City Insider: Some known threats and one you might have missed

City Insider: Some known threats and one you might have missed

City Insider - FT journalist David Stevenson on the travel industry

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Big two Thomas Cook and Tui Travel updated the City last week, with both of the travel majors issuing their customary pre-close period trading statements.

My Travel Weekly colleague Ian Taylor has already expertly picked apart both the financial numbers and the media reaction to these numbers, so I’m not going to add too much detail to the well-received statements from both parties.

I’d pick up on two central messages, with the most important being that there’s no need to panic.

Thomas Cook looks like it’ll stay in business and may even begin to recover some credibility under the steady leadership of Sam Weihagen.

Trading is stable, the UK might at least be showing signs of tentative improvement (from a very low base), “summer trading is more encouraging” and continental Europe is still firing on all cylinders.

As long as there are no other nasty, unexpected events (more on that distinct possibility below), I’d suggest that by summer of 2012 Cook should be on the road to recovery with a share price back above 50p.

The other key message is that quite a few institutional investors now reckon that shares in Tui Travel are cheap, especially when you consider its recent robust trading performance. 

The UK winter market looks good, with strong demand in lates booking, and improved yields and load factors – equally the summer volumes have “improved in all key markets since our last update”.

Analysts at investment bank Jefferies repeated their buy recommendation on Tui’s shares and a price target of 300p.

The consensus among brokers now seems to be that Tui will bring in earnings per share of about 23p and dividends of 11.5p, putting the market leader on a yield of 5.9% and a price to earnings ratio of 8.4.

I wouldn’t be surprised to see Tui’s shares trade consistently above 200p and maybe even hit 210p if the stock market remains positive over the next three to six months.

So a positive story all round then, especially in the core central and northern European market? Hold your horses.

I’d be paying very close attention to developments in the Eurozone over the next few months, and in particular I’d be looking out for a savage downturn in consumer spending, with the inevitable knock-on effect on big ticket consumer spending.

First the good news. A chaotic Greek default has been avoided and the European political class does look like its rallying around at long last.

The ECBs massive LTRO operation – a giant repo cash exercise that is designed to flush money into the bruised banking sector - has calmed nerves brilliantly.

But trouble is brewing in Europe and I’d be watching very carefully for a number of new flashpoints and the potentially dire implications for northern Europe.

The first key issue is that all those PIGGIES haven’t gone away, with Spain in real trouble.

The budget deficit at -5.3% is already well above recent estimates and GDP is dropping like a stone, with a target fall of -1.7% (provided by the IMF) looking increasingly unlikely.

Unemployment is shooting up from already high levels and the local banking system is beginning to wobble again.

Spanish 10-year bond yields have already started to rise above 5.40% and even respected Citi bank economist Mr Buiter now thinks that Spanish debt may well need to be restructured.

It’s also blindingly obvious to any market watcher that Portugal will need to organise an ‘orderly default’ of some form or another. Ditto Ireland.

Even the sprightly Mr Monti in Italy is running into trouble with support for the technocratic plummeting below 45% in one newspaper poll as locals wake up to the real impact of his (sensible) labour market reforms.

The next key flashpoint could be France, where a win for a certain Mr Hollande and his lovable Socialists wouldn’t go down terribly well with 'evil, capitalist predators' in the financial system.

At the moment I’d still (just) put my money on Sarkozy engineering a drastic last minute recovery, but be under no illusions that a renegotiation of the EU25 fiscal compact would be economically painful in the short term (as the markets panicked) and horribly protracted. 
The most dangerous European flashpoint could be Germany though, where a significant economic slowdown is becoming ever more likely.

Many institutional traders and fund managers I talk to are busily piling into ‘shorts’ on the German DAX stockmarket in anticipation of a dreadful set of Spring and Summer numbers from Europe’s economic powerhouse.

Recent macro-economic data has been very resilient and German consumer spending looks to be holding up (for now) but I’d be watching carefully for a sharp slowdown in exports, especially to China and Europe.

That slowdown will also come at the same time as German voters realise that they’re going to need to dip into their pockets and spend yet more money bailing out those destitute Latinos.

Cue a steady but noticeable decline in consumer confidence and then spending inevitably followed by a sharp slowdown on spending for the big ticket summer and winter holidays.

That grim message is backed up recent ‘flash’ PMI data from Germany in March which hit just 48.1, well below the forecast of 51, whilst service PMI data was also lower than earlier forecasts.

Just for the record French flash March manufacturing PMI came in at 47.6, once again, well below forecasts of 50.3.

Looking at Europe in the aggregate Eurozone GDP contracted by 0.3% in the 4th quarter of 2011, and I’d expect even lower numbers for Q1 and Q2.
So Europe is still in trouble and that must have a major effect on both Tui and Cook's trading book.

But I think we may all be looking in the wrong place for the really big next big crisis – our attention shouldn’t be focused on Europe, or even the Persian Gulf and the pesky Iranians.

I’d suggest we need to look to parts of Asia and especially China and Japan for the really big potential flashpoint.
A growing number of economists think that China may have averted a hard landing in the first half of 2012 but at the cost of storing up much more trouble later in the year as export growth continues to slow down and political unrest increases.

Personally, I’m not so bearish on China as some commentators and I’d pay more attention to a small island, off the Korean peninsula that has had a torrid few decades.

If I were looking to bet on the next ‘unknowable unknowable’ crisis I’d be putting my money on fears of a Japanese bonds bust.

A recent paper by Charles Stanley’s chief strategist Jeremy Batstone Carr highlighted rumours in the market that investors might be about to start panic selling Japanese government bonds.

We’ve been waiting a long time for this dismal day to come but if – or when – it does finally arrive, the implications will be huge.

As bonds are intensively sold, prices fall, and yields and then interest rates rise sharply.

That in turn forces the Japanese central bank to wade into the market to stabilise demand but eventually its balance sheet will hit capacity.

It then faces a grim choice – either let yields rise, pushing it to raise interest rates or print money to avert a disaster, or both at the same time.

Cue an inflationary surge and unsustainable debt servicing costs, and an even deeper recession.
I don’t actually think that this kind of Japanese implosion will actually happen in the next few months but I would warn that more and more investors believe that it will happen – and what matters in these jittery markets is the belief not the actual substance.
Capital markets will press a big red button that results in a flight from risk, equity markets will fall, CDS insurance rates on bank debts start to go up again, and credit will tighten.

Concerted action by the US Federal Reserve and the Chinese may stave off the worst of the pain but fear of a Japanese bonds crash could halt the American recovery in its track in the Autumn or winter of this year.

The timing would be awful, if only because UK consumer confidence is just starting to show the first signs of recovering. We’re not out of the woods yet.
One last point on a completely different subject – social media and travel.

Last month I looked at the growing number of start ups looking to use friend’s recommendations to power travel.

The VCs are becoming terribly excited but I reckon that one of the most interesting developments in the travel social media space may be sitting under our noses, namely tour operators' own-label social media websites.

It’s worth taking a closer look at websites such as where there’s a determined effort to provide all of the social feedback from external networks through a company sponsored ‘portal’.

The key here is light touch, going with the flow of the conversation and keeping brand messages to a sensible minimum.

More on how the majors can ‘corral’ social media to their advantage next month.


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