TUI in the shadow of Thomas Cook

Fliers will have to undergo temperature checks prior to boarding and will be encouraged to wear face masks, the latter an obligatory measure for cabin crews. Queuing for toilets will be prohibited on board, although I suppose that is better than charging punters for the privilege of using them.

How effective all this will be when you are breathing recirculated air in a pressurised steel tube at 37,000 feet is anyone’s guess. But health secretary Matt Hancock, himself a Covid-19 survivor, decided to rain on everyone’s parade anyway, insisting that it is unlikely that sunseekers will be able to get away during the regular summer holiday season. The health secretary added that this was not the official government line, at least not yet. But all the sybarites out there may be forced to make do with Skegness on a wet weekend in October.

You could be forgiven for thinking that policy on travel restrictions is being made on the hoof. The government’s latest update provides little succour for travel operators in the face of an existential crisis. Consider the plight of TUI AG (TUI). The German travel group has been unable to offer any holidays that kick off on or before 11 June 2020, thereby forcing it to offer voucher refund credits to holidaymakers with prior bookings that have been cancelled. The cash redemption process is a somewhat arduous affair by all accounts, but you can understand why TUI might want to either delay or limit the drain on cash reserves.   

The group was given added firepower at the end of March, when the German government gave the green light to a bridging loan of €1.8bn (£1.59bn) from the KfW, Germany’s state-owned development bank. The loan was put in place while TUI renegotiated its revolving credit facility with a consortium of banks. No dividends are to be paid while the facility remains in place, but at least the travel group’s debt covenants will not be tested until September 2021.

Understandably, management has been trimming the sails, invoking force majeure clauses on all the group’s third-party hotel contracts, which contributed to a 70 per cent reduction in monthly cash costs. Capital expenditure commitments have been halved and incremental aircraft leases are being renegotiated. Over the long haul, the group plans to reduce its running costs by nearly a third on a permanent basis, necessitating around 8,000 job losses.

Harsh medicine certainly, but will that be enough? Taking account of lease liabilities, net debt from continuing operations as of the March half-year increased by €2.94bn to €4.90bn, representing 176 per cent of net assets, which is somewhat worrisome with the debt-driven collapse of Thomas Cook fresh in the memory.

Given wider issues, the group's half-year figures to March only tell us so much. At €6.64bn, half-year sales were broadly flat, while reported losses were exacerbated by lower margins and a one-off charge of €77m relating to the grounding of the Boeing 737 Max fleet. Sales and profits are normally weighted to the second half, but there is no specific guidance for the September year-end. One suspects it will not be pretty.

The good news is that 35 per cent of the 2020 summer program is still booked, but even if there is a mad scramble for bookings once restrictions are lifted, certain segments of the business could continue to suffer regardless. You are left wondering about the public’s appetite for maritime adventures following the Covid-19 outbreak. Few retirees will be hankering for a berth on any vessel if they think it will go the way of the Marie Celeste. This is a concern given the ongoing integration of Hapag-Lloyd Cruises within the group’s joint venture with Royal Caribbean Cruises.

The group has around €2.1bn in cash and undrawn facilities to see it through the coming months – and you imagine it will need every penny. There was a net cash outflow of €734m through the period, largely reflecting the second half weighting, although any seasonal improvement is far from guaranteed in FY2020. And cash refunds for cancelled holidays are still expected to run at “mid-single digit hundred millions per month” (presumably that equates to €500m). Everything considered, it is probably just as well that the European Union’s state-aid provisions have gone out the window.