Europe’s tour operators are on a holiday from hell. Late on Wednesday, TUI AG, which until now has defied the downturn in the region’s travel market, cautioned on earnings. Then Thomas Cook Group Plc, which delivered a nasty profit warning in November, said it was “reviewing” its airline business.

These two mainstays for Europe’s holidaymakers have been hit by a triple-whammy. First, last year’s heatwave put people off booking last-minute summer holidays. As soaring temperatures continued into the autumn, that also weighed on bookings into the winter holiday season and the summer of 2019.

Second, uncertainty about Brexit is making Brits think twice about booking their vacations. Before now, spending had held up, while discretionary purchases in other areas such as clothing and footwear suffered. That’s no longer the case. Finally, there’s been a switch back to holidays in Turkey and Tunisia, as terror fears have eased, leaving the big operators with too much capacity in Spain.

While this confluence of factors might be unusually unfortunate, it’s hard to see the situation improving significantly.

True, the companies’ luck with the weather might change. A colder and wetter Summer, not an uncommon event in Britain, would encourage people to swap their back gardens for a faraway beach.

But the uncertainty over Britain leaving the EU is a long way from resolution. With no certainty over what kind of Brexit will emerge, expect the impact to continue beyond the March 29 departure date. If the country leaves without a deal, the economic damage might be severe.


Even if the Brexit fallout is contained, clouds are gathering over the world’s economy. The European Commission slashed its growth forecasts for all the euro region’s major economies on Thursday. Germany, a key market for both companies, slowed dramatically at the end of last year. And then there’s the structural change in the industry brought about by online rivals.

Both companies are naturally trying to protect their business, including capacity cuts at Thomas Cook and cost controls at TUI. Thomas Cook is also thinking about selling its airline, which could have an enterprise value of about 1 billion pounds ($1.3 billion). That’s sensible. The unit has attractive takeoff slots in Germany and the U.K. and is profitable. But finding a buyer may not be easy. Europe is awash in surplus capacity, while Thomas Cook’s fleet is relatively old.

Still, selling whole or part of the division would let the company shore up its balance sheet. Thomas Cook had net debt of 1.6 billion pounds at December 31 (its market value is just 541 million pounds), plus a similar amount of operating lease liabilities mostly related to the airline. Although this is the weakest point in the company’s financial year, as it comes before the peak summer season, the borrowing burden is high compared to the modest cash flow expected from Thomas Cook in coming years.

A disposal might also let the British company invest in developing an own-brand hotel arm. That would copy a path that Tui has trodden for some time. While the latter was hurt by carrying too much hotel capacity in Spain, having its own hotel and cruise brands helps it stand out from internet rivals.

Tui’s shares plunged on Thursday, while Thomas Cook’s soared. Even so, with its much stronger balance sheet, the latter is better primed to weather the industry turmoil. It’s a more tempting destination over the long run.

--With assistance from Chris Bryant.

To contact the author of this story: Andrea Felsted at afelsted@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

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

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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