It’s basic economics – the fewer participants in a market, the less competition on the supply side, and the greater the benefit for those companies that are left. It’s no surprise then that following the collapse of Thomas Cook, rival firm TUI AG (LSE: TUI) has seen its share price climb.
This is understandable of course, given that effectively with the collapse of Thomas Cook there is now about a 30% share of the UK holiday market up for grabs. However it may not all be smooth sailing – TUI may be the beneficiary of the Thomas Cook liquidation, but it is still a participant in the industry that suffered this loss in the first place.
Times are changing
The main problem for this type of package tour operator is of course, the internet. Where once agents were able to monopolise the whole holiday process – from hotels to flights – the average person can now spend five minutes online and do it better.
People can book a cheaper and more convenient flight, better hotel and their own connection without having to pay a middleman anything. We’re no longer obliged to pay a service fee that gets us only a 5am flight, a poor apartment and being last off the coach.
This trend undoubtedly contributed to Thomas Cook’s demise, and of course has also been taking its toll on TUI. Despite the latest week’s price gains, TUI shares are still down about 30% in the past 12 months. It has managed to take some steps away from the traditional tour operator model however, which may be a key difference.
Thomas Cook’s more immediate problem was its massive amount of leverage. The company had about £1.7bn worth of debt following its failed merger with MyTravel – a situation it never really recovered from. Unfortunately for TUI, though the size of the two firms are different (its market cap is about twice that of Thomas Cook at its peak), it also has a debt figure of some €1.96bn.
Brexit and the 737 Max
The two other key issues TUI will face are Brexit, and the grounding of the Boeing 737 Max planes. The company said recently that the grounding of the planes following two crashes this year has cost it about €300m. It’s unclear yet if Boeing will be compensating operators.
The uncertainty surrounding Brexit, meanwhile, means currency fluctuations particularly are taking their toll – TUI estimates an effective price rise for UK consumers of 4% hitting its figures.
Despite these problems however, last month the company reiterated its full-year guidance, and importantly said it will be accelerating its plan for the transformation of its tour operating business to a more online platform.
How successful this will be is hard to tell – it’s certainly a move in the right direction, but is it perhaps one that has come to late? That said, the company owns hotels and cruise liners as well as its holiday business, so there’s potential for it to make up its losses in other areas.
I think the collapse of Thomas Cook may give TUI some room to manoeuvre, but I’d like to wait and see before I’d invest in this one for the long run.