TUI and Thomas Cook Face Up to Bleak 2019

Europe’s big two tour operators Thomas Cook and TUI both are both expecting a rough year with the hangover from last year’s heatwave still hurting bookings.

In the space of a few hours on Thursday, the two companies both put out separate pieces of news illustrating the challenging conditions they face.

Thomas Cook’s struggles are well known but it is now TUI’s turn to feel the pain.

In an unscheduled release Wednesday, the German-based company cut its profit guidance for the year. Analysts at Bernstein said it effectively amounted to a 30 percent downgrade for 2019.

Thomas Cook’s problems have not gone away. To try and improve its finances it announced in its first-quarter earnings update that it was launching a strategic review into its airline. All options are on the table, meaning a sale, partial or otherwise, is a possibility. Thomas Cook is hoping the move gives it more financial flexibility, while also enabling it to invest more in its own-brand hotel business.

While revenue in the period to the end of December rose 1 percent to $2.1 billion (£1.7 billion,) the underlying operating loss increased 30 percent to $77.3 million (£60 million.) Tour operators tend to make a loss in the winter months with sales not translating into profits until customers go on holiday.

To try and avoid a repeat of last year’s disaster, Thomas Cook has cut its capacity across its short and medium-haul markets for the upcoming summer season.

What’s the Problem?

What’s interesting is that both companies highlight similar challenges. They are blaming the hot European weather from summer 2018, destination-specific challenges in places like the Canary Islands as well as problems in the key UK market, stemming from Brexit.

“As expected, the knock-on effect from the prolonged summer heatwave and high prices in the Canaries have impacted customer demand for winter sun,” said Thomas Cook CEO Peter Fankhauser.

“Where summer 2018 bookings started very strongly, bookings for summer 2019 reflect some consumer uncertainty, particularly in the UK, and our decision to reduce capacity which will both mitigate risk in our tour operator business and help our airline to consolidate the strong growth achieved last year.”

TUI said that the weakness of the pound was “making it difficult to improve margins on holidays sold to UK customers.” This weakness can be traced back to the day after the 2016 Brexit referendum.

Last year’s hot weather seems to still be hurting sales. TUI said it was seeing this in both winter ’18 and summer ’19, while Thomas Cook indicated it was a predominantly winter problem. It is worth remembering that January  is still a key selling time for European travel companies.

Mergers and Acquisitions

From what both companies are saying it’s clear that the overall European holiday market is in bad shape, especially for traditional tour operators. It therefore seems likely that we’ll see some form of consolidation over the coming months.

One possible route might be some form of airline merger. Thomas Cook has already said it is exploring options in this area and talks have taken place in the past. Might it now look to revive this idea with TUI and potentially Lufthansa?

TUI said it the difficult market conditions to could trigger “market consolidation,” which it “could be a beneficiary of.”

A full-scale merger with Thomas Cook seems unlikely at this stage, especially given competition concerns, but if tour operators continue to struggle, all bets will be off.