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Holiday from hell

2 Jun 2020 By Christopher Thompson

Package holiday operators trade on their ability to take the hassle out of vacation planning. Not so for shareholders in TUI as Covid-19 pummelled Europe’s largest tour operator. Mediterranean countries reopening to tourists may provide some succour. Any respite, however, is likely to be seasonal.

TUI’s official motto – “discover your smile” – has been replaced with a sad face as lockdowns across Europe induced a collapse in travel and sunbirds cancelled bookings. The Germany-based company run by Friedrich Joussen described the pandemic as the greatest crisis the industry has ever faced.

It comes at a particularly sensitive time too. Travel companies rely on the summer months to generate most of their profits, and popular southern European destinations accounted for over half of TUI’s revenue in 2019. Joussen was forced to take drastic action, cutting operating costs of around 1 billion euros per month by 70%. That was necessary given he only had enough cash to survive around seven months, assuming no revenue.

With economies reopening, some overseas vacations will now be salvaged. Having lost around three quarters of their value between the start of the year and mid-May, TUI shares have rebounded by some 60% since Spain, one of its largest markets, announced tourists could return from July. A bookings bump from sun-starved northern Europeans plus the sale of its cruise joint venture mean Joussen should avoid an imminent cash crunch.

Still, any relief is likely fleeting. New lease accounting rules mean TUI’s net debt increased by 149% year-on-year to 4.9 billion euros at the end of March, equal to over 6 times last year’s earnings before interest, tax and amortisation. A forecast 40% year-on-year decline in revenue this year and 2 billion euro operating loss – as analysts at Goldman Sachs predict – will pile pressure on the balance sheet. And government quarantine rules, particularly in the UK, may keep sun-lovers at home.

Joussen has two options: follow UK peer On the Beach and raise capital from shareholders, or tough it out. However, it may be harder to tap investors later on, particularly if a second shutdown follows. He could always seek a bailout, as Deutsche Lufthansa did. But, as the airline discovered, the German government and European Commission may insist on punitive terms and asset sales. Raising capital now would be a prudent move. A resurgent southern Europe has spared Joussen from a rainy summer. He should enjoy the sun while it lasts.


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