Outlook: Air rage as tour operators go to war

BRITAIN'S SUN and sea package holiday industry has been through some pitched battles in its time, but this one is shaping up to be a very bloody affair indeed. There was First Choice Holidays, trying desperately to squeeze through a cosy agreed merger with Kuoni, and now all hell has broken loose. In an attempt to wrest the market leadership from Thomson, Airtours has piled in. Thomson, for whom size is clearly very important, might bid itself. Already it has launched a spoiling campaign, with an increase in holiday capacity, a new budget brand and a series of low-priced offers.

That Airtours has muscled in on the First Choice-Kuoni tie-up is not surprising. The cost-cutting potential is much bigger and so are the benefits of enhanced market power. But its assertion that it is likely to receive fast-track clearance from Brussels is surely misguided. The combined group would have 34 per cent of the UK travel market, as well as sizeable shares in Scandinavia.

Airtours has been here before, of course. Back in 1993, when it bid for what was then called Owners Abroad, the Office of Fair Trading advised that the deal be referred to the MMC. However, the then Competition Minister, Neil Hamilton, disagreed. The Government, in the shape of DTI president Michael Heseltine, eventually decided not to refer but the whole episode left a bad smell. Mr Hamilton knew David Crossland, the Airtours chairman, and he was also one of Mr Hamilton's constituents.

This time around the deal will be studied in Brussels and with Karel van Miert in his present belligerent state of mind, the deal looks to be on shaky ground. First Choice says the Airtours bid would raise serious competition issues, but can hardly be seen to be lobbying for a referral as this would be against its own shareholders' interests. The Airtours offer is clearly superior to the Kuoni merger. First Choice shareholders can hardly believe their luck. It would ill become their directors to say sorry, but we prefer the lower bid.

What may be a good deal for shareholders is hardly likely to benefit consumers. Airtours admitted yesterday that its deal would not lead to lower prices. Holidaymakers will enjoy wider choice instead, they argued.

The travel industry was given a clean bill of health by the MMC as recently as 1997 but much has changed since then. The market has consolidated and this deal could lead to an effective duopoly controlled by Airtours and Thomson, with Thomas Cook a distant third. Hold on for a bumpy ride.