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TUI AG no longer outshines Thomas Cook after shock profit warning

TUI shares plummeted on a shock profit warning while Thomas Cook gained on the back of news it could sell its airline business
TUI
TUI and Thomas Cook seems to be losing ground to smaller rivals

TUI AG PLC (LON:TUI) was seemingly outshining rival Thomas Cook Group PLC (LON:TCG) until it issued a profit warning in an unscheduled update on Wednesday night.

FTSE 100-listed TUI said it now expects full-year earnings to be flat compared to the previous year after last year’s summer heatwave led to more staycations and a weaker pound diluted British travellers’ purchasing power abroad.

READ: TUI AG shares descend as it blames warm weather and weak pound for profit warning

The tour operator, which is also listed in Frankfurt, published the trading update on its website but avoided having to release it on the London Stock Exchange’s regulatory news announcements platform.

However, the warning did not go unnoticed with TUI shares plunging 17% at the time of writing.

Market reacts positively to possible Thomas Cook break-up

Shares in Thomas Cook, on the other hand, are up 13% after the travel firm revealed on Thursday that it was considering a sale of its airline business to raise cash to support its plan to turn around the business after a tumultuous year.  

READ: Thomas Cook suggests possible sale of airline business as it posts wider quarterly loss

Thomas Cook has kicked off a strategic review of the airline business and said it will “consider all options to enhance value to shareholders and intensify our strategic focus”.

The company made the announcement as it posted a wider loss for the first quarter on broadly flat revenue. Like TUI, Thomas Cook was hit by a good run of hot weather over summer last year.

Tough competition in the Spanish holiday market and high hotel prices in the Canary Islands also dampened demand.

But unlike TUI, Thomas Cook’s struggles were already widely known. In November, the firm confirmed a 23.3% drop in 2018 underlying earnings, two days after issuing its second profit warning in two months. 

READ: Thomas Cook confirms 'disappointing' full year earnings and turnaround plan

“In recent times Thomas Cook has been left in the shade by fellow operator TUI but at least on this occasion it can take some comfort from the fact its rival is also under pressure,” said AJ Bell investment director Russ Mould.

Thomas Cook and TUI lose market share to smaller rivals 

Thomas Cook and TUI appear to be losing ground to smaller rivals like On the Beach PLC (LON:OTB), which on Thursday said it achieved a 20% jump in UK revenues in the four months to the end of January.

READ: On the Beach Group posts 20% jump in UK revenues

According to a recent survey by Morgan Stanley, 36% of UK holidaymakers were likely to book with Thomas Cook in the next 12 months, compared to 43% in last year’s study.

For TUI, 35% of survey respondents said they would book a holiday through the company, down from 38% last year.

“This is the first drop for both companies in four years, and is likely due to newer entrants (On the Beach, Jet2), and slower capacity growth than the competition,” Morgan Stanley said.

“Including subsidiary brands, TUI and First Choice combined have lost more market share (54% vs. 63% last year) than Thomas Cook and Airtours (45% vs.50% last year).”

Thomas Cook takes steps to improve performance

Thomas Cook hopes to claw back market share by investing more in its own-brand hotels, improving its digital sales offering, reducing capacity and delivering further cost savings. It is also taking a good look at the airline business, which has fared well in what has been a tough market due to fierce competition.    

Last year, the airline division delivered a 12% rise in underlying earnings to £129mln and revenue grew 9% to £3.5bn. In contrast, the tour operator division saw underlying earnings fall 34% to £161mln on revenue up 4% to £7.4bn as margins were squeezed by heavier discounting to fend off competition as well as people making bookings later in the season when holidays are cheaper.

This trend continued in the first quarter with the wider loss attributed to the tour operator unit while the airline business continued to “perform well”’.

News of a possible break up of Thomas Cook was well received by the market.

"Thomas Cook's debt pile was getting so heavy that something probably had to give,” said Fiona Cincotta, senior market analyst at City Index.

“Selling its airline would offer a well-needed injection of capital, but also mean parting with the only division that posted higher earnings last year.”

“The big question now is whether the tour operator business would be able to flourish consistently in its own right. Going by the figures released today, a successful turnaround is far from assured.”

TUI looks to turn around business 

TUI said it was taking steps to improve its performance, including harmonisation under one leadership to save costs, shifting its sales online and increasing upselling of activities and excursions.

It also believes “continued sector headwinds” could trigger market consolidation, which would benefit the firm.

In similar fashion to Thomas Cook, TUI cut its earnings estimates just days before it is due to release its first-quarter results, expected on Tuesday. 

Investors will be keen to hear more on TUI’s strategy in the quarterly statement and annual meeting, which will be held on the same day.

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