Thomas Cook sees UK earnings tumble amid 'challenging' trading

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Travel giant Thomas Cook has revealed a 40% plunge in UK earnings as it suffered amid "challenging" trading and a hit from the weak pound.

The holiday giant reported underlying earnings of £52 million for the UK division in the year to September 30, down from £86 million the previous year after it was knocked by rising hotel prices, the pound and intense competition in the Spanish market.

It also said its costs were sent surging after facing a torrent of fraudulent illness claims and after supporting 10,000 customers caught up in the devastating Hurricane Irma.

Shares in the group plunged as much as 13% at one stage after the results.

Thomas Cook stock
Chief executive Peter Fankhauser said trading has been "challenging" in the UK (Thomas Cook/PA)

But the group said it has launched action to return its UK division to profitable growth once more by slashing costs, taking legal action against illness fraudsters and focusing on fast-growing holiday destinations Turkey and Egypt as demand returns to the countries.

The wider group enjoyed a better year, with pre-tax profits rising to £46 million from £34 million a year earlier thanks to a turnaround at its German airline Condor and improved customer demand.

Underlying earnings rose £24 million to £330 million.

Peter Fankhauser, chief executive of Thomas Cook, said: "2017 was a milestone year in the strategic development of Thomas Cook.

"By delivering what we promised on strategy, we've inspired more customers to choose our holidays for their hard-earned weeks in the sun."

He added: "Looking to the year ahead, we can see real momentum in our Group Airline, and expect our Continental Europe and Northern Europe tour operator businesses to continue their good performance.

"While conditions are challenging in the UK, we have implemented a set of actions to improve performance."

Thomas Cook has been struggling amid a price war for Spanish holidays, which partly contributed to the collapse of smaller rival Monarch last month.

The woes in Spain, which is Thomas Cook's biggest destination, left its profit margins 1.3 percentage points lower at 22.1%.

Its UK division saw margins drop after four years of growth.

But Thomas Cook gave some hope that trading was turning around as holidaymakers return to "more profitable" destinations Egypt and Turkey.

Demand for trips to Egypt and Turkey plunged after the bombing of a plane from the Egyptian resort of Sharm el-Sheikh and a violent attempted coup by the Turkish army, which has been followed by a string of terrorist attacks in the country.

It said current trading was in line with management's expectations, with total bookings up 5%, supported by demand for holidays in the Canaries and the renewed interest in Egypt.

Bookings in the UK are up 1%, with good growth to Turkey and Egypt, while prices are up 4% due to hotel price hikes in its biggest winter destination, the Canaries.

Average selling prices in the UK are 6% higher year-on-year for next summer, which Thomas Cook said was mainly down to "input price inflation".

Fiona Cincotta, a senior market analyst at City Index, said while Thomas Cook's group-wide revenues were ahead of market expectations, investors were focusing on the hit to profit margins.

She said: "While those pressures had already been previously flagged by the company, it's disappointing there wasn't a greater positive offsetting effect on margins from strategic growth initiatives."