City Insider: March mayhem, but respite for Cook and boom time for Expedia

City Insider: March mayhem, but respite for Cook and boom time for Expedia

City Insider - FT journalist David Stevenson on the travel industry

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Another month and yet more mayhem in Europe.

The financial community is growing increasingly skittish about Spain and its banks – the hot topic in the square mile and in Mayfair HedgeFund Land is that the smart money is putting global giants Santander and BBVA in the same (miserable) category as the French leviathans SG and BNP Paribas.

The worry? The local banks own absolutely astonishing amounts of their own government’s debt. One analyst reckons that Spanish and Italian banks have bought €85bn and €77bn of their country's sovereign debt in the last 4 months, while banks outside these countries have actually reduced their holdings.

Nothing good will come of this development mainly because it  ‘localises’ the debt issue, making Spain easy to ‘pick off’  – national banks end up being the main creditors to their own government which will increase the chance of a push to ‘restructure’ that debt or, even worse, prompt a bond vigilantes panic.

I cannot count the number of times in the last few weeks that a friend in either the hedge fund world or the investment banking community has said that they think that there’s a major car crash looming in 2013 prompted by Spain’s problems.

Its real estate market continues to implode and unemployment levels are truly, staggeringly, shocking. My worry is that local ‘unrest’ starts to intensify late this year and early next year and tourists begin to become jittery about the summer 2013 booking season.

There have also been a bus load of rumours circulating in the square mile about Thomas Cook - or at least there was until this weekend’s announcement of a new loan deal.

The bears have it that Thomas Cook would have faced a major challenge in the autumn as the next stage of the cashflow cycle kicks in and those debts start to bound upwards again.

Not anymore – this Saturday’s announcement is a game-changer, albeit an expensive one. Expect a swift rally in the share price of Thomas Cook as the news sinks in over the day – the bears and short sellers may be caught in a classic ‘short’ squeeze as investors realise that there’s life in the old dog yet.

Cook’s debt ceiling has now been raised to £1.4 billion on relatively decent interest rates, although the £14 million deal fee and the ‘reward’ of an option to purchase 10% in ordinary share at 8p (plus a requirement to sweep any spare cash back over the next two years into repaying that debt) are a tad demanding.

There’ll also be continued pressure to sell more assets although Thomas Cook doesn't have an especially strong negotiating position – knowing how badly it needs the money, if I were on the other end of a sale process I’d be determined to push an incredibly hard deal at the moment.

But this deal makes it clear that the banks are in too deep with Cook now and unless the trading situation worsens dramatically (always possible given how fragile Europe is right now) they’ll almost certainly try to keep the company intact and publicly listed until at least the end of May 2015 when the refinancing needs to be looked at again.

The trading update that accompanied the loan announcement also suggested that everything is going according to plan, with a positive outlook for the northern European and German businesses.

I’d be slightly more cautious and the cynic in me would be on the lookout for a rapid deterioration in trading in both France and a sudden about turn in sentiment in Northern Europe.

Apart from Norwegian Cruise Line's superb recent numbers, I found Expedia’s first quarter results much the most interesting thing in travel.

Cutting through the blizzard of numbers and new business initiatives, Expedia’s quarterlies underline three key observations, all very positive for the online giant.

The first is perhaps the most obvious, namely that the US consumer market is recovering as predicted and that, frankly, America and Asia are the only places in which you’d want to be running a travel business in at the moment.

The next equally obvious observation is that everything we believed about travel going online is true...and some more.

Hotel booking is being overwhelmed by the internet in North America with room nights growing by “24% year-over-year powered by 37% year-over-year growth in room nights at” according to the Expedia release accompanying the results.

“Room night growth accelerated across our leisure business in Europe, Asia-Pacific and the Americas compared to growth in the fourth quarter of 2011,” it said.

This stellar performance helped pushed group earnings before interest, depreciation and amortisation up by 24% year over year.  Expedia’s air tickets booking service wasn’t quite as strong but across nearly every broad metric, Expedia pushed up sales, margins and bottom line.

But for me the most important trend is that Expedia is betting the bank on social and mobile. may have taken its time launching a groovy new mobile app, but better late than never and the app has already hit 5 million in downloads.

Traffic is also inexorably increasing to its Late Minute Deals pages on – its focused  “A Sudden Amazing Price (ASAP) 12-hour flash” promotion resulted in triple digit room night growth over the last quarter.

Across a huge range of fronts Expedia is spending serious amounts of money on wooing younger customers via Facebook, encouraging them to use its online presence for everything from dynamic packaging through to simple hotel or flights purchases.

Take, for example, a recent push to sell large blocks of rooms at specific hotels in Las Vegas during a week-long special.

The campaign featured lots of rich media – big photos – and Twitter hashtags all over the place, with great success for Expedia. One report on the campaign noted that on the days where a hotel was promoted in the campaign, there was double digit year on year growth.

A Facebook campaign featuring a flood of ads to promote a sweepstakes contest to win vacation packages was also fascinating. According to one US newspaper account “by the end of the six week contest, the users visiting that [facebook] page jumped 750%”.

As an aside, the success of this initiative will be loudly trumpeted by Facebook executives as they justify a huge valuation for the IPO of the social media giant – will its 901 million active users justify a $100 billion valuation? Given that many of these young users spend as much as three in every four minutes on the site, anything is possible. 

Expedia’s growing commitment to the Facebook phenomena as well as to marrying social and mobile generally, only serves to underline a key demographically inspired transformation.

Teenagers and twentysomethings may be impoverished and increasingly unemployed but they’re also tech savvy and price conscious and clearly have no inhibitions about using online and mobile as their primary source of knowledge.

As this generation grows older and settles down will they be the generation that finally gets around to completel consigning the traditional summer package holiday to history?

Will this be the generation that instinctively packages their holiday on line, using their friends as the best advice rather than a physical travel agent or will they ‘mature’ into the high street and trust in the travel agent?


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