The ‘for sale’ sign makes sense, but to whom?
Thomas Cook is to review whether it needs an airline. It is not the only major tour operator to have asked this question.
Tui chief executive Fritz Joussen thought long and hard about the need for an airline when he took over at Thomas Cook’s biggest rival.
In late 2016, the Tui board proposed relinquishing control of the group’s German carrier to create a new leisure airline in partnership with Air Berlin and Etihad of Abu Dhabi.
The proposed joint venture fell through early the following year and Air Berlin ceased flying in late 2017.
It is no great surprise Thomas Cook chief executive Peter Fankhauser announced a “strategic review” of its airline last week.
Indeed, it is not the first time Cook has done so. Speculation about a potential sale has rumbled on for years.
As long ago as March 2014, Thomas Cook airlines chief Christoph Debus told Travel Weekly: “Do we have to own an airline? There is not a clear yes or no.
“We know we can run an airline profitably. But if there is a good partner, a good option, it can be interesting for Thomas Cook.”
The UK business newspaper the Financial Times provided a partial answer to Debus’ rhetorical question following the announcement, noting: “No one buys seven nights in Mallorca in order to spend two hours on a Boeing 737.”
Analysts at Barclays suggested the airline should be spun off last December, while the UK newspaper the Sunday Times reported Thomas Cook was pondering a sale in July last year.
Thomas Cook responded then: “We are open to playing our part in consolidation where it makes sense.”
There was speculation about a sale in 2016, when Fankhauser responded by insisting: “Our airline is an important part of the group.”
Thomas Cook was reported to be looking to offload its carrier in February 2015, when the Sunday Times (again) reported the group had “sounded out potential buyers”.
German media reported Condor was for sale in February 2012 at the height of Thomas Cook’s problems in the UK, and the group had talks with Tui on a potential merger of their airlines in Germany late the same year.
A chance to pay down debt
Asked ‘why now’, Fankhauser chose to emphasise the group is not in financial straits. He said: “I want to underline we kept a healthy liquidity. This is a strong business.”
He insisted: “We have a healthy business, which we feel is in a good position to review.” Should the review lead to a sale: “We will make our core business more healthy.”
Yet at bottom, Thomas Cook needs the cash. Its debt currently peaks in winter at £1.6 billion, falling to about £400 million when holiday revenue has rolled in.
The relevant bonds don’t fall due for several years, but the group could do with clearing the debt early to save on interest payments and refinancing.
A deal and debt pay-down would also likely leave several hundred million over to invest in the own-brand hotels which are now key to Thomas Cook’s strategy.
One analyst suggested the group airline might fetch as much as £3.2 billion. That seems excessive. Another put the value of the carriers if broken up at about £630 million.
The truth lies probably in between at closer to £1 billion to £1.5 billion.
A sale could be partial or whole, of course, but the airline is worth more than the sum of its parts while a joint-venture deal would not provide the funds Thomas Cook seeks.
A healthy business
The airline group generally turns in an operating profit, having cut its cost base over the past decade or more.
The carriers – Condor of Germany, Thomas Cook Airlines UK, Thomas Cook Airlines Scandinavia, and the recently established, small-scale Thomas Cook Airlines Balearics – operate as a single airline.
The Thomas Cook and Condor brands are strong – when the latter was ditched for a time in Germany in favour of Thomas Cook it was brought back by popular demand.
They operate a fleet of 100-plus aircraft, carrying more than 20 million passengers a year from some of Europe’s primary airports to popular holiday destinations.
The group’s long-haul flights occupy one quarter of the fleet and are increasingly popular.
Thomas Cook operates a hub-and-spoke model for these, unusual for a leisure carrier, funnelling passengers on to long-haul flights from Frankfurt and Manchester through partnerships with other airlines.
It has a healthy seat-only business comprising about 38% of traffic.
However, two assets stand out.
First, the group has attractive take-off and landing slots at capacity-constrained airports – 400-odd at Germany’s main hub airport Frankfurt, 232 at Dusseldorf and 162 at Munich.
At Gatwick, Thomas Cook has 200-plus slots and at Manchester 350. These alone would make the airline attractive to rivals.
Second, nine million of Thomas Cook’s 20 million airline passengers a year are customers of Thomas Cook, the tour operator.
That is a large proportion of seats filled by holidaymakers who have booked a package. It’s the sort of percentage easyJet would love to see its easyJet Holidays attain.
The Financial Times noted the airline “is likely to appeal to the likes of easyJet and Ryanair. But it also might attract Lufthansa and IAG”. Indeed, it might.
A limit on options
The large proportion of Thomas Cook holidaymakers on flights cuts both ways, of course.
The need to maintain a close commercial relationship with Thomas Cook the tour operator will limit the options when it comes to an outright sale.
How would easyJet make a good fit when it is ready to make a serious attempt at building its own easyJet Holidays business from next year with former Tui deputy chief Johan Lundgren now at the helm?
Ryanair recently wound up its half-hearted attempt at a package holiday brand, Ryanair Holidays. But its record on service, partnerships and in a host of other areas make it an unlikely bedfellow for Thomas Cook.
IAG might be interested, though UK competition authorities could be unimpressed when it comes to Gatwick, and Thomas Cook lacks the latest long-haul aircraft which might interest the British Airways owner.
Financial investors such as private equity funds generally steer clear of airlines – the variables and the losses can be too great.
Air France-KLM and perhaps fellow Virgin Atlantic-shareholder Delta Air Lines might be interested.
It would take Air France-KLM into the UK, Germany and Scandinavia from which the merged carriers offer solely connecting flights via Paris and Amsterdam at present.
But Air France may have enough on its plate and lack the resources for a deal.
That leaves Lufthansa as the potential favourite. What would it give for those slots at Frankfurt and at Dusseldorf and Munich for its low-cost Eurowings subsidiary? What price Manchester and Gatwick?
The Lufthansa Group has the financial clout, although EU and German regulators would most likely consider any deal carefully.
Thomas Cook should consider carefully too. A sale of the airline would remove about half of Thomas Cook’s group operating profit in the last full year.
The Financial times also issued a note of warning. Without an airline, the newspaper noted, Thomas Cook “will find itself as a pure tour operator selling holidays in a price-war zone”.
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