Thinking back to the Thomas Cook disaster, you might not have expected to see TUI (LSE: TUI) heading the FTSE 100‘s list of biggest winners on Tuesday morning. But that’s exactly what happened. As I write, TUI shares are up 11%, on the back of a record-breaking first quarter.
The company was helped by an upsurge from customers who would otherwise have gone to Thomas Cook, which collapsed in September 2019. But in these tough times, it’s still good to see TUI bagging the biggest month of bookings in its history in January.
Total turnover gained 6.8% over the same quarter a year ago, and for the full year, TUI expects to see underlying core EBIT of €850m to €1.05bn.
Grounding
It’s not all sunshine, though, as the continuation of the Boeing 737 Max grounding is taking its toll. The planes are now expected to remain on the tarmac until at least mid-2020. The costs to TUI are likely to come in at approximately €220m to €245m, as it has to make alternative leasing arrangements. Still, that’s below previous estimates, as the firm says it has now “included a certain level of compensation from Boeing.”
While the market reaction was bullish, I don’t share the same sentiment. It has been, undoubtedly, an impressive quarter for TUI. But the falling demand that has, perhaps ironically, helped TUI by squeezing out one of its biggest competitors, is still with us. And I see big risk in relying on the traditional travel agent market for generating long-term wealth.
The shares are valued on a price-to-earnings ratio of around 12.6, and that would drop if 2021 forecasts come good. On the face of it, that might look like good value. But I’m not seeing the safety margin I’d want to compensate for the risk.
Dividends are also falling, after the company announced a new policy in December. That means this year’s is likely to be around 50% down from 2018’s peak payment.
Another record
Looking elsewhere in the FTSE 100’s travel sector, International Consolidated Airlines (LSE: IAG) has also just set a new record. Helped by an unusually strong jet stream propelled by storm Ciara, a British Airways 747 made the trip from New York in just four hours and 56 minutes. That was 80 minutes ahead of schedule, and the plane reached ground speeds of up to 825mph.
But if that flight went smoothly, IAG shares haven’t. They’ve been on a real roller-coaster ride over the past five years, resulting in an overall gain of 13%.
That’s better than the FTSE 100’s 8.5%, but I don’t like the volatility. IAG shares slumped badly in the first half of 2019 before a second-half recovery, but still put in a 12-month fall of 6%.
Risk
The big question is whether the IAG share valuation provides a big enough safety margin to compensate for the risks that come with owning an airline. We’re looking at a forward P/E of only 6.7, so the answer might well be yes.
Against that there was net debt of €6,179m on the books at 30 September. That was only 1.2 times EBITDA, so perhaps not onerous by common standards, but it still makes me twitchy.
IAG could well prove to be a good long-term investment for providing a reliable income stream. But even though it arguably looks good value now, I just won’t buy an airline.