City Insider: Expect signs of life in autumn in year of two halves

City Insider: Expect signs of life in autumn in year of two halves

City Insider - FT journalist David Stevenson on the travel industry

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We survived, just. 2011 was a true howler of a year, not only for the travel sector, but for just about anyone with a large base of customer-facing operations in the UK (outside of London).

In fact 2011 was a desperate year for the financial markets globally, excluding the US that is, which is showing worrying signs of slowly recovering.

The travails of Thomas Cook may seem unusual – more on that later – but we have to keep some perspective at the global level.

Scores of countries reported stock markets down by more than 20% last year, including India and China. If you want a truly miserable story, feel sorry for the endangered southern European investor.

According to data from a major French bank, one of the key Greek benchmark stock market indices (from MSCI) was down a stonking 92% over the last four years, with markets in countries such as Austria, Finland, Ireland and Italy down an equally alarming 60% or more during the same period.

This compares to the UK, which is down just 15% from its four year peak. Even the poor old Japanese had a miserable 2011 – the local stockmarket actually fell by more than the Eurozone’s (which takes some doing) and most western investors have now given up on the country, assuming that Japan is a total basket case when it comes to corporate activity.

Astonishingly though the US stockmarkets actually finished the year up, with small, single digit increases.

And what about 2012 – what’s the consensus from the City pointy heads? Well, if there was something remotely resembling a consensus I’d sum it up as a ‘year of low expectations’.

Most analysts and economists have no idea what will happen next year with those European Jokers – the politicians that is – and are reluctant to admit to anything more than a year of two halves.

The first half will probably see continued carnage with a wave of job losses hitting the City of London, a crucial process which will undermine confidence in the London-based consumer markets.

The second half might be more positive as the US economy continues its slow but steady recovery and the US consumer starts spending again – cautiously though at first.

For the travel sector I’d focus on the first, miserable, half though. The key metric to watch out for is corporate profits (or earnings ) growth which is likely to be terrible.

We’re just entering into the Q4 earnings season, and earnings momentum is already at depressed recessionary levels in most regions, with most analysts busily downgrading their numbers for individual companies.

The Eurozone remains weak – as you’d expect – with profits likely to be down by around by 30% for 2012 forecasts. On the more positive side we should probably expect moderate profits growth in the US in 2012, at around 8%, and even some positive growth here in the UK – at 5%.

These numbers will have a major impact on consumer confidence in 2012 as corporate profits are directly relevant to sustained consumer demand in the more affluent middle classes employed in the private sector.

Confidence may have cratered outside of London, in the public sector – dragging down spending on discretionary big ticket items like holidays – but the south east has, by contrast, experienced relatively steady levels of spending.

Much of this can be explained by the huge numbers of more senior employees working in the corporate machines based in the south east.

In many respects this group has never had it so good. Interest rates are low, corporate profits are high, bonuses decent though subdued, and jobs secure.

This may all change in 2012 as profits growth slows down markedly and the major corporates go through yet another wave of rationalisation and cost cutting. If I were in the luxury end of travel, I’d be battening down the hatches for a stormy first half of 2012.

That dismal forecast chimes with recent consumer research data which shows a marked deterioration in already low levels of confidence.

Market consumer indices for instance have been showing steady month-on-month falls as the big chill spreads out from the public sector-focused north into the more affluent private sector-influenced south. 

And this is just the beginning of the bad news, especially as government cutbacks and job losses start to be felt in 2012 – in particular I’d be watching how wealthier public sector professionals react to the potential for sizeable increases in pension contributions.

Add it all up and I’d suggest that travel is in for a tough time in the foreseeable future, with confidence badly affected in the core continental European markets – this must have a sizeable impact on the bottom line for both Tui  Travel and Thomas Cook, which is of course exactly what they don’t want to hear at the moment (especially Cook).

From my vantage point, 2011 was a deeply disappointing year in which Thomas Cook went from being a solid FTSE 250 mid cap company to a virtual penny stock, where nearly all share trading is now originating  from private investors betting on the likely future shape of the UK’s number two travel operator – bust or a phoenix stock that will flower in late 2012?

For this jaundiced observer, the shares are now a sideshow which should be safely ignored. As should the news that bonuses for Manny [Fontenla-Novoa] are being delayed (an expression involving Sherlock comes to mind) and the non-execs reshuffle.

The absolute key for me is what happens in the next two weeks. January is a tough old month for lots of reasons but especially severe for Thomas Cook, and I’d be watching the cash flow numbers like a hawk; in particular watching for any big increases in the number of days payable to key suppliers.

In fact I’d go so far as to suggest that January will be the make or break month for Cook as a publicly listed entity. If it can get past the next four to six weeks, then I’d suggest that the new management team has a decent chance of pulling off a brave rescue.  If not, expect loads of hysteria and panic from the broadsheets.

Any good news? If we assume that the European political elite doesn’t entirely mess up – a decent chance, to be fair – I’d suggest that the second half of 2012 could be a positive one.

The US government under Obama will do everything in its power to make sure that the election goes off without any nasty surprises and the US economy is steadily recovering.

I also think that the faster the fall in Eurozone economies in the first half, the greater the chances of stabilisation in the second half.

For the travel sector I’d suggest that the first signs of a pickup will come from early summer 2013 bookings taken in the autumn and winter – these numbers might be surprising.

The key is to stay long enough in the game to see those first rays of hope.


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