Thomas Cook Airlines on sale, what went wrong with the world's oldest tour operator?

• Profit warnings due to disruption in the travel market
• Market capitalisation wiped out as shares fell more than 80% in a year
• Closure of Club 18-30
• Airline business sale announced

Thomas Cook, the world’s oldest tour operator and a 177-year-old company is currently facing difficult times. Founded in 1841, Thomas Cook is a leading global travel group having tour operator, airline and hotel businesses with an annual sale of GBP 9.5 Bn, 22 Mn customers and 21,000 employees operating in 16 countries. A series of turbulences buffeted the British tour operator after the second half of 2018. Moreover, since September 2018, following an announcement of the first profit warning by the company, its shares have tumbled by more than 70%. Currently, the company is saddled with more than GBP 1.58 Bn in debt, which is nearly four times its market capitalisation.

What went wrong?

There is a number of factors which cast grey clouds over Thomas Cook from financials to market disruptions by online bookings to even meteorological reasons.

The global travel market is facing disruption by budget airlines and online bookings. Traditional tour operators like Thomas Cook, which owns costly brick-and-mortar stores are facing the heat of competition with online travel booking companies due to ease and transparency. While customers want to see what rooms or facilities they are being offered at the time of bookings, they also prefer the option to bespoke their holidays and modify their plans while booking for travel. This results in a preference for online bookings nowadays. Similarly, budget airlines are more economical to fly for travellers, who want to spend more on the travel experience rather than the travel mode.

Secondly, while WTTC (The World Travel & Tourism Council) forecasts a slowdown of growth in the Eurozone, the IMF (The International Monetary Fund), owing to continued uncertainty on Brexit, forecasts an economic slowdown in the UK. The weak pound has also spoilt the enthusiasm of European peripatetic. The torrid summers in European countries last year further strained the situation. According to the company’s report, the travel demand from its European source markets tailed off in the fourth quarter as hot weather-induced customers to delay their bookings and enjoy summers at home. This resulted in an oversupply, and more competitive pricing market than usual with heavy discounts to lure customers, bookings in ‘lates’ (meaning: in the season when holidays are cheaper) and ultimately lower margins to the company.

Profit warnings and debt burden

While market disruption and cyclical problems caused malaise in the travel industry, Thomas cook is not alone, which has issued profit warnings. TUI, the world’s biggest tourism group, which hold two-thirds of the European package holiday market along with Thomas Cook also issued a profit warning in late March 2019. But TUI also has cruise and hotel businesses, which generate a third of its profit, and by an early adoption to the ongoing structural changes in the market, its profit and margins barely budged, while Thomas Cook reported GBP 163 Mn loss in 2018 FY.

Additionally, its total debt burden mounted to GBP 1.58 Bn by the end of the first quarter of FY 2019 against a market capitalisation of nearly GBP 350 Mn only.  A scenario of negative free cash flow in FY 2018, with the EBITA to interest cover reaching a 1.02x level and ongoing challenging market, it is envisioned that more difficult years lie ahead for the British tour operator. Thomas Cook has now cut its profit guidance and has suspended its dividend. Furthermore, Moody’s has downgraded Thomas Cook’s rating to B3 from B2 (2019) amid its weakened liquidity profile. The price of Thomas Cook bonds also tumbled as the cost of insuring its debt against default on payments hit a record high indicating concern about the firm’s ability to pay it back.

Thomas Cook's strategic plans

Thomas Cook has announced its plan for 2019 to improve its margin and free cash flow amid ongoing financial crunch in the company. It is revamping its business since the first profit warning in 2018 to focus on high margin business of its own brand hotels and its main business of package holidays. A series of actions were taken by Thomas Cook:

• October 2018, it retired its Club 18-30 after failing to find a buyer.
• February 2019, airline business was put up for sale.
• March 2019, it announced a review of its money division and closed 21 high street stores in the UK.
• In early May 2019, it is in advance talks on securing up to GBP 400 Mn new borrowing (Source: Sky News) to avoid any cash crunch and provide a cash cushion during winter (2018/19) season for which bookings are already down by 2%.

Airline on sale

In order to repay its debt and get financial flexibility, the company announced the strategic review to the sale of its airline business in February 2019 so that it could focus and invest more on high margin brand hotels and further digitise its sales channels to improve online holiday offerings. Thomas Cook Airlines business consists of Condor; a German long-haul airline as well as British, Scandinavian and Spanish operations with a fleet of 103 aircraft. Thomas Cook Airlines business has some valuable lucrative European slots linking Britain to Spain, Greece and Turkey, which has drawn the attraction of bidders. Investor community was speculating on prospective bidders including Lufthansa, Indigo Partners, easyJet and others, then Thomas cook finally received an offer from Lufthansa for its German airline business, Condor on 7th May 2019. According to industry experts, it was unlikely that a single buyer could acquire all airlines of Thomas Cook due to antitrust regulation.

Thomas Cook woes have not ended yet

The sale of Condor Airline to Lufthansa could get support for repaying its debt and improve the liquidity, but there are still concerns about its more competitive and price sensitive short-haul business for which potential bidders are yet to be confirmed. In addition, there is uncertainty on valuation and timing. Further, Thomas Cook’s airline business support its holiday business with 9.1 Mn internal customer, which is almost 40 percent of customers that travels using all of Thomas Cook offering including holiday packages, hotels and flights. Hence, if entire profitable airline business is sold, Thomas Cook would not be able to bundle up tours and flights, putting an expectation on commitment from buyers of airline business to maintain seat availability for holiday package customers.

The uncertainty does not stop here. According to the Sky News, the company has also been approached by others, which are interested in Thomas Cook holiday tour operations and even the entire company. As per a report, the Chinese giant Fosun International, which is the largest shareholder in Thomas Cook with a 17% stake and is interested in its tour business. While the company has now hired a consulting firm for the restructuring plan to work on its balance sheet, reduction of costs to tackle its piling debt and to maintain liquidity headroom for the coming winter season, a group of lenders are also taking advice from another consulting firm on their financial exposure to the company. 

The entire seasonal holiday and travel sector is facing high competition amid disruption from an online and stark price war. Especially, the European market has been affected badly. While holiday airline Germania ceased operation this year, easyJet also issued a slower sale outlook apart from profit warning from the TUI. Thomas Cook could prove to be an attractive buyout with slashed valuation after shares fell to its lowest levels in the last five years, but prospects do not appear to be bright.