Shares in FTSE 100 travel firm Tui have spiked after its biggest rival, Thomas Cook, collapsed on Monday, but it is also involved in the rescue effort to bring back stranded travellers. Investors often assume that less competition in a very crowded marketplace is a good thing, but the industry is more interconnected than many think – and all operators are subject to the same pressures.
This is not just altruism on Tui’s part: it sold Thomas Cook flights and holidays through its Tui-branded shops, and is working with the Civil Aviation Authority to bring back affected customers. Thomas Cook also sold Tui holidays in its shops, which the latter company will honour.
“We keep our colleagues at Thomas Cook and its customers in our thoughts,” the company said on its Twitter account. In an announcement today, Tui said it is currently assessing the impact of Thomas Cook’s collapse on its own results. Tui’s financial year runs to the end of September so the full impact is not likely to be felt until the next financial year, 2019-2020. Tui reiterated the full-year profit forecasts made in March, that profits will be 26% lower year-on-year at €1.17 billion.
But Tui shares are up around 10% to 925p since the start of the week.
When a company in a sector as competitive an industry as travel goes under, shares in its rivals go often go up. Monarch Airlines went into administration in 2017 and shares in easyJet rose. Thomas Cook’s demise is not the first airline collapse this year – Flybmi went out of business in February 2019.
Airlines themselves are a precarious business, but when one goes under it is often then bought by its rivals: for example, Thomson Airways, which was a rival to Thomas Cook, was bought by Tui Airways when it went under in 2016. Thomas Cook had tried to find buyers for its airline arm as part of a rescue deal earlier this year.
Indeed, Tui’s “Markets and Airlines” division is one under the most pressure, largely due to events beyond its control: the grounding of the Boeing 737 Max planes has forced Tui to enter new rental agreements for replacement aeroplanes.
Debt Was Thomas Cook's Nemesis
Beyond Brexit, sterling weakness and online competition, Thomas Cook’s debt made it extremely vulnerable to outside pressures. Tui is better capitalised than Thomas Cook, and that is reflected in the higher credit rating for its bonds. At the half-year stage, Thomas Cook had £1.2 billion of debt, a £361 million increase on the first six months of 2018, while Tui’s was below £1 billion at the end of June 2019.
Peter Sleep, senior investment manager at Seven Investment Management, described Thomas Cook’s balance sheet as “massive liabilities balanced on a very slim sliver of equity”. At the time of the summer restructuring, Kames Capital’s Mark Benbow said Thomas Cook’s profit margins of 5% were unsustainably low compared with other players in the industry.
Even if Thomas Cook had survived until next year, he said, it still had to manage the £1.5 billion outflow in the first quarter for pre-booking flights and hotels for the 2020 holiday season. So, perhaps, for Thomas Cook it was a question of when, not if, its banks pulled the plug.
Analysts have reacted to Thomas Cook’s demise by predicting it will benefit Tui, but there is a note of caution too.
“All the evidence points to Tui being the biggest beneficiary, but it is always difficult to accurately predict how big the benefit may be and when it will show through in results, so investors should not jump to any major conclusions just yet,” says Ian Forrest, investment research analyst at The Share Centre.
Richard Hunter, head of markets at Interactive Investor, agrees: “Tui is a rather different animal from Thomas Cook, with its diversified business model and digital aspirations providing rather more of a defence than the one broken at its former rival.” He also points to its well-covered dividend of more than 7% as one compensation for investors taking a risk on the troubled travel sector.
Still, Tui maintained an upbeat tone in its update, telling investors of new hotel openings, new cruise ships and an improvement in bookings to recently troubled destinations in Turkey and North Africa.
Tui is held by a range of active and passive funds, many with a European focus and some concentrated on UK equity income. Among active funds, L&G, Janus Henderson, EdenTree own Tui – for example the L&G Growth Trust owns more than 4% of the travel company.
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