FTSE preview: Credit crunch impact on travel sector to be revealed

May 11 2008

Annual results from supermarket giant Sainsbury’s and British Airways are the highlights of a busy week for corporate news, which also sees figures from travel giants TUI Travel and Thomas Cook.

British Airways reports full year figures on Friday after a torrid past year for the group, blighted by its chaotic move to Heathrow’s Terminal 5 and fuel price woes from soaring oil costs.

The shambolic opening of T5 at the end of March saw the group suffer reputational embarrassment worldwide, while the latest passenger statistics showed it also impacted on business, with 7.9% fewer passenger travelling with BA last month year-on-year.

Friday’s figures will not show any financial hit from the T5 troubles, coming right at the end of its financial year, but they are likely to reveal the true cost of BA’s vulnerability to the rocketing cost of crude.

The carrier has already said that it expects its fuel bill to have cost £2.1 billion in the year to March 31 and warned that it could have to fork out £2.5 billion in the current financial year.

With oil having risen past 126 US dollars at one stage in recent days, the group has been hammered on the stock market alongside other travel groups as investors fear the inevitable bottom-line impact.

Despite its cost pressures, BA is expected to increase pre-tax profits by 44% to £877 million. Its full-year success is set to come after it banked a better-than-expected 35% hike in profits for the nine months to December, at £788 million, with a weak US dollar helping offset the fuel price hikes.

But as with its third quarter results, the market is likely to look past any immediate profit cheer to concentrate on future prospects.

News earlier this month of a potential tie-up between British Airways and two US rivals had given BA shares some brief respite on the London market, yet the group’s stock market progress remains at the mercy of increasingly volatile oil price movements.

Supermarket giant Sainsbury’s has had a far more successful year, as annual results are expected to reveal on Wednesday.

It heaped the pressure on its “big four” rivals in March with news of a 4.1% hike in fourth quarter like-for-like sales, which saw full-year comparative sales lift by 3.9%.

Against Tesco’s annual sales growth of 3.5%, excluding petrol, the result signalled that Sainsbury’s is reclaiming the ground lost to competitors in recent years and reaping the benefits of its Making Sainsbury’s Great Again turnaround plan.

The revival strategy has delivered £2.7 billion of sales growth since its launch three years ago, compared with original hopes for a £2.5 billion improvement. The sales success is set to be reflected in its results for the year to March 22, with analysts pencilling in a double digit rise in underlying pre-tax profits to £485 million, up 28% on the previous year’s £380 million.

This comes despite the pressure of soaring commodity prices, which have seen the cost of rice rise by 72% and corn by 29% in the last 12 months.

Retailers have also been battling against a slowdown in consumer spending amid the economic uncertainty, although so far food shops seem to be bucking the trend in a sign that shoppers are prepared to splash out on the weekly food bill.

But recent industry figures showed that despite the recent sales success, Sainsbury’s market share dropped 0.4% to 16% in the 12 weeks to April 20 as a resurgent Morrisons continued to steal share, as did cheaper chains such as Aldi and Iceland. The news suggested that Sainsbury’s may be getting back on track, but will have have to fight to retain its new-found sales success as trading conditions get tougher.

Mr Kipling cakes-to-Branston Pickle firm Premier Foods updates on first-quarter trading on Tuesday after a difficult start to 2008.

The group has struggled with soaring food prices and interest payments on its £1.6 billion debts following acquisitions of Campbell’s Soup and RHM, which makes Hovis bread.

Premier was forced to slash its dividend two months ago as the group unveiled a £73.5 million pre-tax loss for 2007, with wheat alone adding £40 million to its costs.

But the firm also unveiled a refinancing deal to ease the pressure on a creaking balance sheet, which gave it £225 million in working capital to take the fight to rivals Warburton’s and Kingsmill with a new recipe for its Hovis white range.

Analysts are expecting further volume declines across the business during a tough first half, although this should be partially disguised by higher prices.

Citigroup analyst Jeff Stent said: “Premier has well flagged that full year delivery will be weighted to the second half and we expect this to be reflected in the statement.

“We will be seeking confidence that Premier’s full-year expectations remain unchanged.”

The firm could also confirm reports that three group businesses - chilled foods firm RF Brookes, cake and confectionery group Avana and French baker Sofrapain - are up for sale.

Premier, which is based in St Albans, Hertfordshire, also makes products including Oxo stock cubes, Batchelors soups and noodles and Loyd Grossman cooking sauces. It employs almost 20,000 people at more than 60 sites throughout the UK.

The new chief executive of DSG International will announce the results of his group-wide business review on Thursday at a difficult time for the Currys owner.

John Browett, who joined the company from Tesco at the end of last year, unveils his plans for the group as DSG battles against a consumer spending slowdown, profits warnings and - most recently - news of a potentially significant new competitor.

Last week, Carphone Warehouse announced a tie-up with US giant Best Buy to launch consumer electronics stores across the UK and Europe from next year in a move that will pit the firms in direct competition to the likes of DSG.

Already under pressure in a competitive market, DSG has been cutting prices to attract increasingly cash-strapped shoppers, but the heavy discounting has started to impact the bottom line. It issued a profits warning last month, bracing investors for lower-than-expected profits of between £200 million and £210 million in the year to April 5.

The warning came just four months after DSG lowered forecasts in the wake of a difficult Christmas trading period.

Mr Browett has already pledged to increase the company’s focus on delivering the “value, choice and service that our customers demand”, but the market will be looking for tangible details on how it plans to protect margins in the current trading climate.

Recent figures from the British Retail Consortium revealed that electronics goods suffered among the heaviest price falls last month, down 5% year-on-year, which is presenting all retailers in the sector with a considerable challenge.

The firm behind the First Great Western rail service labelled “unacceptable” by ministers earlier this year is likely to stoke further criticism with bumper annual profits on Wednesday.

Transport operator FirstGroup is expected by analysts to unveil pre-tax profits of around £248 million for the year to March 31 - 77% ahead of the previous 12 months.

The Aberdeen-based group’s bottom line will be boosted by six month trading from US group Laidlaw - the yellow school bus giant and owner of trans-American bus company Greyhound - which it bought in a £1.9 billion deal last year.

But the group is also the UK’s largest rail operator and its latest trading update also boasted a 10%-plus rise in rail revenues during the year.

In January, passengers were hit with above-inflation fare rises across the network, although FGW’s poor performance prompted fare strikes by some consumers.

A month later it received a formal rebuke for its handling of the rail franchise and was forced into a £29 million programme of improvements at FGW, which runs services to Reading, Bristol, South Wales and the West Country.

First’s other rail franchises are First ScotRail, First Capital Connect and First TransPennine Express, where punctuality rates are higher than 90%.

The group’s UK bus business boasts a 9,000-strong fleet, carrying three million passengers a day in more than 40 major towns and cities. Passenger revenues grew 5% last year.

Investors will be looking out for the possible impact of soaring fuel costs on the company as well as prospects for the US business in a difficult economic climate.

Charles Stanley analyst Tony Shepard said: “There are some concerns about how Greyhound will perform in a recessionary environment as, in the last recession, Greyhound profit margins declined sharply.”

TUI Travel and Thomas Cook will give their verdict on the travel sector when the two firms report interim figures on Tuesday and Thursday respectively.

But the market will be focusing on comments on summer 2008 and bookings for 2009 rather than performance over the past six months, with strategies to combat the soaring cost of oil also expected to be high up on the agenda.

First up is Thomson and First Choice parent TUI Travel, which is forecast to reiterate that current demand for travel remains strong, despite the signs of a consumer spending slowdown in other sectors.

The group said on unveiling a more than halving of first quarter losses in March that it was already 47% booked-up in the UK for summer holidays, thanks to tight capacity management.

Next year is thought to be a different story for all travel firms, however, with the consumer backdrop due to become increasingly tough.

According to Numis Securities, TUI - created by the merger of First Choice and the travel arm of German firm TUI last summer - is “far from immune” to the weakening consumer, but the group’s analysts believe it is relatively well placed and will continue to benefit from merger synergies, cost cutting initiatives and tight capacity control.

Thomas Cook likewise gave a bullish account of the UK travel market in its last update, with news that average UK selling prices were 2% ahead of last year and that it had fewer holidays left to sell in the discounted “lates” market.

Again the group’s future prospects will be of more importance than its half year results, with fears that holiday travel will be one of the first expenses to get the axe as consumers tighten their belts.