Europe mega-operators TUI and First Choice propose merger

A new leisure travel group being formed by the merger of the tourism division of TUI AG with First Choice Holidays will be the largest entity of its kind in the European travel market and will effectively close the book on an era of tour operation.

The deal, which still must be approved by European Union antitrust regulators, would create a new venture to be known as TUI Travel PLC. TUI AG would hold 51% of the venture, while First Choice shareholders would end up with 49%. The company would be headquartered in the U.K.

Based on the 2006 filings of the respective companies, the merged venture is expected to start life with $24 billion in annual revenue. Within three years the new company hopes to realize $194.1 million annually from synergies, including the elimination of redundancies in areas such as administration, IT infrastructure, back-office functions, scheduling, planning and marketing.

But it's not just about being bigger, insisted First Choice spokeswoman Jessica Rouleau, who said the deal represented an alternative to the tour operator model that has dominated the European market for a generation.

"There's no point in being a traditional tour operator any more," Rouleau said. "It has changed because of the low-cost carriers and Internet intermediation."

In a market that has greatly empowered the consumer, she said, "Now it is about what kind of products do consumers want? And more importantly, how do they want to purchase them?"

The many merger talks in recent months among vertically integrated, giant European tour operators were triggered by changes in the marketplace that rendered the traditional tour operator model in Europe obsolete.

What is left on the battlefield are two combined entities, one formed by the merger of Thomas Cook and MyTravel, announced last month, and a second by the merger of TUI and First Choice, effectively bringing the former Big Four down to the Bigger Two.

Confronting the prospect of diminishing profits under the onslaught of low-cost carriers and Internet bookings, European tour operators saw two possible strategies, Rouleau said.

One was to go for economies of scale and mass distribution through the Internet, following the model of the low-cost carriers and online distributors such as Expedia. The other was to specialize in niche markets, "which is what First Choice has done," Rouleau said.

Although First Choice has "embraced the Web in a big way," Rouleau said, "it moved its tour operator business from its traditional short-haul package holiday business into the long-haul flying sector of niche travel, such as active travel, adventure travel. That brought a better margin."

The niche travel can be purchased online, or through First Choice's more than 1,000 retail outlets in the U.K.

TUI, on the other hand, chose to develop its Web distribution with dynamic packaging.

The new venture will capitalize on potential synergies between the two models, Rouleau said, calling the merger "a perfect fit."

Heading the new company will be Peter Long, the First Choice CEO who raised margins to a degree envied by competitors.

"Peter Long has a fantastic reputation with what he's done with First Choice Holidays," said Rouleau. "He's well respected because of what he set out to do and delivered. When he joined First Choice [on Sept. 6, 1999] the margins were zero; now they are 5%."

TUI would like to see Long do the same for its business.

"First Choice is the margin leader," said Robin Zimmermann, TUI's head of media relations. "It has by far the biggest margin in the field, with 5%. Ours is only 2.5%.

"We are by far the market leader in mainstream holidays. But First Choice is the leader in the specialist business, and that is far more profitable. It's not only the higher end, but they have student travel companies in the U.S. and a large business in yacht charters, over 1,500 private yachts, as well as the active travel operators who offer hiking and biking tours and so on." 

While TUI developed its online distribution system, "we only started to develop specialist travel," said Zimmermann, "so by joining First Choice we will be able to profit from their knowledge."

TUI plans to add First Choice's high-margin specialties to its markets in Germany, France, Switzerland and Austria, Zimmermann said.

The parties expect to complete the merger in the third quarter of 2007, assuming the deal is approved by relevant antitrust authorities and the shareholders of First Choice.

The new company being created by the merger of First Choice Holidays and TUI expects to have 27 million customers in 20 source markets, Rouleau said.

Both of the parent companies are huge, with long fingers that seem to spread virtually everywhere. TUI is the larger of the two, but not all of TUI's travel businesses will be included in the new TUI Travel.

According to Kuzey Esener, a TUI spokesperson, TUI is built primarily on two pillars, shipping and tourism.

Shipping is primarily the container shipping business, which recently grew when TUI purchased CP Ships. The shipping division also includes the Hapag-Lloyd cruise operation, which operates four ships. The cruise operation will stay under TUI's shipping division and will not be included in TUI Travel.

In December 2006, TUI signed a letter of intent with Carnival Corp. to develop, market and operate two premium, high-volume cruise brands, Carnival's AIDA Cruises and a new TUI Cruises brand for the German market.

TUI also held its hotel operation apart from the new joint venture with First Choice. TUI Hotels & Resorts, comprising 279 hotels with 164,000 beds, will stay with TUI AG.

TUI AG recently signed an agreement with Worldspan to partner on hotel distribution.

The remainder of TUI AG's travel business, including 80 tour operators; seven airlines with 125 aircraft; 3,300 retail agencies; and inbound operators in 35 destinations, will become part of the new joint venture.

First Choice is a global leisure travel company operating in 17 major source markets, with more than 15,000 employees and more than 80 brands and 200 countries in its portfolio of destinations.

The company breaks down into four sectors: mainstream holidays, which includes First Choice Airways; specialist holidays; destination and lifestyle; and activities, which includes expedition cruising.

In 2004, First Choice made an incursion into the U.S. market with the purchase of several student travel companies.

In late 2005, it purchased a number of U.S. adventure travel companies, including Country Walkers, International Expeditions, The Moorings, Park East, TCS Expeditions and Travcoa, which were formerly held as the group Grand Expeditions, and Intrav. First Choice later created a new division for the high-end travel companies called First Choice Expeditions.

One of the Grand Expeditions companies, a yacht cruise operator called The Moorings, was joined with First Choice's Sunsail Cruises in the company's sailing division, First Choice Marine.

Jerre Fuqua, president of First Choice Expeditions, said the merger would have little effect on the way the U.S. businesses function.

"We're appreciative of the news, but it doesn't have the same implication for us as it does in Europe," he said. "As far as our business group is concerned, we've been very clear on our direction, on managing our business for the long term. Our strategy is very dependent on our mix in the U.S., which is different than Europe. Travel agents are a big component in our strategy for moving this business along. We see growth in all our sectors."

The merger could, however, create new "buying opportunities" for First Choice Expeditions, Fuqua said.

To contact reporter David Cogswell, send e-mail to [email protected].