The rescue deal for Thomas Cook (LSE: TCG) was finally fleshed out Wednesday, as plans were revealed for a £450m cash infusion from major shareholder Fosun of China, plus a further £450m from lenders, coupled with the conversion of much of the travel firm’s debt into new equity.
In exchange for the cash, Fosun will acquire “at least 75% of the equity of the group tour operator … and 25% of the group airline,” while lenders will end up with “approximately 75% of the equity of the group airline and up to 25% of new equity in the group tour operator.”
Just how much dilution that will ultimately mean for existing shareholders is not immediately clear, but the company said that “the recapitalisation is expected to result in existing shareholders’ interests … being significantly diluted.”
Price fall
Thomas Cook shares plunged 15% as a result, to 6p, which I think was always going to be inevitable once the bailout terms became known. My only surprise is that the market seems to have been surprised — oh, and that the fall on the day was so modest.
When I last looked at Thomas Cook, with the shares hovering around 8p, I said I suspected my colleague Roland Head’s estimation that the share price could fall to around 2p might have been optimistic. I still think so, and I think you’d be mad to buy at 6p today.
The sad thing is that every £1,000 invested in May last year before Thomas Cook shares started to slide is now worth only £43, and after transaction costs, you’d get about £33 by selling. That reinforces two of my long-term rules: never buy a company that operates an airline, and always diversify.
Worst service
Speaking of airlines, I wouldn’t invest a penny in Ryanair (LSE: RYA) either, especially not after the controversial operator has continued its run of coming last in the annual Which? customer services survey of 100 popular UK brands.
That’s six years in a row that Ryanair has earned that unenviable accolade, scoring just 45% in the satisfaction ratings. And when faced with 50 key terms they could use to describe the company, many went for ‘greedy’, ‘sneaky’ and ‘arrogant’.
To be fair to Ryanair, other airlines didn’t do much better, with British Airways in 83rd place and easyJet 79th. And I wonder how much of the negative response is due to Ryanair’s poor reputation rather than actual customer service — the last time I flew Ryanair I encountered very helpful staff. But consistently coming last has got to hurt, and struggling to beat a pilots’ strike doesn’t help either.
Share value?
Putting that aside, how has Ryanair actually done as an investment? The shares had a strong run until summer 2017, but it’s been downhill since. Over the past five years, the share price is very close to the FTSE 100 average with a 4% gain, but that comes with no dividends and with a far more volatile ride. Including dividends, which have been yielding better than 4% per year, a Footsie index tracker would have easily beaten Ryanair.
Airlines had a decent spell when oil prices were low, but things always get tougher when fuel costs rise. In general, airlines are hostage to costs that are entirely outside of their control, and that’s the main reason I won’t invest in one.