Late bookings may not be enough to let MyTravel keep its place in the sun

A damp summer and England's exit from the World Cup boosted sales of holidays

Nothing prompts a Brit to book a last-minute holiday more quickly than the prospect of yet more soggy summer days. So it came as little surprise yesterday that one of the dampest Junes in years, coupled with national disappointment at England's World Cup failure, had helped MyTravel to chip away at what in May was a mountain of 1 million unsold summer holidays.

Britain's biggest tour operator, better known under its previous incarnation as Airtours, prompted investors to reach for a pina colada after it revealed that trading had improved across all its divisions. This followed a profit warning in May at its interim results when MyTravel unsettled the market with the news that bargain-hungry holidaymakers were refusing to book until the last minute.

With schools breaking up for the holidays and the so-called "lates" market (holidays booked less than eight weeks before departure) in full swing, MyTravel said it had less than half of those 1 million unsold holidays remaining. Its bookings for this summer are just 5 per cent below last year's levels, despite the battering that the industry has taken since last year's terrorist attacks on the US. The capacity cuts made by all tour operators in the wake of 11 September have supported prices in the lates market and holidays are selling at prices 7 per cent ahead of last summer, MyTravel said.

The news, which came in an unscheduled trading update, accompanied an investor briefing that analysts conceded went some way towards repairing the battered image of Tim Byrne, MyTravel's chief executive. Mr Byrne, who stepped into the shoes of the company's founder David Crossland ahead of his retirement in November, has recently taken the rap in the City for one profit warning too many from the former champion of sun, sea and sand package holidays. Describing the mood at yesterday's briefing, one leisure analyst said Mr Byrne "came out all guns blazing" in an effort to drum the message across that MyTravel was not merely a rebranded Airtours of old.

Fresh from its unsold holidays disappointment, the group was thrust back under the spotlight last month when Europe's top court overturned a 1999 decision from the European Commission blocking a merger between Airtours and First Choice, a rival UK tour operator. Speculation that the one-time bed partners may seek a fresh alliance has since supported their share prices, in spite of the travel sector's volatility. Peter Long, the chief executive of First Choice, has done little to dampen that speculation – fully aware that in a fight to the death the City backs him over Mr Byrne.

Both men have said they believe the UK will wind up with three, rather than four big tour operators. And Mr Long has previously acknowledged First Choice's appetite for being at the "forefront" of any prospective mergers between the big four travel companies, as long as it is in shareholders' interests. Given that analysts believe the deal would still offer the same £35m cost savings that Airtours identified back in 1999, it is safe to assume that investors could be tempted.

But could British competition authorities be persuaded to allow a combined MyTravel/First Choice to dominate the holiday market? Yes, according to the verdict reached by European judges in deciding to rule against the Brussels authorities last month. The judgment by the Court of First Instance argued that the cut-throat nature of the travel market, where tour operators jostle with the might of low-cost airlines such as easyJet for the holidaymaker's pound, is sufficient to ensure that prices would remain competitive in the event of further consolidation.

Analysts pointed to Scandinavia, where MyTravel controls a 75 per cent duopoly with Germany's TUI, and Germany, which is dominated by Thomas Cook and TUI, as evidence that concentrated market shares do not translate into easy profits.

Germany is a particular bugbear for MyTravel, which waded into one of Europe's most competitive markets in 2000 with the purchase of FTi. Despite managing to stem losses at its German arm, analysts remain sceptical that the UK company will ever turn a profit in the country.

James Hollins, an analyst at WestLB Panmure, said that while a tie-up between MyTravel and First Choice was unlikely in the short-term, "given current share prices and market sentiment, it is a distinct possibility in the medium term". Other analysts agreed, pointing to First Choice as the likely aggressor.

Since First Choice first received an approach from Airtours, Mr Long's company has gone from strength to strength, carving out a niche as a specialist holiday operator much as its customers might carve their way down a piste on a the latest parabolic skis. In an attempt to close the gap with Airtours as was, First Choice has chased growth from higher margin activity holidays, such as sailing and skiing. It recently added an adventure holiday specialist to its portfolio, working on its logic that some of its package holidaymakers are actually adrenaline junkies on the sly. While MyTravel clung to its mass market crown, with earnings disappointment after earnings disappointment, First Choice earned City credibility and closed the gap with its larger peer. In 1999, Airtours had a market capitalisation of £2.5bn to First Choice's £800m. Today, the respective stock market valuations are £760m to £520m.

Forced onto the offensive, MyTravel has picked up the gauntlet by attempting to re-mould itself as a leisure services provider. Hence the name change, intended to convey the image of a one-stop holidays shop, more attuned to the multifarious demands of the 21st century holidaymaker. "We want to build a better relationship with our customers and believe we can talk to them more on an individual basis," Mr Byrne said.

This is reflected in the number of ways customers can purchase a holiday – on the internet, via the phone, and shortly through a new MyTravel interactive television channel – and the types of products on offer. Next month, MyTravel will launch a low-fares airline, run along the same lines as easyJet and Buzz. It has poached Ryanair's Tim Jeans to run the operation, which will limit itself to leisure destinations. While the City frets that Mr Byrne may have bitten off more than he can chew, analysts have applauded the group's move to adapt to changing times.

Although MyTravel's results for 2002 will still be hammered by the £59m loss it has previously warned that it will not be able to recoup from its first quarter, which ran from October to December, true to firm it remains optimistic for 2003. The company believes it can double profits to £160m but, warns WestLB's Mr Hollins: "The problem with the industry is that there seems to be something round every corner. It shouldn't release any more profit warnings but it is still exposed to anything going wrong like any more pick-up in terrorist activity in Spain."