Vacation Giant & Airline Thomas Cook Verges on Collapse

Citi Group analysts slashed their price target to zero.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

The shares of 178-year-old British global travel company Thomas Cook are in free fall, tumbling 10% on Thursday and another 40% today, after it issued a zinger of a profit warning for the second half of its fiscal year — the third profit warning in less than a year — and announced a £1.46 billion loss before taxes for its fiscal first half, ended March 31. It also unveiled a 12% slump in tour operator bookings, and a 37% rise in net debt.

The company’s shares are now worth just 11 pence a piece, down 92% from 130 pence a year ago. At that time, Thomas Cook Group was worth £2.5 billion. Today, its worth a couple of hundred million.

Citi Group analysts said first thing this morning that the company has “zero equity value” and slashed their target price for the shares from 28 pence to zero pence. The analysts also cited a warning from Thomas Cook’s auditor, EY, regarding “material uncertainties” over the group’s sale of its airline, a sale on which a new £300 million loan facility depends.

Thomas Cook Group has been seeking a buyer for Thomas Cook Airlines for some time. Though many of its routes are desirable — to popular vacation destinations such as Palma de Mallorca, Pointe-à-Pitre, and Santorini — the airline is bogged down with aging, less fuel-efficient aircraft. Potential buyers are scarce, and all of them would attract close scrutiny from EU antitrust authorities.

Thomas Cook needs to offload the airline as quickly as possible to reduce its debt overhang and win itself a little added time. The sale could raise as much as £600 million as well as sharply reduce its pension commitments and put an end to the millions of pounds it spends each month on its planes. But finding a buyer quickly at a time when Europe’s airline business is already suffering from “short-haul overcapacity,” in the words of Ryanair CEO Michael O’Leary, is not going to be easy.

“Like the auditors, we see material uncertainties around the airline sale and the new debt facilities,” said the Citigroup analysts, adding, for good measure, that the tour operator’s poor performance could “unsettle consumers and drive further weakness in bookings”. It could also prompt hotel partners to tighten payment terms, putting further pressure on the company’s finances.

Thomas Cook blames its latest round of losses on a variety of factors, first and foremost a £1.1 billion write-down of the value of My Travel, the business it acquired in 2007. Thomas Cook has also struggled to contend with the meteoric ascent of travel-oriented websites as well as fierce competition from German tour-operator colossus TUI, which served 5.3 million British passengers in 2018, more than double Thomas Cook’s 2.4 million.

The firm also blamed some of its woes on higher fuel and hotel costs as well as unseasonably warm weather in the UK. And, of course, the catch-all scapegoat, Brexit, uncertainty over which is apparently keeping Britons from booking summer holidays.

There has been “an uncertain consumer environment across all our markets” during the first five months of this year, said Peter Fankhauser. “The prolonged heatwave last summer and high prices in the Canaries reduced customer demand for winter sun, particularly in the Nordic region, while there is now little doubt that the Brexit process has led many UK customers to delay their holiday plans for this summer.”

If true, this could be bad news not just for UK tour operators like Thomas Cook but also for European airlines, many of which are already struggling with wafer-thin margins and tightening financial conditions, and popular tourist destinations. In Spain, for example, Brits accounted for 22% of the 80 million foreign tourists that visited the country in 2018. While the number was down some, British visitors still dwarfed the number of visitors from second-placed Germany (11.8 million) and third-placed France (10.8 million). As for Thomas Cook, it will have its work cut out staying alive long enough to keep serving its customers for the duration of this year’s holiday season. By Don Quijones.

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