February 11, 2019

Thomas Cook eyes options for airline unit

UK-based global travel company Thomas Cook Group has launched an early stage strategic review of its airline unit and has reduced committed airline capacity for 2019.

Thomas Cook’s profitable airline business encompasses German Condor as well as units in the UK, Spain and the Scandinavian region.

Condor has come under strong pressure, particularly as a result of increasing long-haul competition from Lufthansa subsidiary Eurowings.

Thomas Cook’s airline division generated £3.5 billion ($4.5 billion) in revenue in the last financial year and an underlying operating profit of £129 million.

The increased profitably of the airlines, up 37% year-on-year, contrasted sharply with that of the group, which reported a decline in operating profit.

Thomas Cook’s airline unit has been growing at a decent clip and only 45% of seats now go to the company’s package holiday customers.

… company reeling under debt burden

Thomas Cook, shouldering £1.59 billion ($2.1 billion) of net debt, saw shares hammered at the end of last year following a third profit warning of 2018 and stinging full-year losses.

The company has been stung by charges related to flight disruptions, writedowns on money owed by hotels and transformation costs.

Thomas Cook was also impacted by a delayed demand for tour holidays due to the summer heatwave.

The company is required to repay a £50 million bond in 2022, part of an inefficient debt restructure characterised by a mix of expensive bonds.

Thomas Cook previously faced speculation that Guo Guangchang, who owns a 15% stake in the company and is chairman of Shanghai-based conglomerate Fosun International, could launch a bid for a bigger piece of the business.

In an initial foray into the business in March 2015, Fosun paid £91.9 million for a 5% stake in Thomas Cook.

Fosun’s acquisition of shares was made through subsidiary Fidelidade Companhia de Seguros, the largest insurance company in Portugal.

Credit Suisse acted as financial advisor to Thomas Cook for this transaction.

Also in 2015, Fosun, together with investment partners, acquired France-based holiday company Club Med; Thomas Cook is the largest distributor of Club Med products.

… sale could free up cash to invest in hotels

A sale of the airline unit, in whole or in part, would enable the company to invest more in its own hotels, improve its digital sales offering and drive further cost savings.

The company announced in a three-month trading update on 7 February that “all options” are being considered, which may include putting the airline unit up for sale.

For the three months to 31 December 2018, Thomas Cook reported a widened underlying operating loss of £60 million compared with a £46 million loss in the year-earlier quarter.

… deal would include valuable airport slots

If Thomas Cook puts the airline unit on the block, EasyJet, Ryanair and Lufthansa are potential buyers, particularly for valuable airport slots, including Frankfurt, Munich, Manchester and London Gatwick.

The Germany-based Tui Group, the largest travel and tourism company in the world, may also be interested.

Tui’s broad portfolio, gathered under a group umbrella, consists of 1,600 travel agencies and online portals, six airlines with around 150 aircraft, over 380 hotels and 16 cruiseships.

Thomas Cook holds 400 slots at Frankfurt and 162 at Munich.

Those are Lufthansa-dominated airports where rivals, such as EasyJet and Ryanair, also have looked to expand.

German media reports indicate that Lufthansa has already held informal talks over a possible purchase.

Competition concerns, however, could crimp Lufthansa’s ability to go after parts of Thomas Cook.

The European Commission had been concerned during the 2017 Air Berlin bankruptcy that Lufthansa, which bought up more than half of its rival, would become too powerful.

Routes from the Air Berlin Group also landed with competitor EasyJet and Ryanair.

The market share of German airlines (Lufthansa Group, SunExpress Deutschland, TUIfly, Condor, Germania) at German airports fell from 61% to 57% in 2018 due to the bankruptcy of Air Berlin.

Thomas Cook also controls more than 200 slots at London Gatwick, where other carriers, such as British Airways and Iberia parent International Consolidated Airlines Group (IAG) and Norwegian have expansion plans.

… Brexit uncertainty is not helping matters

The big unknown is the impact of Brexit.

While both Tui and Thomas Cook have admitted to a hit on margins in the UK from the weakness of sterling, it is more difficult to determine whether Brexit uncertainty is hitting forward bookings.

Uncertainty is causing some to delay the decision of when and where to book holidays.