Skift Take

Investors in Thomas Cook cheered when executives said they might sell its airline to pay off debt. But the next day an analyst's report spotlighted concerns about how Brexit-related regulatory snafus might hamper a sale. The divorce has so many unintended consequences.

Thomas Cook Group Plc shares dropped the most in more than two months amid emerging doubts about whether the U.K. tourism company would be able to sell its profitable airline business because of potential hurdles from Britain’s pending exit from the European Union.

The stock fell as much as 18 percent, the steepest intraday decline since Dec. 3, and was down 15 percent at 11:56 a.m. in London in the worst performance on the FTSE All-Share Index. That reversed a jump posted Thursday, when Thomas Cook announced a strategic review of its airline operation as part of an effort to boost financial flexibility following a weak summer performance.

There are “few obvious buyers” for the unit, as any suitor would also need to consider EU ownership rules governing each air operating certificate following Brexit, analysts at Morgan Stanley, including Jamie Rollo, wrote Friday in a report cutting their share-price estimate by 17 percent. The U.K. and EU parts of London-based Thomas Cook would in practice both need to have majority EU-based ownership to maintain their flying rights, the analysts said.

“There could also be further considerations for the U.K.-based flying and whether cuts or caps could be imposed,” they said.

Bearish speculation on Thomas Cook stock has increased since the company suspended its dividend in late November and said earnings would be lower than an earlier reduced forecast. Short interest was at 3.7 percent of shares outstanding on Feb. 6, compared with just 0.5 percent the day of its profit warning, according to data compiled by IHS Markit Ltd.

Thomas Cook profit warning Bloomberg chart

Citizenship Question

Carriers with either U.K. ownership or large airport bases in the country are working on how to maintain routes to the EU once Brexit comes into effect because access hinges on controlling shareholders’ citizenship. That’s become an issue for companies including British Airways parent IAG SA, with potential complications for its Spanish units Iberia and Vueling, as well as discounters Ryanair Holding Plc and Wizz Air Holdings Plc.

Thomas Cook’s airline division comprises operations in the U.K., Germany, Scandinavia and the Balearic Islands, according to its website. Its German brand Condor, which offers flights to Mediterranean, African and U.S. destinations, wouldn’t run into issues of EU route access if sold separately.

Any decision to dispose of Thomas Cook’s airlines raises questions about investor interest in the “current structurally challenged market environment,” analysts at Bernstein, led by Richard Clarke, wrote in a report also cutting the stock’s target price. Even with “some attractive cost and yield economics,” the division flies “an old and unappealing fleet to any potential buyer and operates on a high degree of crowded routes.”

©2019 Bloomberg L.P.

This article was written by Lisa Pham from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to [email protected]

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Tags: airline innovation, brexit, earnings, thomas cook, thomas cook group

Photo credit: The aircraft tails of Thomas Cook's airline, which the tour operator might sell off to pay down debt. Analysts spoke skeptically about the plan. Thomas Cook

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