City Insider: Tui has the edge in battle of the big two

City Insider: Tui has the edge in battle of the big two

City Insider - FT journalist David Stevenson on the travel industry

Last week’s interims from both the travel majors saw the bigger brand telling essentially the same story as its peer but adding a few extra twists that make it clear why it’s the City’s favourite.

Both the majors confirmed that we Brits were the laggards in Europe while all those Germans, Dutch and Nordic types were clearly top of the class yet again. 

The scariest numbers in this mapping of consumer markets came from Tui Travel’s accompanying presentation to analysts, which showed the pace of change in consumer sentiment across Europe and Russia.

Asked whether household finances would improve over the next 12 months, 30% of UK consumers said it would worsen, only a tad lower than peak levels in December 2008.

What’s really worrying for both the majors though is that sentiment has turned very negative in France in the last few months, with 27% now voicing a negative view.

Scarily the number of ‘glass half empty’ types is also showing small but perceptible increases in the Netherlands and Sweden, where both Tui and Cook are displaying strong trading numbers at the moment.

This mood of financial concern will only intensify the push by both groups to increase their exposure to all-inclusive holidays – apparently the perfect antidote to financially strapped families looking to cap their bills.

It’s also true that both of the majors appear to be on target when it comes strategic cost-cutting and synergistic programmes. Perhaps more importantly, both appear to be doing an excellent job of improving cash flow and lowering debt levels.

All the investors I’ve talked to laud the attempt by both groups to reduce operational gearing. In Tui Travel’s case that means a decline in net debt of £171 million, with net debt now at £1.18 billion, while Thomas Cook has managed to cut its net debt to £951 million, a reduction of £141 million.

The bad news for both majors is that these numbers set a high barrier for the future. Investors will expect more of the same over the next few difficult years.

In fact if one could argue that both of the majors should have done even better in pushing gearing out of the business as a result of bumper trading in core markets such as Germany and Sweden.

Both markets must inevitably slow down (Sweden is already showing signs of doing so in terms of customer sentiment) and its inevitable that sooner or later some unpredictable nasty event will come along and hit both majors in terms of cash flow – so push those cash spigots to the full now.

Talking of predictably unpredictable events it’s also worth noting that both majors seem to be doing their best at mitigating the knock-on effects from the events in North Africa – although hopefully both Egypt and Tunisia will start to turn around soon, giving a much needed boost for French customers in particular.

My only concern is that Morocco could get nastier if the government mismanages the wave of political protest – in particular I’d be worried that the ruling elite take heart from Syria and Bahrain’s apparent short term success at beating the hell out of an opposition.

Morocco’s elite might decide to follow this path only delaying the bigger cataclysm as a sullen population starts to wage open civil war. I’d also be rather cautious about Turkey where I have a sense that things could turn a bit bumpy very soon.

Dividends and Asian growth

Overall the same themes seemed to weave their way through both sets of interim results. But there are two key differences between Tui and Thomas Cook: dividends and the ‘what comes next’ question.

Tui Travel has taken the very canny decision to increase its dividend while Thomas Cook has chosen to play safe and maintain the maiden dividend. There’s no intrinsically right or wrong answer to this payout but Tui’s upping of it will endear the group to the large community of equity income investors who like a company with strong cashflow and a board determined to reward long-suffering shareholders. Canny politics.

The other stand-out difference is that although both majors seem to be making great progress online, Tui Travel genuinely does seem to have something to crow about with its A&D business, with LateRooms and AsiaRooms both growing gangbusters.

A good few pages of the Tui’s analysts presentation were given over to the Asian business and for good reason – internet-based travel in Asia is growing incredibly fast and outfits like China’s C Trip are continuing to ride an astonishing tsunami of demand.

AsiaRooms has very sensibly decided to focus its attack on the non-Chinese Asian secondary markets, leaving outfits like C Trip to dominate the mainland.

If Tui Travel can make this work, it could be the perfect strategic way of playing the Asia growth story without over-committing to the purchase of an expensive local operator.

Investors will also like the clear articulation of where growth in the future might be coming from assuming that we in the UK will still be in our quagmire of despair a few years hence – a far too pessimistic assessment in my view.


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