TCG - update

All

In relation to our short on Thomas Cook, we have re-examined recent releases from competitors and market participants to view the outlook for Thomas Cook.  Thomas Cook are not due to report until mid May. 

Promotional activity is visible from TUI and the Jet2Holidays (Dart Group) -  http://www.travelweekly.co.uk/articles/327112/jet2holidays-bolsters-marketing-amid-brexit-delays &  http://www.travelweekly.co.uk/articles/329280/tui-slashes-prices-in-break-from-brexit  

These promotions confirm the pricing pressure that Thomas Cook is under in the UK market. Please see attached for discussion by leaders from the industry.  http://www.travelweekly.co.uk/articles/328940/special-report-brexit-fatigue-is-having-biggest-impact-on-the-mass-market 

The airline industry have been preoccupied with the Boeing Max issue, Brexit and licensing issues. Boeing issue yet to be resolved but the Brexit flextension has kicked the can down the road - notably past the summer holidays. However, despite this we are seeing some negative comments from the airlines. 

EasyJet released statement on 1st April stating """For the second half we are seeing softness in both the UK and Europe, which we believe comes from macroeconomic uncertainty and many unanswered questions surrounding Brexit which are together driving weaker customer demand. We are rolling out further initiatives to support our trading and are making significant progress in our Operational Resilience Programme, which is designed to make the easyJet flying experience better for our customers over the summer.”

"Whilst easyJet will deliver H1 results in line with expectations, macroeconomic uncertainty and many unanswered questions surrounding Brexit are together driving weaker customer demand in the market, such that we are seeing increasing softness in ticket yields in the UK and across Europe. Given this uncertainty our outlook for H2 is now more cautious.”

Nothing new from Ryanair but they had warned about Brexit impact earlier in the year.  

All of the above confirms our negativity towards Thomas Cook. But as a word of caution: This news flow is very UK focused. As regards TCG’s segments:

Tour Operator: This business generated “only” 25% of revenues in the UK. This is certainly significant, but the segment clearly benefits from good geographic diversification relative to above news flow. With only 13% gross margin, however, 25% exposure to a weak market should have a pronounced effect on EBITDA.

Airline: This business generated 40% off revenues in the UK. The Airline segment was going to benefit from a number of positive developments this year, namely: 1) fewer strikes, 2) capacity removed from industry (AirBerlin, Monarch, Germania), capacity reduction at TCG. But the first two will also benefit Ryanair and Easyjet and are thus already included in the above outlook. In total therefore the Airline segment remains strongly exposed to the Brexit drama and the high operating leverage (if lower than at the tour operator) should ensure that lost revenue impacts EBITDA significantly. 

While the current news flow around the flextension of Brexit is unquestionably positive, and while the holiday advertising campaigns across the industry are in full swing now, we think that any catch-up effect will not suffice to the damage that has already been done.

We are therefore happy to remain short.  

Tomas is on the ball.