Strategic review

Thomas Cook considers airline sell-off

Condor could be heading for a new owner.
Condor could be heading for a new owner.

Thomas Cook Group could sell off its airline operations partly or fully to raise funding for hotel investments amid higher quarterly losses, weak summer 2019 bookings and continuing Brexit uncertainty.

Europe’s second-largest tourism group today announced a strategic review of its profitable airline, which has some 20 million passengers a year and consists of Germany’s Condor and the ‘Thomas Cook’-branded airlines in the UK, Scandinavia and Balearics.

The move comes amid continuing uncertainty how Brexit will affect the rights of UK-owned airlines to fly in Europe and follows long-standing speculation about the future of the group’s airline business. Already back in 2008, a merger of Condor and Air Berlin was blocked by German competition authorities.

Announcing the airline review as part of the Q1 results, CEO Peter Fankhauser said: “We recognise that we need greater financial flexibility and increased resources to accelerate the execution of our strategy of differentiation: to invest in strengthening our own-brand hotel portfolio; further digitising our sales channels; and driving greater efficiencies across the business.

“As a result, we are today announcing a strategic review of our Group Airline. We are at an early stage in this review process which will consider all options to enhance value to shareholders and intensify our strategic focus. We will provide an update on this process in due course.”

Explaining the decision, the company commented: “Our strategy for the airline has been to profitably grow as a leading European leisure airline with a reliable, customer-focused service. This has involved a continuous review of our cost structure in order to stay competitive in a highly fragmented market. We currently operate a fleet of 103 aircraft, of which a quarter serve long-haul destinations.

“Our Group Airline delivered strong growth in 2018, despite facing industry-wide disruption. We made good progress in strengthening our seat-only offer, and growing services to third-party tour operators. We carried over 20 million passengers and generated £3.5 billion in revenue, with underlying operating profits growing 37% year-on-year to £129 million.”

Meanwhile, under the group’s strategy of expanding its portfolio of owned and franchised own-brand hotels, Thomas Cook Hotel Investments (TCHI) this week raised €51 million from Spain’s CaixaBank, taking its total funding to €91 million, including an initial tranche of €40 million from Greece’s Piraeus Bank.

The latest funds will be used to buy two hotels in Spain, a 250-room hotel in the Canary Islands and a 300-room hotel in the Balearics. This will make the fund owner of seven hotels, with the aim to grow to 10 – 15 hotels within the next two years. Overall, Thomas Cook Hotels & Resorts has a portfolio of eight brands operating 200 mostly franchise hotels in 47 destinations.

Thomas Cook Group had low revenue growth of just 1% to £1,656 million in the October – December 2018 quarter, led by strong customer demand for Turkey and North African destinations, offsetting weaker demand for Spain.

But the seasonal loss broadened by £14 million to £60 million due to a higher loss in tour operating, where a weaker performance in the UK and Northern Europe was partially offset by a good performance in Continental Europe. The Group Airline continued to perform well, delivering a seasonal underlying loss in line with a strong comparative period last year.

On Summer 2019 trends, the company said: “Group Tour Operator bookings are consistent with the capacity reductions we have made across our markets to closely manage our risk capacity throughout the year. As a result, tour operator bookings are down 12%, helping to support pricing, which is up in all key segments, and 4% higher overall.” Similarly, airline bookings are down on capacity reductions but average selling prices are up 6%, with higher yields in both short and medium-haul and long-haul.

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

But, in contrast to rival TUI which downgraded its profit outlook yesterday, Thomas Cook confirmed the 2019 outlook made last November, “reflecting the early stage in the year and limited visibility due to wider market uncertainty, particularly in the UK”.