choice, Airtours and Thomson Travel — were all listed, with the latter two making it into the FTSE 100.

Indeed, Thomson’s initial public offering in May 1998, in which it achieved a £1.7 billion valuation ($2.3 billion), was so heavily over-subscribed that the allocation of shares put aside for retail investors was increased from 10% to 17%, making it one of the most popular issues since the privatization boom of the 1980s and early 1990s.

Some 500,000 small shareholders invested.

The trio each had their own high street travel agency — something vital to capture volumes in a low-margin sector — and their own airline.

This vertical integration saw the big players frequently accused of squeezing independent travel agents and tour operators out of the market — and they were constantly in the sights of competition regulators as a result.

But the intense competition also led to fierce price wars with accompanying bouts of over-capacity.

There were even marketing wars that sometimes backfired, as in 1994, when Owners Abroad promised a marketing blitz after rebranding to First Choice. In response, Thomson and Airtours rushed out their 1995 brochures — which was, of course, how people researched holidays back then — before some customers had even taken that year’s break. It sowed confusion among consumers and staff and led to a big drop in sales across the sector. 

Consolidation came eventually. In 2000, Thomson was bought by the German company Preussag, with the enlarged business — which was listed in London and Frankfurt — rechristened TUI two years later. In 2007, it merged with First Choice, while the same year also saw MyTravel, as Airtours had renamed itself, merge with the then German-owned Thomas Cook. It left the entire European package holiday industry dominated by two Anglo-German players.

By then, though, the sector was struggling.

The rise of low-cost airlines like Ryanair and easyJet, along with the widespread adoption of the internet and operators like Airbnb, gave consumers the confidence to book their own flights and accommodation and create their own trips. The struggle was encapsulated by the collapse of the heavily indebted Thomas Cook in September 2019, leaving 600,000 mainly British, German and Scandinavian holidaymakers trapped overseas, necessitating the biggest peacetime repatriation in history.

The collapse prompted Michael O’Leary, Ryanair’s chief executive, to declare the package holiday “dead.”

But then came the pandemic, creating a huge build-up in demand. At the same time, strikes, southern European wildfires and conflicts in Ukraine and the Middle East — as well as memories of how airlines like Air Berlin and Monarch had collapsed before the pandemic — combined to drive holidaymakers back into the arms of companies offering a one-stop shop.

Asset-light new entrants like On The Beach, offering the protections of traditional package holiday providers while not owning any hotels or aircraft, have become big players.

Perhaps the biggest beneficiary of the upsurge in demand has been easyJet, which launched easyJet Holidays to fill the gap left by Thomas Cook. It is now the fastest-growing part of the business and explicitly targets customers of On The Beach and online travel agents like Expedia, Loveholidays and Booking.com.

Yet last week’s warning from Jet2, a business respected for its cost control and excellent customer service, has served as a reminder that, for all the impressive growth of recent years, this remains a volatile and sometimes unpredictable sector.

— Ian King

As U.K. long-term borrowing costs hit a 27-year high, we also got a date for Chancellor Rachel Reeves’ Autumn Budget: Nov. 26. CNBC’s Ritika Gupta breaks down all the latest developments.

September is said to be a bad month for equities, but does it deserve its reputation? CNBC has been crunching the numbers behind the so-called “September effect.”

Peel Hunt’s Chief Economist Kallum Pickering discusses the bond market sell-off in the U.K. and the outlook for the Autumn Budget.

— Holly Ellyatt

Digital gold could shake up London’s precious metal markets. London’s $930-billion gold market could be set for a transformation as the World Gold Council (WGC) looks to digitalize the metal.

UK feels the heat as investors and critics question its future. There’s no doubt it’s a miserable time for the U.K. government, with Prime Minister Keir Starmer and his ministers under increasing pressure as investors question Britain’s fiscal, economic and political future.

Fund manager sees ‘generational opportunity’ in the bond market. Government bond markets were in focus as several long-dated yields hit multi-decade highs — which, one fund manager says, presents a “generational opportunity” in U.K. gilts.

— Holly Ellyatt

U.K. borrowing costs have fallen significantly over the last week, in the wake of jitters in the bond market that saw the yield on the 30-year gilt soar.

The 30-year yield was around 5.485% on Tuesday afternoon, down from 5.693% at its Sept. 2 peak, while 2-year and 10-year U.K. yields were also lower.

Sterling gained against the U.S. dollar across the week as expectations mount that the Federal Reserve will resume interest rate cuts this month, following two weaker-than-expected labor market readings. The British currency has also strengthened against the euro, which has been weighed on by volatility in French politics.

London-listed stocks have been back on the ascent amid strength in retail and mining names. The FTSE 100 index closed at 9,116.69 points on Sept. 2, rising to 9,239.2 points by Sept. 9.

Sept. 12: UK monthly GDP data

Sept. 16: UK unemployment data

— Holly Ellyatt