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Thomas Cook and TUI highlight sector challenges amid tough competition and Brexit

The uncertainty surrounding Brexit, worries about terrorism and tough competition are weighing on the European travel sector

Travellers are opting for holidays to Greece

TUI Group (LON:TUI) and Thomas Cook (LON:TCG) have this week highlighted concerns about the uncertain economic outlook and competitive pressures in the travel and leisure sector.

The travel companies have warned separately in trading statements of the external challenges they face as a weaker post-Brexit pound makes travel more expensive for UK travellers.  

They also cited weak demand for bookings to Turkey as recent terrorist attacks have deterred holidaymakers. Instead travellers seem to prefer to take their holidays to Greece at the moment.

TUI said in its pre-close trading update today that the “impact of macroeconomic and geopolitical challenges is evident” in certain destinations.

Still, the company reiterated its guidance for a 10% increase in underlying earnings (EBITA) for fiscal year 2016/17 on the back of its restructuring.

The group said 48% of its summer programme had been sold, as strong demand for holidays in Greece, Spain’s Canary Islands and long haul destinations offset a weak performance in Turkish holidays.

The winter programme was 97% sold, as a robust performance in its cruises, Riu hotels business and Robinson package holiday arm offset weak demand in Turkey and North Africa.

Amid tough competition and macro-economic challenges, TUI has been selling off non-core assets to streamline the business and focus on its own cruise and hotel brands.

Last April TUI said it was selling Hotelbeds Group to private equity firm Cinven and the Canada Pension Plan Investment Board for €1.19bn.

In February the company announced it would dispose its specialist holiday business Travelopia to KKR for €381mln.

 “We are progressing our transformation as the world’s leading integrated tourism business focussed on own hotel and cruise brands, financed by our strong cash flows and proceeds from the disposals of Hotelbeds Group and Travelopia, creating a more competitive and less seasonal business for the long term,” said Joussen.

Shore Capital reiterated a ‘buy’ rating and target price of 1,135p, saying the trading statement was in line and the group has reaffirmed its full year expectations.

The broker has forecast EBITA of €1.168bn for the year and said it continues to view the stock as attractive given the increasing proportion of profits from higher value cruise and hotels.

Thomas Cook cites margin pressures...

Similarly, Thomas Cook repeated its full year guidance but expressed concerns about fierce competition putting pressure on margins in a pre-close trading statement yesterday.

Chief executive Peter Fankhauser said competition was "particularly intense" in the airline sector, putting downward pressure on pricing. Average selling prices at the company's airline Condor fell 6% over the winter period.

The company said summer holidays were 42% sold, a 1% increase on the previous year, and bookings rose 10%, driven by trips to Greece, Cyprus, Bulgaria, Croatia and Portugal. 

Demand for Turkey and Egypt holidays remained weak but Thomas Cook said it was beginning to see early signs that customers are returning to the countries for their holidays.

Winter holidays were 90% sold, up 1% compared to last year, but selling prices fell 1%. Sales of holidays to Spain and long-haul destinations such as the Dominican Republic offset soft demand for Turkey.

Thomas Cook said it continues to expect its full year underlying operating result to be in line with current market expectations, based on its current trading performance and supported by financial benefits from implementing its strategy.

Neil Wilson, senior market analyst at ETX Capital, said while Thomas Cook is doing better than last year the company is still faced with a tough operating climate. He thinks a first half loss will be hard to avoid.

"Meanwhile prices are down 1% - a sign of the pressure on margins as it contends with a weak pound, fierce competitive and higher fuel costs," Wilson added.

"Thomas Cook posted a loss of £49mln in the first quarter and even with these positive bookings figures underlying operating results won’t be any better than the market’s currently low expectations.”

Quick facts: TUI AG

Price: 270.6 GBX

Market: LSE
Market Cap: £1.6 billion

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