Thomas Cook Group Plc is falling behind its less cash-constrained rival TUI AG as the largest tour operators try to distinguish themselves from younger online booking agencies.

“TUI Group is further ahead in so many initiatives that Thomas Cook plans to undertake,” said Filip Adamec, a credit analyst at Muzinich & Co Ltd. in London. “Many online brokers can do the same right now — rent you a car, get you a flight, arrange accommodation — somehow you have to differentiate yourself.”

Four years after Thomas Cook was saved from the brink of collapse, the 174-year-old travel firm is struggling to generate the cash needed to fulfil its modernizing ambitions. In its latest financial year, it reported free cash flow of 116 million pounds ($182 million) on sales of 8.6 billion pounds. Net interest costs alone totalled 130 million pounds.

Chief Executive Officer Peter Fankhauser expects earnings to take a 25 million-pound hit from Greece’s economic crisis and the terrorist attack in Tunisia, with the strong pound adding further pressure. The company has also faced criticism over its handling of the deaths of two children on holiday in Corfu in 2006, although bookings have not suffered significantly as a result.

Thomas Cook owes bondholders almost 1 billion pounds and is ranked five levels below investment grade at Standard & Poor’s, two behind TUI. S&P estimates debt in the current fiscal year at 5.6 times earnings before interest, taxes, depreciation and amortization, more than double that of TUI.

Under Pressure

A measure of credit risk known as the Z-spread shows investors demand more yield to hold Thomas Cook euro-denominated bonds maturing in June 2020 than they do to own TUI securities in the same currency payable in October 2019.

“Because of their higher indebtedness, the additional headroom for Thomas Cook to invest without being constrained by the risk of excessive leverage is more limited compared to TUI,” said Sebastian Kauffmann, a credit analyst at S&P.

With established tour operators facing competition from low-cost airlines and online booking sites such as, Thomas Cook and TUI are under pressure to invest in new offerings.

Asset Intensive

Hanover, Germany-based TUI is increasing its existing Boeing 787 Dreamliner long-haul fleet to 17 by 2019 from 13 and adding 60 exclusively owned hotels and resorts over the next five years. Plans also include a new cruise-ship offering. Thomas Cook is keeping up where it can, taking delivery of 25 new single-aisle Airbus A321s by 2016, refurbishing the cabins of its long-haul fleet and entering a hotel-management deal with a Chinese company.

“It’s a lot less asset intensive than what TUI is doing,” Adamec said. “Thomas Cook is trying to get to a similar level of flexibility to what TUI has.”

Fankhauser has sought to continue the restructuring started by his predecessor Harriet Green, who presided over a ratings upgrade and a tenfold increase in the share price during her 28 months as CEO.

In May, Thomas Cook expanded its credit facility to 800 million pounds to remove some “tough financial restrictions.” The new arrangement lasts through 2019. The company also sold a 5 percent stake to Fosun International Ltd. for 91.8 million pounds this year, with a commitment from the Shanghai-based company to purchase as many as 50 hotels to be managed by Thomas Cook.

Debt Pile

“We’re confident on our progress,” said Thomas Cook spokesman Mathias Brandes. He noted that net debt is on course to fall to 200 million pounds by the end of September compared with 788 million pounds three years earlier.

TUI spokesman Kuzey Esener declined to comment beyond referring to the company’s third-quarter statement this month.

With Thomas Cook targeting a further 400 million pounds of savings by the end of 2018, the tour operator “operates comfortably” within its current rating, said Paula Murphy at Fitch Ratings, which also has Thomas Cook five levels below investment status. Still, competition remains “intense,” she said.

“On a gross-debt basis, it’s still got far too much and far too much of the debt is fixed,” said Karl Burns, a credit analyst at Panmure Gordon in London. “Without reducing that debt pile it will struggle to invest properly in the business.’

This article was written by Benjamin Katz and Joe Mayes from Bloomberg and was legally licensed through the NewsCred publisher network.

Photo Credit: Planes in Thomas Cook's fleet. Thomas Cook