The Power Game: Thomas Cook and its "discount"

The Balearic Government intends to "adjust" its agreements with Thomas Cook. It plans to do so in an act of solidarity with hoteliers facing the 5% "discount" on payments from the tour operator which was announced last month. The government's stance is hardly a surprise, given a need to support the all-powerful hotel lobby, but Joana Barceló, the tourism minister, has not been specific as to the exact nature of the "review of financial contributions to co-operative agreements" that the government has in place.

The action by Thomas Cook is not solely directed at Mallorca; it applies worldwide. Hotelier groups in the Caribbean have been joined by their counterparts in Spain in considering the taking of legal action against the tour operator, claiming breach of contract and abuse of market position. Travel industry lawyers believe that the cost of fighting legal cases could end up costing Thomas Cook more than it stands to gain from holding back the five per cent.

When the discount was announced, and it is meant to apply only to hotel bills for the August and September period, Thomas Cook said that opposition to the move "had been sorted out". Hardly.

Discount. Let's call a discount spade a deduction spade, shall we. It is one, according to the company, that is intended to make up for losses incurred as a result of the Icelandic ash cloud. The 5% applies to destinations served from the UK and not from Germany. German airspace was unaffected by the cloud?

There might be some sympathy for Thomas Cook, confronted as it was by the wholly unexpected, as it did incur significant losses because of the volcano. But losses were also incurred by others. They were all in it together. Weren't they? The answer to this question goes to the heart of the matter. It is the extent to which hotels - and governments - are partners in tourism. Or not.

The dynamics of the tourism supply chain have changed markedly. It was once the case that the hotels exerted the power over the tour operators. Not so now. It's a similar situation to that of the UK retail supply chain. Manufacturers and suppliers used to hold the upper hand over the retailers themselves. Not now they don't if they deal with the giant multiples such as Tesco. Partnership is an easy word to use, but it hides an unequal balance of power. The Co-operative Travel is likely to come to appreciate this through its merger with Thomas Cook. The reporting of this has to do with a further strengthening of Thomas Cook's position in a flat market and an improvement to what was an undervalued share price. Reporting about Thomas Cook, not the Co-op. There is always a dominant party in any merger.

Mallorca's hotels have had their prices squeezed. Realism in their price negotiations has been forced upon them by the economic climate and competition. No bad thing, you might think, but a further 5% cut understandably doesn't go down well. They have every right to contemplate legal redress, but they do so from a position of weakness. The big two tour operators hold the aces. And everyone knows they do.

TUI, for its part, has said that its UK division will not follow Thomas Cook's lead. It argues that the imposition of the cut does not "establish a good partnership" in the long-term. It's right to say so, but this doesn't obscure the fact that it, along with Thomas Cook, is what the game is all about. The big two just keep getting bigger and stronger. The Co-op merger is a case in point. For the tourist consumer, alarmed by the failures of smaller operators, the big two offer confidence, notwithstanding Thomas Cook's own recent financing issues.

One can but hope that the likes of Globus (Monarch and Cosmos) forge an increasingly strong third presence. A fourth, fifth or sixth significant player wouldn't go amiss either. But it's unlikely. Business theory was many years ago now speaking of the rule of four. Four dominant market players, created through the pursuit of economies of scale and the dreaded s-word of synergy brought about via acquisition. The theory wasn't completely accurate, as can be seen in the tourism industry.

There is a fear that hotels might suffer reprisals as a consequence of any action taken against Thomas Cook. This is overstating the situation and wouldn't be in the company's own interests. But the mere fact of the deduction affects not only any possible legal contract, it also affects the psychological contract between parties. The deduction is an expression of dominance and its reverse state of submissiveness, one from which the government also suffers. It can seek to pull the plug on co-operative marketing agreements, but would it? Cut. Nose. Spite. Face.


Any comments to andrew@thealcudiaguide.com please.