Airlines

Rival travel stocks leaped after Thomas Cook's demise, but turbulence remains

Key Points
  • The British stalwart's biggest like-for-like rival, TUI, saw its shares jump almost 10% on Monday morning and continued to climb into Tuesday, closing at 959.6 pence per share. The stock slipped 5% lower on Wednesday.
  • Shares of Jet2 owner Dart Group rallied almost 10% at Monday's open to peak on Tuesday at 928p per share, and were still trading at 904p per share on Wednesday afternoon.

European travel operators and airline stocks enjoyed an initial spike after the news emerged over the weekend that rival firm Thomas Cook had filed for bankruptcy.

But while analysts agree that the demise of the world's oldest travel firm is an opportunity for rivals, a number of long term challenges continue to hang over the sector.

The British stalwart's biggest like-for-like rival, TUI, saw its shares jump almost 10% on Monday morning and continued to climb into Tuesday, closing at 959.6 pence per share. However, it fell back by 6% on Wednesday, and there are further headwinds to consider.

"Life has been hard for TUI in recent years with the company suffering from certain aircraft being grounded, overcapacity in the airline sector and the impact of Brexit uncertainty on consumer spending," Russ Mould, investment director at U.K. brokerage AJ Bell, said in a note Tuesday.

But he added that Thomas Cook's collapse would be "Christmas come early" for TUI, despite some short-term costs associated with repatriating Thomas Cook customers stranded overseas, and lost revenue from TUI holiday packages that used Thomas Cook flights.

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"Short-term pains will almost certainly turn into long-term gains for TUI. It has a chance to mop up business that would have normally gone to Thomas Cook and to potentially convince some of its rival's customers to go for some of its more differentiated offerings rather than a bog-standard package holiday," Mould explained.

"For example, current trading shows how its holiday experiences continue to be the strong part of the business, such as husky sleigh tours in Lapland or a trip to Ferrari Land in Spain."

There is therefore a "major chance" for TUI, he added, but it will require some "very smart marketing."

In its full-year trading update, TUI insisted its business model was proving "resilient" in challenging market conditions. However, it warned that Brexit uncertainty hitting demand and the grounding of the Boeing 737 Max 8 airliner. The group sees full-year earnings falling by 26% and has issued two profit warnings so far this year.

Richard Hunter, head of markets at Interactive Investor, said the update proved that these are "tough times in the travel industry" but stressed that TUI's diversified business model and digital aspirations render it a "different animal" to its fallen rival.

Quick gain eases long-term pain

Shares of Jet2 owner Dart Group rallied almost 10% at Monday's open to peak on Tuesday at 928p per share, and were still trading at 904p per share on Wednesday afternoon.

Low cost airlines also saw an investor windfall. Wizz Air shares climbed from £35.32 per share at Monday's open to £35.85 on Tuesday, but pulled back slightly Wednesday amid a wider European market sell-off.

EasyJet jumped more than 6% early in Monday's session to around £11.21 and continued its steady climb to trade at £11.27 Wednesday afternoon, defying losses throughout the sector.

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Ryanair and EasyJet have both issued profit warnings this year and while the Euro Stoxx Travel and Leisure Index is up 4.39% over the past month it is down by almost exactly the same amount across the past 12 months.

"In all, the jury remains out not just for TUI's progress but perhaps for the industry as a whole," Hunter said.

"The (TUI) share price has spiked of late, having risen 23% over the last three months including a fillip (Monday) following the Thomas Cook news, although over the last year the picture is markedly different," he added in a note Tuesday.

"Here, a decline of 37% compares to a 1.8% dip for the wider FTSE100, while the general view of the shares has also recently eased. Perhaps not surprisingly, given these uncertain times and clear challenges, the market consensus of the shares has now slipped to a hold, albeit a strong one."