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Six Factors That May Determine If Thomas Cook Survives the Year

Six Factors That May Determine If Thomas Cook Survives the Year

(Bloomberg) -- Within the space of a year travel industry giant Thomas Cook Group Plc has gone from expressions of mild concern about how a freak north European heatwave might crimp sales to a full-on fight for survival as its bonds and shares trade close to record lows.

Here are six factors that may determine whether the company that invented the package holiday in Victorian England will be helping Europeans to get a tan in summer 2020 -- or be putting its feet up for good.

Airline Disposal

Thomas Cook revealed in February that it was looking to raise cash by selling airline operations that carry 20 million passengers a year from the U.K., Germany and Scandinavia to the Mediterranean and other holiday sunspots. The fleet of about 100 jets flew 90% full in 2018, generating 3.5 billion pounds ($4.5 billion) in revenue and 129 million pounds in underlying earnings, with Deutsche Lufthansa AG, Virgin Atlantic Airways Ltd. and Ryanair Holdings Plc said to be taking a look. But the unit’s allure is tempered by its seasonality (spare jets are sent to Canada each winter for Caribbean flights), while Europe is already enduring a capacity glut that’s sparked a price war and prompted Lufthansa to freeze growth at its once fast-expanding discount arm. A sale of Cook’s Frankfurt-based Condor brand to the German giant remains possible, but sliding fares and the deepening crisis mean the price may be falling.

Loan Lifeline

For all its troubles, banks haven’t turned their backs on Cook yet, with lenders last week agreeing to provide a 300 million-pound loan to help support the travel agent through next winter, when it needs cash to book hotels for 2020. Unlike the company’s existing debt, though, the facility comes with strings attached. It’s a secured loan, meaning that there will be less money available for other creditors in case of liquidation. And while it’s available from October through June next year, that’s only if the company shows “progress” on the airline sale. Quite what that means hasn’t been fully explained.

Brexit Jitters

Six Factors That May Determine If Thomas Cook Survives the Year

Chief Executive Officer Peter Fankhauser said in an earnings statement last week there is “little doubt” that concern about Britain’s plan to leave the European Union has put a brake on U.K. demand. Other travel companies, including EasyJet Plc and Ryanair, have also been negatively impacted by the uncertainty surrounding the protracted negotiations. But as a tour operator Cook’s thousands of hotel rooms mean it can’t simply redeploy planes. Unlike global rival TUI AG, which owns much of its hotel space, Thomas Cook can’t cut prices to boost occupancy without taking a profit hit. With the European Union extending the Brexit deadline to Oct. 31, the issue isn’t about to go away. Demand elsewhere is also weakening, with sales in Germany and Sweden failing to match availability even after swingeing capacity cuts.

Rain Dance

The start of Thomas Cook’s current ills can be traced to it reserving too much hotel space in south European resorts -- especially in Spain -- last summer when temperatures surged beyond 30 degrees Celsius (86 Fahrenheit) across Britain and other northern nations, prompting millions of sun-seekers to holiday at home.

Six Factors That May Determine If Thomas Cook Survives the Year

Cook had initially predicted that it would partly make up lost ground with a surge in winter bookings to locations such as the Canary Islands, but that failed to transpire. Another year of record highs in northern climes would be disastrous. So a spell of wet, cool weather will be at the top of Fankhauser wish list for coming months.

Debt Swap

Thomas Cook has suffered a debt crisis before and lived to tell the tale, flirting with collapse in 2011 when bookings were hit by a consumer spending squeeze in the U.K. and unrest in tourist resorts in North Africa. Its salvation then came in the form of a rescue loan and subsequent 1.6 billion-pound refinancing that included a rights offer and bond sale. The new threat to the company may require stronger medicine, especially since scope for cutting costs through the closure of travel shops has been largely exhausted. Bondholders now expect to recover as little as 34% of their investments, based on declines this week, with Thomas Cook’s credit-default swaps indicating that it has a 67% chance of defaulting before the end of the year, according to ICE Derivatives data. That could point to a debt-for-equity swap as the company’s best chance of survival, Citigroup analyst James Ainley said Monday. The analyst on Friday cut his share-price target to zero, saying its debt outweighs the intrinsic worth of the tour-operator and airline arm.

Consumer Concern

None of the above will matter if customers stop buying vacations and flights from Thomas Cook for fear that the company won’t be around to honor their bookings. Concerns were heightened Saturday after Sky News said payment firms are seeking to hold on to money from transactions for longer to guard against a further deterioration in Cook’s financial health. “The wider issue now is that they may be facing a loss of confidence among consumers spooked by the risk of disruption,” said Olivier Monnoyeur, a London-based high-yield portfolio manager at BNP Paribas Asset Management. “That could be the final straw that accelerates the company’s deterioration.”

--With assistance from Lucca de Paoli and Laura Benitez.

To contact the reporters on this story: Luca Casiraghi in London at lcasiraghi@bloomberg.net;Richard Weiss in Frankfurt at rweiss5@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Christopher Jasper, Vivianne Rodrigues

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