Travel industry: Thomas Cook

The travel market, particularly in Europe and the Northern African region has been under significant stress following the attacks seen in Tunisia, Paris, Istanbul and Brussels amongst others throughout the year.

One could expect the bout of terrorist attacks to have short term impacts on tourism but not too drastic measures in the medium to longer term. The travel industry has already been confronted, over the past 24 months or so by unrest from the Arab Spring, Ebola, and terrorist attacks in the latter months of 2015, without resulting in a major downturn in revenues. Operating in the highly cyclical tourism industry is Thomas Cook.

Thomas Cook is Europe’s second largest tour operator and travel agent, behind TUI AG, listed on the LSE. The group is geographically diversified with around 50% of FY15 revenues (excluding the airline business) coming from Continental Europe, 35% from the UK and 15% from Scandinavia.

The business model of the company remains for vertical integration, with the principal shift being the rapidly rising penetration of internet sales relative to the high street stores. The cyclicality of Thomas Cook allows for the majority of cash generation to be generated in the summer months, where the most parts of bookings are crystalised into sales.

Despite a drop in demand in the Turkish and Belgian segments of operations following most recent terror attacks, the company has nonetheless managed to sustain, even marginally improve its operating margin by 0.1%, up to 2.8% on a last twelve month (LTM) basis. Improvements came mainly from a shift in operational focus towards the sales of exclusive and higher quality holidays. Increases in booking demands in the West Mediterranean and the US also helped offset the fall in Turkish and Belgian holiday bookings.

With Thomas Cook successfully re-routing and engaging in cost efficiencies, given the geo-political risks to have impacted the group, capital expenditures remained stable. Furthermore, £650m of working capital movements as a result of higher receivables and lower payables were seen in the first half of the year.

The company’s Net Debt increased in early 2016 and stood at £825m as at the end of June, though the company remained committed to reducing its outstanding debt by £300m by financial year 2018. In fact the group counts repurchasing £100m of outstanding debt in the current year and was aided in doing so thanks to an additional 2 year banking agreement secured of £150m.

Thomas Cook was assigned a B1 rating by Moody’s in the first half of the year, one notch higher than S&P and Fitch, signalling the company is well continuing its recovery, following the Corfu tragedy of 2006. Furthermore, the company maintains its plans to resume dividends at the end of financial year 16 with expectations of a Target Payout Ratio of between 20-30% going forward.

Following concerns of Brexit, the Sterling volatility seen as a result of the vote was mostly mitigated by the company by taking hedged positions of over 85% in all EUR, USD and Jet fuel costs. The hedge was and is aimed at minimising negative translation effects back to the reporting GBP currency.

Going forward, a cessation in the intensity of geo-political tensions and terrorism could most likely see the travel industry recuperate lost fearful travellers and Thomas Cook are definitely at the forefront to welcome such improvements for their operations.