The holiday business is in trouble. Firms are merging like Brits in Benidorm

EUROPE'S travel industry has had four terrible years: a recession, an Icelandic volcano, unrest in the Middle East, costly oil, a weak dollar and a widespread sense of malaise. People want to get away from it all, but worry that they can't afford to.

Airlines, hotels and cruise ships have all suffered, but the worst-hit are the tour operators. To survive, they have merged and cut costs. In 2007 Thomas Cook, a German-owned travel firm, took over MyTravel, a British rival, to create Europe's second-biggest package-tour firm. A couple of months later Hanover-based TUI, Europe's biggest travel company, merged its travel business with First Choice, another British package-holiday company, to create TUI Travel, a company based in London and listed on the London Stock Exchange. Both package-holiday giants cut capacity by as much as 25% in the following years.

Yet mergers and downsizing have provided only temporary relief. On August 3rd Holidays 4 UK, a tour operator specialising in trips to Turkey, went bankrupt, leaving 12,800 holidaymakers stranded. On the same day, Manny Fontenla-Novoa, the boss of Thomas Cook, was forced out of his job after three profit warnings in 12 months. His replacement will have a big job on his hands. In the nine months to June, Thomas Cook lost $326.1m before tax.

TUI Travel is perking up a bit. Its pre-tax losses fell to ￡355m ($424m) in the nine months to June, from ￡563m for the same period last year. On August 10th it reported a 57% increase in its "underlying operating profits", a figure that excludes planeloads of supposedly one-off costs.

TUI Travel has several advantages. It is less centralised than Thomas Cook, more flexible and better managed. It sells fewer holidays in the turbulent Middle East. And its margins are buoyed by its focus on fancy holidays rather than bargain booze-ups on beery beaches.

Even so, a spokeswoman for TUI Travel admits that the high oil price is a worry. TUI Travel owns 143 aircraft. The company was fully hedged for oil-price volatility this year but next year it is expecting a 30% increase in its fuel bill. Its French business is suffering because of political unrest in France's former African colonies, which are a favourite destination for French holidaymakers. TUI Travel is now planning to merge its French operations to create one brand in the hope that this will turn around its weakest unit.

The traditional tour operators' business model is out of date, says Jamie Rollo of Morgan Stanley, a bank. Their fixed costs are high. They book flights and rooms months in advance, and still have to pay for them even if a volcano or terrorist forces travellers to cancel. And although they now do a lot of business online, they struggle to compete with cheaper online-only firms such as Expedia, Travelocity and Orbitz.

Further consolidation is likely. Germany's package-tour market is still fragmented and lucrative, so REWE Touristik and others might soon be snapped up. TUI Travel and Thomas Cook might even merge, creating a giant and saving plenty of money. Alternatively, one of these two big boys might marry a low-cost airline, linking cheap flights with cheap beds.

In the short run Thomas Cook's new boss will have to improve the company's dire finances. The firm is planning to sell assets worth ￡200m over the next six to 18 months, including some or all of its seven hotels. Its chief financial officer says that an equity issue is not on the cards, at least for now. He may have to change his mind. Holidays are supposed to be relaxing, but for the firms that provide them, they are anything but.