Aviation: Thomas Cook considers selling airlines

United Kingdom-based Thomas Cook Group is exploring options that could include the sale of its airline unit which includes Thomas Cook Airlines, Thomas Cook Airlines Scandinavia and Condor Flugdienst. A sale could help reduce the group's £1.59bn debt and enable it to open more exclusive hotels to strengthen its brand in holiday resorts.

Group CEO Peter Fankhauser said that bookings for summer 2019 - which are currently down 12% - reflect consumer uncertainty, particularly in the UK.

Thomas Cook's airline operations are under review. (Lasse B.)

He admitted that “some customers appear to be putting off bookings because of concerns about Brexit" and explained that there would be a review of the group's airline business. Fankhauser continued: "We are at an early stage in this process which will consider all options to enhance value to shareholders and intensify our strategic focus."

Profitable airline - loss-making tour operator

Profit at the three carriers, which operate 103 aircraft, increased by 37% to £ 129m in 2018 - around £6 per passenger. Together they generated revenue of £3.5bn and carried 20m customers. Around half of the airline unit's capacity is used by Thomas Cook's tour operator business for package holidays, while the rest is sold direct on a seat-only basis. The three airlines have significant slot holdings at London Gatwick and Manchester airports in the UK, as well as Frankfurt and Munich in Germany.

Although the airlines trading position is positive and improving, overall group losses widened by £14m to £60m in the first quarter of the year despite revenue increasing by 1% to £1.65bn. Thomas Cook's package holidays business is operating in a challenging market and it needs to upgrade properties to compete with rivals such as TUI and Jet2 Holidays. The firm needs to fund an expansion of its own-brand hotels portfolio, which will add 20 properties this summer.

New aircraft

Some of Thomas Cook's aircraft - particularly its Airbus A330s, Condor's Boeing 767-300s and the odd-ball Boeing 757-300s - are also coming up for replacement as the oldest have reached 20 years of age.

Some of Thomas Cook's aircraft, including its Airbus A330s, are coming up on replacement age. (Aero Pixels)

A major fleet acquisition program would incur significant costs that would put downward pressure on the results of the airlines at a time when the group's focus is on investing properties to alleviate pressure from competitors.

Condor is one of the carriers Thomas Cook might sell as part of a strategic review of its business. (Kiefer)

Not all bad news

Unlike some of the other recent stories emanating from the European aviation industry, the news that Thomas Cook might sell some or all of its individual its airlines isn't really bad news. The firm has already pointed out that if the carriers are sold, the new owners will be required to provide seats to its package holiday business. Even if it relinquishes ownership of its airlines unit, Thomas Cook's inclusive tour operations will still need some of the seat capacity currently provided in-house.

The Aviation Oracle believes that Condor's operations could be a good fit for Eurowings, a Lufthansa subsidiary that concentrates on no-frills European and long-haul services. But its difficult to see the group letting its UK and Scandanavian airlines go to its main local rivals (e.g. TUI Airways or Jet2), as the divestment would mean it ceding brand recognition for the air travel component of its package tour business.

The Thomas Cook board clearly believes it needs to invest and upgrade its holidays business to deliver a competitive edge in a challenging market, but the group is already deeply indebted. If its tour operators go down, they will likely take the airlines with them as 50% of the seat capacity comes package holidays. Selling the airlines could therefore be a way forward despite it entailing the loss of vertical integration, especially as they may require significant investment in the not too distant future.