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TUI’s shares rise after collapse of its arch-rival

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

When there are winners there are losers and there is usually opportunity in the face of adversity. Travel company TUI is doing everything in its power right now to prove that it’s nothing like Thomas Cook - and every bit a company investors should have faith in.

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Issuing a trading update in the wake of the collapse of the world’s oldest tour operator, Thomas Cook, yesterday TUI, the still-up-and-running Anglo-German tour operator, was at great pains to tell the world that it’s on track.

It seems investors have had no qualms about buying into the company that is now the last one standing in the traditional package holiday sector. A once crowded market place, the 21st century shift from brochure to browser, has whittled the contenders down to just one. And time will tell whether it can carve out a viable business when it’s so out on its own.

For now, TUI shares are certainly enjoying their day in the sun. They shot up more than 6% yesterday to 893.4p, as investors welcomed the removal of the company’s arch-rival from the market.

The two companies had been the only ones to book up third-party hotel rooms in the way they did. So investors are clearly buying TUI shares in the hope that higher package holiday capacity and better pricing will spell greater profits for the surviving group.

The company certainly before yesterday had to share the key holiday markets of the UK, Germany and the Nordics with Thomas Cook. Now it’s got the whole package holiday market to itself some reckon every £2 billion of Thomas Cook revenue it can pick up will add 4% to its own group profits.

In today’s trading update TUI said it was preparing measures to support customers stranded by its rival's demise, including offering replacement flights.

It also said it was assessing the short-term impact of Thomas Cook's insolvency, on the final week of its financial results for the 2019 financial year, but that its summer season was closing out in line with its expectations. It also acknowledged that “external challenges” would continue into its 2020 year end.

But it added: “Our vertically integrated business model proves to be resilient, even in this challenging market environment.”

However, let’s not forget that there’s a lot more to TUI’s success, or failure, than simply Thomas Cook’s demise. The grounding of the 737 MAX aircraft, ongoing Brexit uncertainty and a glut of over-supply in the airline industry, all have the capacity to continue to weigh heavily on TUI’s bottom line.

Back in March, TUI said its 2019 profits could fall by as much as 26% after its Boeing 737 MAX aircraft were among those grounded amid safety concerns following the two crashes. It said it expected a one-off €200 million (£173 million) impact on underlying earnings relating to costs of replacement of aircraft, higher fuel costs and other disruption costs and the anticipated impact on trading.

TUI is, at best, in a holding pattern right now. In a statement, chief executive Friedrich Joussen said: Our vertically integrated business model proves to be resilient, even in this challenging market environment.”

TUI’s shares rose a further 1.55% higher in morning trading to 916p.

More on TUI

Five year performance

(%)
As at 24 Sept
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
TUI 7.1 13.3 15.3 8.7 -2.8

Past performance is not a reliable indicator of future returns

Source: FE, as at 24.9.19, in local currency terms with income reinvested 

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
 

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