Two tour operators go toe-to-toe.
The two big tour operators have had a difficult time, with last summer's volcanic ash cloud adding to the pain of recession and tightened consumer spending.
Both TUI Travel (LSE: TT) and smaller rival Thomas Cook (LSE: TCG) are heavily dependent on the European market and remain cautious of future prospects.
Globally the industry's prospects are healthier, with the World Travel and Tourism Council forecasting 4% annual growth for the next decade, with emerging markets driving much of the increase.
So which of the two companies is better positioned to capitalise on recovery in the European market, and growth elsewhere?
Valuation
The low quality of earnings is translated into modest P/Es and a generous dividend yield at two times cover:
| | Share
price | P/E | Dividend
yield | Dividend
cover |
|---|
| TUI Travel | 238.4p | 10.6 | 4.7% | 2.0 |
| Thomas Cook | 185.7p | 8.2 | 5.8% | 2.1 |
Thomas Cook's lower rating is largely attributable to two factors.
The market gave a better reception to TUI's results, which came in at the top of analysts' expectations whilst Thomas Cook's were at the lower end. And TUI's share price is buoyed by the possibility of a bid from its majority shareholder TUI AG.
Performance
In their results for the year to 30 September 2010, both companies highlighted their underlying performance before a raft of separately disclosed items.
So let us compare them as they would wish to be judged:
| | Operating
profit* | Operating
margin | PBT* | PBT
margin |
|---|
| TUI Travel | £447m | 3.3% | £337m | 2.5% |
| Thomas Cook | £391m | 4.4% | £277m | 3.1% |
*underlying results as reported, before the effect of volcanic ash
On these numbers, Thomas Cook has the better performance ratios, contrary to perceived wisdom. It fared worse in comparison with the previous year. Revenues dropped 4%, twice as much as TUI's, whilst profit before tax dropped 6% against a 4% rise for TUI.
Statutory profit before tax was a much lower £41.7m for Thomas Cook and a £36m loss for TUI.
Mix
The companies' operations include retail travel distribution, tour operations and charter airlines.
Both derive the bulk of their revenues from Europe. Thomas Cook is somewhat more dependent on the UK. It accounts for 35% of revenues compared with a quarter of TUI's, for which Germany is the marginally larger market.
Apart from recovery in the European markets, the upside potential for both companies lies in improving margins in their existing businesses, and developing new businesses.
TUI
TUI is seeking to move more customers onto higher margin differentiated holidays, which it aims to comprise 50% of the next summer season's sales.
It has a number of turnaround projects including merging its loss-making Canadian operation in return for a 49% stake in the number 2 player in the market.
To turn around its loss-making French airline, Corsair, the ageing fleet will be replaced and, in a country where shedding employees is notoriously difficult, agreement has been reached to reduce headcount by 330 over two years. But restructuring costs of £95m (£55m already incurred) and capex of £60m seems a high price for an anticipated annual benefit of £14m.
Thomas Cook
Thomas Cook expects to spend a mere £20m restructuring its UK operations to yield £40-£50m of annualised savings through the loss of 500 jobs, lower input costs and IT efficiencies.
On top of this, it has announced the next -- and possibly final -- stage of consolidation in the high street travel market with a proposed joint venture with Co-operative Travel and Midland's Co-operative, subject to competition clearance.
Thomas Cook will have 66.5% of the merged entity and a call option over the remainder. £30m of integration costs are anticipated to yield annualised synergies of £35m and a further £10m a year in Thomas Cook itself.
Emerging Markets
Thomas Cook has also stolen a march with its well-timed acquisition of Russian travel business Intourist. The $45m deal gives it 50.1% of an iconic name in the Russian travel market, plus an option over the remainder. Intourist is number one in inbound travel and number five in the fast-growing outbound market.
Three years in the making, the deal was announced a week before Russia was named as host for the 2018 World Cup, which came as a surprise to many and no surprise at all to some. The tourism ministry promptly said it would promote Intourist as the exclusive manager of the event.
TUI already has a presence in Russia, but with a long-standing business in India as well Thomas Cook looks to have the edge in emerging markets.
Conclusion
The market values TUI more highly. But bid potential apart, that seems to put more emphasis on past results than future prospects. To me, Thomas Cook looks to have the clearer path to higher margins and the better foothold in new markets, and is relatively cheap.
What do you think?
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