Thomas Cook Group plc - Annual Report & Accounts 2008 - Directors’ Report

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Thomas Cook Group, 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.

Risk	Impact	Mitigation
Operational and strategic risks
Downturn in the economies of our source markets leading to a reduction in demand for our products and services	Pressure on volume and margin	Significant capacity reductions through our actions to maintain margins Flexibility of business model: – Less than 10% of our hotel capacity is committed – Around 89% 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 Asset-light business model Utilising our buying power to manage accommodation costs across the Group Programme implemented in 2008 to reduce our cost base with defined contingency plans to cut costs further if necessary Further information can be found within the Business Review, beginning with the Chief Executive Officer's Statement.
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 Acquisitions in the independent sector, e.g. Hotels4U.com and Elegant Resorts in the UK and TriWest Travel in Canada Split of UK sector into Mainstream and Independent Businesses with dedicated Chief Executive Officers to focus on each specific market and maximise the opportunities in each Shift to higher margin all-inclusive resorts Launch of our own hotel brand – SENTIDO Focus on expanding into new emerging markets Step change achievements in our e-commerce performance 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 Further information can be found within the Business Review, beginning with the Chief Executive Officer’s Statement.
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, whilst 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 Increase in higher margin, all inclusive holidays, which give cost certainty to customers Further information can be found within the Business Review, beginning with the Chief Executive Officer’s Statement.
Corporate social responsibility, including environmental issues	Damage to the Company’s brand and reputation	CSR programme as detailed in the Corporate Social Responsibility report Further information can be found within Corporate Social Responsibility and in the full online Corporate Social Responsibility Report.
A major incident caused by a significant lapse in health & 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 Further information can be found within Corporate Social Responsibility and in the full online Corporate Social Responsibility Report.
Loss of, or difficulty in replacing, senior talent	Inability to drive strategic initiatives, discontinuity in management and leadership	Embedded new talent management processes to identify high potentials within the businesses Embedded succession management processes to identify gaps and to deploy our talent optimally Hired new talent from outside sector to fortify talent pipelines and provide senior succession for the future Created a High Potential Development Programme to develop our most talented people for the future
Business continuity	Business disruption and loss of profits	Existing business continuity plans being strengthened across the Group
Performance failure by outsourced partners	Business disruption and loss of profits	Business continuity and service level agreements in place
Risk	Impact	Mitigation
Financial risks
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 Further information can be found within the Chief Executive Officer’s Statement and the Finance Review and in Note 24 and Note 25 to the Financial Statements.
Foreign currency risks	Costs incurred may not be recovered from customers Brochure prices do not reflect actual cost of holiday	Actively managed Board-approved hedging policy Further information can be found within the Chief Executive Officer's Statement and the Finance Review and in Note 24 and Note 25 to the Financial Statements.
Interest rate risks	Interest cost uncertainties	Actively managed Board-approved treasury policy Further information can be found within the Chief Executive Officer's Statement and the Finance Review and in Note 24 and Note 25 to the Financial Statements.
Liquidity risk	Group is unable to meet its financial commitments as they fall due	Actively managed Board-approved treasury policy New £1.4bn. credit facility put in place in May 2008 Further information can be found within the Chief Executive Officer's Statement and the Finance Review.
Counterparty credit risk	Loss of cash	Daily assessment and management of cash balances Further information can be found within the Chief Executive Officer's Statement and the Finance Review.
Tax risk	Inability to utilise losses due to legislative or other changes	Compliance with Board-approved tax policy Further information can be found in Note 27 to 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 Special contribution scheme started three years ago has reduced deficit significantly
Risk	Impact	Mitigation
Other risks that are continually monitored by management
Breakdown in internal controls	Inability to operate, loss of profit	System of internal control in place, which is continually monitored Further information can be found in the Corporate governance report.
Political, military, terrorist, security, natural catastrophe and health risks in key tourist destinations	Reduction of revenue and loss of profit	Ongoing monitoring by management Asset-light and flexible business model
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

Operational and strategic risks

Financial risks

Other risks that are continually monitored by management