Tui AG** €


(€18.48bn) **Listed in Frankfurt


3.52bn +26%


everyone can weaken their FX rates at the same time – someone’s FX rate has to strengthen and that someone is the US and the dollar. That is bad news for US exporters and UK travellers to the US.


Side effects These positive trends will, of course, have some negative side effects. In particular, investors will be keeping an eye on profits, especially in industries such as travel where margins are traditionally razor tight and easily overwhelmed by revenue expansion. The key concern here is that capital costs


will be slowly rising, wage rates might start bumping upwards and governments will need to start increasing tax rates to help fix structural deficits. We have already seen a vision of the future in Japan where the government recently hiked consumer tax rates and nearly caused an economic slump. Poorer consumers cannot afford increases


in tax rates, but governments will be desperate to raise revenues. The fix might come from increased industry-specific taxes; I would wager that energy-price fixes, aviation duties and carbon taxes will increase in the next few years. Falling energy prices will be especially tempting – governments will want to plug holes in their energy levies by pre-emptive raids on the transport sector. I would also argue that although the


€


1.83bn -12%


Thomas Cook


(€9.1bn)


eurozone should have a better 2015, there is still one big risk, France. Put simply, the country is in a mess, with a potential revolt against its political elite, a worsening balance sheet and stalling consumer confidence. Investor panic could result in an even sharper retrenchment in the domestic economy.


Company prospects So given this big picture, what should we expect at company level? It will come as no surprise that industry leaders such as IAG, easyJet, Ryanair and Tui Travel (post-merger with Tui AG) will be in good shape. Both Ryanair and easyJet should see a big bounce upwards in profit, although at the margin level I would argue that both will be under some pressure. IAG should be sitting pretty, but slower growth in North America might have an impact, as might a sharp downturn in Latin America. I can’t see either Tui Travel or Thomas


Cook experiencing a big upturn in profits, although Thomas Cook should move comfortably into profit. Both will face company-specific issues: integration with German-merger partner Tui AG at Tui Travel, and question marks around the position of chief executive at Thomas Cook. Investors could be spooked as they worry that the focused leadership at Tui Travel becomes diverted by the merger, while virtually


every investor I talk to expected Cook chief executive Harriet Green to move on, although maybe not on the morning of the group’s full-year results announcement. Green’s successor, Peter Fankhauser, still faces a huge challenge – in part to build the differentiated brands without massive increases in marketing budgets but also to tame the group debt.


Cruise sector and OTAs One last observation based on those likely to be the biggest winners and losers – the cruise sector and digital-travel businesses. Sharply lower energy prices will be unalloyed good news for the cruise giants, as will the increasing focus on all-inclusive holidays. By contrast, the digital travel giants might


face a tougher time in 2015, especially as I suspect the market will be saturated, with Tui and Thomas Cook desperate to grab market share via their own fast-expanding web businesses. Add in Google’s steady encroachment and the digital travel giants’ natural focus on the US market (which might slow down a bit) and we could see some big profit misses in the digital sector – with a knock-on effect on funding for travel start-ups.


Rise in corporate prices


The increasing cost of capital will have a knock-on effect – rising prices for travellers most able to afford them, namely business travellers. The constant drum beat from economists is that we should fear Japan- style deflation. But this isn’t a uniform trend. In business travel, the bigger issue will be increased product prices. The Carlson Wagonlit Travel (CWT) 2015 Global Travel Price Outlook, produced with the GBTA Foundation, noted: “Travel managers expect price increases next year across the board on . . . air fares, hotel room rates and rental car rates.”


Travel Weekly Insight Annual Report 2014 | 33


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