Sun, Sea, Sangria! Spain Saves the Holiday

Tui's Spanish hotels are a bright spot, but worries persist.

As Europe's workers head to the beach, travel companies don't have too much to celebrate.

Tui snuck a lowering of its revenue forecast into an analyst presentation. Sales are expected to increase by 2-3 percent this year, compared with the previous expectation of 3-5 percent. Underlying earnings are still forecast to rise 10 percent, which helped lift its shares about 4 percent on Thursday.

Tui's not alone in lowering expectations. Last month, rival Thomas Cook cut its profit forecast, while just a few days ago, Norwegian Cruise Line reined in earnings estimates. Britain's vote to leave the EU, the failed coup in Turkey and a string of terrorist attacks have darkened the outlook.

No Holiday

Thomas Cook shares have fallen almost 50 percent this year as the industry outlook has darkened

Source: Bloomberg

But even after Tui's stealth forecast cut, it looks best placed to withstand the shocks. Both it and Thomas Cook have reduced exposure to to Turkey, which is sensible as consumers abandon a previously popular destination. For Tui, it accounts for 14 percent of capacity. The figure at Thomas Cook will be about 11 percent of capacity by the end of the summer.

The two companies have been transferring to Spain. For Tui, the country now represents about a third of capacity. It benefits from owning the RIU hotel chain, which has a big Spanish presence. Its room occupancy rose 5 percentage points, while the average rate per bed increased 3 percent. Thomas Cook has about 35 percent of its capacity in Spain too.

Tui has also been expanding its cruise business. It reckons that overall, its own hotels and cruise operations contribute about a third of profit. It wants to increase that to half within five years. The model means it's less reliant on third-party hotel operators if it needs to make quick changes. Thomas Cook, by contrast, owns a negligible number of hotels.

Tui also has a strong balance sheet, with net cash of 121.2 million euros ($135 million) in the final quarter of its last fiscal year, compared with 139 million pounds of net debt at Thomas Cook. It pays a dividend. Tui's additional flexibility will come in handy if times get even tougher. 

This helps explain why it's shares have done better, with Tui down about 14 percent this year, and Thomas Cook falling almost 50 percent. Thomas Cook trades on just 5.8 times the next 12 months' earnings, well below Tui's 10.5 times.

Travelling Light

Tui is more highly rated than its peer on a forward P/E basis

Source: Bloomberg Intelligence

While Tui's financial discipline is admirable, its future is far from worry-free. Islamic State is reported to have made comments about targeting Spain. Any attack that made the country feel less safe would affect Tui, given its hotel assets there. Meanwhile, the fallout from Britain's vote to leave the EU is yet to be felt. The impact has been limited so far for both Tui And Thomas Cook, but many holidays will have been booked before the referendum.

As TUI CEO Fritz Joussen points out: summer 2017 is a long way off. He should hold off on the tanning lotion.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andrea Felsted in London at

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    James Boxell at

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