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The TUI share price just fell, and On The Beach is down 10% too. Which would I buy?

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Couple relaxing on a beach in front of a sunset
Image source: Getty Images.

I’ve been a fan of holiday firm On The Beach (LSE: OTB) for some time. It does just what it says, selling beach holidays, and I do like that simple and effective approach. TUI (LSE: TUI), meanwhile, hasn’t really attracted me. As I write, On The Beach is down 10% on the day, and the TUI share price is down 7% since results released on Wednesday.

On The Beach has stopped selling all summer holidays for this year. It’s down to Covid-19 uncertainty, as we might expect. But it comes in contrast to the opening up of the travel business, and the approach taken by others like TUI.

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The TUI share price fall comes on the back of first-half results. The figures show an 89% drop in revenue. Underlying EBIT came in highly negative too, with a loss of €1.3bn. We’re also looking at a net debt position of €6,813m, though that has improved in the three months since December.

Red, amber, green

The government has introduced a traffic light rating for the safety of holiday destinations. But most are rated amber, meaning 10 days of quarantine after returning, and Covid tests before departure and on return. A lot of people just won’t want that inconvenience.

And there’s a danger that amber destinations will turn red, resulting in expensive, forced hotel isolation. I think On The Beach is taking a sensible and responsible position, even if it results in a short-term hit for the share price.

TUI, meanwhile, is going to offer holidays to amber-rated destinations, even though the government advises against all leisure travel. I see that as a riskier approach. Still, selling amber destination holidays might support the TUI share price, at least in the short term, and we have seen a smaller drop than for OTB.

TUI share price collapse

So far in 2021, OTB has gained 2.5%, even after the Thursday drop, while TUI has lost 8.7%. And since mid-February 2020, immediately before the crash commenced, the TUI share price is down 53%. Meanwhile, On The Beach shares are down a relatively modest 10.5%.

A lot of that is surely down the OTB’s leaner business model. TUI has significantly greater investment in infrastructure, including its aircraft fleet and hotels. And a lengthy business downturn is going to hit companies like that harder. On The Beach, meanwhile, just puts together the flights and the accommodation to offer customers a simple beach package with no fuss.

Different businesses, different risks

That does expose what I see as a potential weakness for On The Beach though. I’m not sure I’m seeing much in the way of barriers to entry. Putting together a package that combines the various elements into one specific type of holiday would take a lot less investment than trying to set up a TUI style operation. But the TUI share price performance highlights the longer-term risks of a capital-intensive business model.

Comparing the risks and what I see as future potential, I’m putting On The Beach on my possible buy list. But not TUI.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended On The Beach. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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