All,

Following the announcement we have put together a small table below - deconsolidating the Airline business from Thomas Cook and gauging bond recoveries in return. Valuations are in line with the equity market at present and do not yet reflect any conviction on our behalf whether or not 3x EBITDAR is a realistic price for the Airline or whether 4x EBITDA is the right way to value the remaining tour business (excluding any remaining stake in the airline).

But it does lend itself nicely to some playing around. The main inputs are: EBITDAR multiple for the Airline, EBITDA multiple for the Operator and the %age of Airline sold.

A 1-Pager is attached. Thomas has more material.

Notes:

- We don’t think the current environment is conducive to selling the airline business. Tui last night corrected its own growth outlook, citing ongoing margin pressures. Moreover, the buyer/new shareholder structure would have to be over 50% European (consider Thomas Cook looking to retain a degree of control as it’s vital for the tour business). We think that narrows down the range of purchasers considerably - perhaps even to financial investors, not strategic ones.

Conclusion

We remain negative on the name, but are still struggling to have a particular target value in mind. These are the areas we are concerned about:

- The value of the Airline business and how much cash can be raised in this environment

- Liquidity - and covenants - in case TCG cannot sell the Airline before peak demand

- The reduced footprint of the tour business as well as the cost of the further reduction

- The outlook on the business at the end of the year looking back on a summer that is not looking promising from today’s perspective.

The sliver lining: At least some of the concerns that TCG are operating far worse than Tui have been dispelled. Tui shares are down 17% this morning.

The not so silver lining: Tui are better capitalised and are not reducing capacity like TCG, thus taking market share.

Thomas Cook this morning. Main headline is the strategic review of the airline business but firstly the underlying business.

First quarter revenue up 1% lfl, with growth in Turkey and Greece offsetting lower Spanish demand.
However, Gross profit was down due to highly competitive market conditions.
This has led to losses increasing by £14m to -£60m on lfl basis. Add in additional loss of £4m from currency movements, giving down £64m on an underlying basis
(To Thomas Cook’s credit, Separately Disclosed Items (SDIs) or Exceptionals were lower than last year). With reported losses only increased by £7m.

Winter 2018/19 Outlook

Group Tour Operator bookings down 2% with pricing 3% lower.
Group Airlines - bookings up 8%, but just in line with capacity increases (not lfl) Pricng down 3% - Company explaining this away with shift in mix from long haul to short/medium haul.
Overall, total bookings up 8%, but average selling prices down 10%

Summer 2019

30% sold, slightly ahead of last year, But this is due to lower capacity, - i.e. tour operator bookings are down 12%.
This has supported prices, up in all key segments, 4% higher overall
Group Airlines - again capacity taken out of the market - so bookings below last year but average prices are up 6%.

Strategic Review - Airline

Interesting move by the Company - remember, they bought Air Berlin slots so this is a marked move in strategy.
Operate 103 aircraft, 25% focused on long-haul
20 million passengers with underlying EBIT of £129m in FY18. I am bullish on the airline segment and can see this EBIT increasing year on year.

Questions outstanding

Company cut short the conference call - so still have outstanding questions
Proceeds from any asset sales would need to be used for debt reduction - both bonds have "Limitation on sales of assets and subsidiary stock”. clauses. Need to be examined, but why sell the business if proceeds are going to be used for debt reduction. The aim of the strategic review is to give "greater financial flexibility and to accelerate the execution of strategy of differentiation”. i.e. increase CAPEX on own brand hotel portfolio and IT spend.
Any sale, including partial sale, is potentially an option - but Thomas Cook wish to retain commercial relationship in all scenarios.