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TUI’s share price is down 65% year-to-date. Can this FTSE 250 faller bounce back?

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Travel operator and airline TUI (LSE:TUI) was kicked out of the FTSE 100 in March and relegated to the FTSE 250. It also swung to a £1.3bn pre-tax loss in its third quarter. Group revenue is down 98% for this period, to the end of June. The impact of the volatile market environment created by the coronavirus pandemic is taking its toll on the travel industry, and TUI is no exception. It is fair to say the company has been having a rough time of it. And to top it off, the TUI share price has fallen 65% year-to-date.

Hope springs eternal

Consumers desperate to escape to the sun are pinning their hopes on a Covid-19 recovery and have begun booking holidays for 2021. TUI has confirmed its holiday bookings for next summer have risen 145%. It began to resume flights in mid-May and business is gradually picking up.

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TUI has reached an agreement with the German Federal Government for a €1.2bn stabilisation package to see it through to the end of 2021. This includes both a loan and convertible bond agreement. It is the second such package after it received a €1.8bn state-backed loan in April.

However, this may not be enough, and it is considering issuing shares or selling off parts of the business to reduce its debt burden. It has also been cancelling holidays amid further quarantine restrictions and travel bans. Destinations such as Spain, Canary Islands, Morocco and Cyprus are being cancelled, leaving many unhappy holidaymakers out of pocket.

The impact on the TUI share price

In May, the company announced it would need to cut 8,000 jobs and save €300m a year to see it through the crisis. All this bad news is making travel a risky sector to invest in and is also reducing consumer sentiment around the brand. This £2bn company has a price-to-earnings ratio of 5, and earnings per share are 63p. A share placing may be necessary but is unlikely to be welcomed by existing shareholders. 

TUI has big plans to become a digital platform business, and the current environment is giving it a welcome boost in achieving this. By streamlining its operations, restructuring and adapting to a new world, it could emerge with a much more profitable business model. This all depends on how quickly the pandemic subsides and business as usual returns.

Also worth noting that that the firm is expecting a compensation payout from Boeing over the grounding of its 737 Max planes. The specifics of the deal remain confidential, but it will receive the compensation during the next two years. There will be credits against future orders and TUI has deferred delivery of 61 aircraft until required.

As the world’s largest tour operator, I will be very surprised if it goes bust. But progress is likely to be slow and interruptions to be expected. The TUI share price is likely to remain subdued for some time. As the virus rages on and stock market volatility persists, I think there are less risky investments you could make, such as the rising BAE share price. However, for those of you with a higher risk tolerance, TUI may prove a long-term winner.

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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