Package holiday provider Thomas Cook Group (LSE: TCG) is currently battling for survival, and at this point, it’s difficult to tell whether or not the near-200-year-old group, will make it through the critical summer season.
Spiralling out of control
Thomas Cook has been in trouble for some time, but until this year, the group seemed to be dealing with its problems. However, during the past few months, the situation has started to spiral out of control. The travel business reported a pre-tax loss of £1.5bn the first half of its financial year, shaking consumer confidence and raising concerns over management’s plan to divest its airline business.
The company was planning to divest the airline ops and use the money to eliminate its entire £1.2bn debt mountain, accrued through a series of acquisitions. However, it is believed that bids are falling far short of this target, with analysts estimating a final sale value that could be as low as £650m or as high as £1.3bn.
The big problem the company now faces is what one set of analysts has called a “vicious circle” whereby customers stop booking with the group due to concerns about its financial health.
During the past few years, there have been several high-profile bankruptcies in the travel industry, leaving many customers stranded abroad, an experience no holidaymaker wants. To avoid falling into this trap, analysts believe customers will stop booking with Thomas Cook altogether, exacerbating the company’s decline.
The group’s problems date back to 2011 when the company closed the second of two major acquisitions that left it with around 1,300 high street stores selling package holidays. The problem is, consumers are increasingly finding it easier and cheaper to book holidays online, leaving Thomas Cook and its FTSE 100 peer, Tui Travel (LSE: TUI) struggling to catch up.
Brewing problems
Indeed, Tui is suffering from precisely the same issues. Only a few days before Thomas Cook reported its breathtaking loss, Tui reported an underlying loss before interest tax and amortisation of €301m for the first half of its financial year, from €170m in the same period a year earlier.
As well as changing consumer habits, Tui is also suffering from the grounding of the global Boeing 737 Max fleet. The company has 15 of these planes in its 150-strong fleet with a further eight more on order.
The one advantage the Anglo-German business has over its UK rival is its stronger balance sheet. The level of net debt varies throughout the year, but at the end of its financial year following the vital Summer season, Tui’s balance sheet is usually in a net cash position. That said, there has been some speculation that the company is hiding the majority of its obligations in joint ventures, which are not consolidated onto the balance sheet. This is something we should keep in mind when valuing the stock. I’m also worried about its cash generation.
For example, last year, the group produced a free cash flow from operations of around €200m but paid out €381m in dividends to shareholders. This clearly isn’t sustainable, and as a result, I’m sceptical that the company can maintain its current 7.8% dividend yield.
So overall, considering all of the headwinds buffeting the travel industry of right now, I think it might be worth giving Tui a wide berth for the time being.
