Thomas Cook Group plc - Annual Report & Accounts 2009 - Directors’ Report - Business Review

Thomas Cook Group plc, like all businesses, faces risks and uncertainties as we conduct our operations and execute our strategy. We place great importance on internal control and risk management, and the system and framework that the Board has put in place is described in the Corporate Governance Report.

The table below lists the principal risks and uncertainties that may affect the Group and also highlights the mitigating actions that are being taken. The content in the table, however, is not intended to be an exhaustive list of all the risks and uncertainties which may arise.

Open +Operational and strategic risks

Close –Operational and strategic risks

Risk	Impact	Mitigation
Downturn in the economies of our source markets leading to a reduction in demand for our products and service	Pressure on volumes and margins	Significant capacity reductions through our actions to maintain margins Flexible and asset-light business model: –Less than 10% of our hotel capacity is committed at the beginning of the summer season –Around 90% of our UK tour operator flying requirements are undertaken by our own fleet, allowing considerable further flexibility to cut capacity without affecting our own airline –Changes in capacity can be accommodated late into the booking season Utilising our buying power to manage accommodation costs across the Group. New central team headed by senior executive Tight cost discipline throughout the organisation with defined contingency plans to cut costs further if necessary. Cost synergies identified between our various airlines Efficiency improvements, such as a new automated yield management system
	Pressure on volumes and margins	Further information can be found in the Business Review section
Fall in demand for traditional package tours and competition from internet distributors and low-cost airlines	Reduction of revenue and pressure on margins	Strategy to establish Thomas Cook as a leading provider of independent travel and financial services Further acquisitions in the independent sector, eg. Airtrack, Med Hotels and Gold Medal Improvement of our online capabilities across the Group and targeting significant long-term growth in the European online travel agency market Shift to higher margin all inclusive resorts Continued focus on expanding into new emerging markets Proven resilience vs. low-cost airlines through much better access to beds in destination Focus on medium haul destinations not economically viable for low-cost airlines
	Reduction of revenue and pressure on margins	Further information can be found in the Business Review section
Customers’ exposure to the falling value of sterling	Reduction in bookings to traditional resorts in the Eurozone as prices appear expensive	Strategy to increase medium haul non-Eurozone destinations, while reducing our short haul and long haul programmes Flexible and asset-light business model Utilising our buying power to manage accommodation costs across the Group. New central team headed by senior executive Increase in higher margin, all inclusive holidays, which give cost certainty to customers
Customers’ exposure to the falling value of sterling		Further information can be found in the Business Review section
Environmental and social concerns	Damage to the Company’s brand and reputation	Focus on environmental and social concerns. Development and approval of a corporate responsibility strategy by the Health, Safety & Environmental Committee Full sustainability programme as detailed in the Sustainability Report
Environmental and social concerns	Damage to the Company’s brand and reputation	Further information can be found in the Sustainability section and in the full online Sustainability Report which can be found on www.thomascookgroup.com
A major incident caused by a significant lapse in health and safety procedures	Significant impact on reputation as a trusted brand would lead to reduction in bookings	Health and safety management embedded in each business with central co-ordinating function Group health and safety strategy in place, developed and approved by the Health, Safety & Environmental Committee
		Further information can be found in the Sustainability section and in the full online Sustainability Report which can be found on www.thomascookgroup.com
Loss of, or difficulty in replacing, senior talent	Inability to drive strategic initiatives, discontinuity in management and leadership	Regular succession and talent reviews within each business segment Identification of key roles in line with business continuity plans Succession planning established for senior roles – periodic review by the Board Competitive package and career development opportunities
Loss of, or difficulty in replacing, senior talent		Further information can be found in the Our people.
IT services	Reduction of revenue due to failure to meet business requirements	Executive engagement for all new developments and change programmes Senior level monitoring of performance with status reports to the Group Executive Board and Audit Committee Performance monitored against service level agreements
Business continuity	Business disruption and loss of profits	Significant progress made to strengthen the business continuity plans across the Group – progress is monitored by the Audit Committee
Performance failure by outsourced partners	Business disruption and loss of profits	Business continuity and service level agreements in place

Open +Financial risks

Close –Financial risks

Risk	Impact	Mitigation
Volatility of fuel prices	Costs incurred may not be recovered from customers Brochure prices do not reflect actual cost of travel	Actively managed Board-approved hedging policy
Volatility of fuel prices		Further information can be found in the Business Review section and in Note 24 to the Financial Statements.
Foreign currency and interest rate risks	Costs incurred may not be recovered from customers Brochure prices do not reflect actual cost of holiday Interest cost uncertainties	Actively managed Board-approved hedging and treasury policies
Foreign currency and interest rate risks		Further information can be found in the Business Review section and in Note 24 to the Financial Statements.
Liquidity and counterparty credit risks	Group is unable to meet its financial commitments as they fall due Loss of cash	Actively managed Board-approved treasury policy €1.8bn credit facility put in place in May 2008. Plans in place to refinance during the current financial year. Considering mixed portfolio of longer term debt instruments to further strengthen the Group’s financial position. Focus on cash management throughout the organisation and regular review of counterparties
Liquidity and counterparty credit risks		Further information can be found in the Business Review section and in Note 24 to the Financial Statements.
Tax risk	Inability to utilise losses resulting in higher taxation charges	Compliance with Board-approved tax policy Regular monitoring of forecasts and high risk areas
Tax risk		Further information can be found in Note 26 in the Financial Statements.
Requirement to increase defined benefit pension scheme contributions, which may be imposed by the trustees or the Pensions Regulator	This may restrict investments in the businesses	Broadly diversified pension fund with limited exposure to single asset classes Pension scheme assets and liabilities are closely monitored Agreed timescales for funding any deficit

Open +Other risks that are continually monitored by management

Close –Other risks that are continually monitored by management

Risk	Impact	Mitigation
Breakdown in internal controls	Inability to operate, loss of profit	System of internal control in place, which is continually monitored
Breakdown in internal controls	Inability to operate, loss of profit	Further information can be found in the Corporate governance report.
Political, military, terrorist, security, natural catastrophe and health risks in source markets and key tourist destinations	Reduction of revenue and loss of profit	Ongoing monitoring by management Flexible and asset-light business model provides ability to switch to other markets and change capacity at short notice
Legal and regulatory risks, especially in respect of airline operating licences, insurance and financial services sectors, and legislative impacts Failure to comply with new regulations in relation to night flying and environmental emissions Money laundering legislation in relation to financial services	Inability to obtain operating and/or route licences leading, ultimately, to cessation of operation	Active legal and regulatory management programme in place Ongoing programme to review airline operations and safety processes

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