As has been reported, many international airlines have succumbed to extreme financial pressures in the not too distant past. Now, European travel conglomerate Thomas Cook appears to be on the verge of collapse after its stock nosedived 44% on Friday May 17th to end the week trading at only 16 cents per share.
While Thomas Cook’s airline businesses, including Thomas Cook Airline and Condor, have performed well recently, the 178-year-old company reported a £1.5 billion GBP pretax loss for the trailing six-month period.
This summer Thomas Cook airlines (including Condor) will provide 727 flights from Europe to the Caribbean with 203,000 seats. This coming 2019/2020 winter they are scheduled to provide 1,125 flights and 317,000 seats.
Thomas Cook has been in talks to sell some of its airline operations and appeared to have secured a 300 million euro loan contingent on that sale, but on Friday external auditors for the airline raised serious concerns about that sale.
With the company’s stock rendered essentially worthless and major hedge funds positioning themselves to benefit from a debt restructuring, it’s likely we’ll see a sale of Thomas Cook and/or Condor sooner rather than later.
Thomas Cook revealed in February that it was looking to raise cash by selling airline operations that carry 20 million passengers a year from the U.K., Germany and Scandinavia to the Mediterranean and other holiday sunspots. The fleet of about 100 jets flew 90% full in 2018, generating 3.5 billion pounds ($4.5 billion) in revenue and 129 million pounds in underlying earnings, with Deutsche Lufthansa AG, Virgin Atlantic Airways Ltd. and Ryanair Holdings Plc said to be taking a look. But the unit’s allure is tempered by its seasonality (spare jets are sent to Canada each winter for Caribbean flights), while Europe is already enduring a capacity glut that’s sparked a price war and prompted Lufthansa to freeze growth at its once fast-expanding discount arm. A sale of Cook’s Frankfurt-based Condor brand to the German giant remains possible but sliding fares and the deepening crisis mean the price may be falling.
Lufthansa confirmed it had submitted a bid for Condor, with the option to extend that to all of Thomas Cook Airlines. Virgin Atlantic is also reportedly involved in the bidding process.
So, what would a takeover of Condor by Lufthansa or Virgin Atlantic look like? While it’s possible that they would continue to operate the airline separately, it seems much more likely that this is simply a distressed asset sale and we’d see Condor and/or Thomas Cook’s fleet, and more importantly landing slots, absorbed by the successful bidder. Lufthansa would certainly like to prevent any other airline from gaining a foothold in its Frankfurt hub where Condor is headquartered.
Thomas Cook operates a fleet of about 100 Airbus A321s and A330s while Condor operates a more diverse mix including 767s, 757s, A320s/A321s and A330s. While the short-haul jets would fit naturally into either Lufthansa or Virgin Atlantic’s operations, it would be interesting to see what they do with the 767s and 757s. Neither of the rumored bidders currently operates those airframes, and there is a real incentive against introducing a new type of plane and complicating scheduling and maintenance operations.
The Thomas Cook company as a whole faces a number of issues.
For all its troubles, banks haven’t turned their backs on Cook yet, with lenders last week agreeing to provide a 300 million-pound loan to help support the travel agent through next winter, when it needs cash to book hotels for 2020. Unlike the company’s existing debt, though, the facility comes with strings attached. It’s a secured loan, meaning that there will be less money available for other creditors in case of liquidation. And while it’s available from October through June next year, that’s only if the company shows “progress” on the airline sale. Quite what that means hasn’t been fully explained.
Chief Executive Officer Peter Fankhauser said in an earnings statement last week there is “little doubt” that concern about Britain’s plan to leave the European Union has put a brake on U.K. demand. Other travel companies, including EasyJet Plc and Ryanair, have also been negatively impacted by the uncertainty surrounding the protracted negotiations. But as a tour operator Cook’s thousands of hotel rooms mean it can’t simply redeploy planes. Unlike global rival TUI AG, which owns much of its hotel space, Thomas Cook can’t cut prices to boost occupancy without taking a profit hit. With the European Union extending the Brexit deadline to Oct. 31, the issue isn’t about to go away. Demand elsewhere is also weakening, with sales in Germany and Sweden failing to match availability even after swingeing capacity cuts.
The start of Thomas Cook’s current ills can be traced to it reserving too much hotel space in south European resorts -- especially in Spain -- last summer when temperatures surged beyond 30 degrees Celsius (86 Fahrenheit) across Britain and other northern nations, prompting millions of sun-seekers to holiday at home.
Cook had initially predicted that it would partly make up lost ground with a surge in winter bookings to locations such as the Canary Islands, but that failed to transpire. Another year of record highs in northern climes would be disastrous. So, a spell of wet, cool weather will be at the top of Fankhauser wish list for coming months.
Thomas Cook has suffered a debt crisis before and lived to tell the tale, flirting with collapse in 2011 when bookings were hit by a consumer spending squeeze in the U.K. and unrest in tourist resorts in North Africa. Its salvation then came in the form of a rescue loan and subsequent 1.6 billion-pound refinancing that included a rights offer and bond sale. The new threat to the company may require stronger medicine, especially since scope for cutting costs through the closure of travel shops has been largely exhausted. Bondholders now expect to recover as little as 34% of their investments, based on declines this week, with Thomas Cook’s credit-default swaps indicating that it has a 67% chance of defaulting before summer 2020, according to ICE Derivatives data. That could point to a debt-for-equity swap as the company’s best chance of survival, Citigroup analyst James Ainley said Monday. The analyst on Friday cut his share-price target to zero, saying its debt outweighs the intrinsic worth of the tour-operator and airline arm.
None of the above will matter if customers stop buying vacations and flights from Thomas Cook for fear that the company won’t be around to honor their bookings. Concerns were heightened Saturday after Sky News said payment firms are seeking to hold on to money from transactions for longer to guard against a further deterioration in Cook’s financial health. “The wider issue now is that they may be facing a loss of confidence among consumers spooked by the risk of disruption,” said Olivier Monnoyeur, a London-based high-yield portfolio manager at BNP Paribas Asset Management. “That could be the final straw that accelerates the company’s deterioration.”
The situation is deteriorating rapidly, and Thomas Cook could likely be forced to sell one or both of its airlines in the near future in order to keep the rest of its operations running.
Jim Hepple is an Assistant Professor at the University of Aruba and is Managing Director of Tourism Analytics.