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Thomas Cook – the aftermath: Should we continue to invest in airline stock?

If you’ve heard the news about the Thomas Cook collapse, you may well be wondering why anyone would choose to continue to invest in the airline industry. If you’re one of the unlucky ones who got caught out by the collapse of the holiday giant – you weren’t alone, and you have our commiserations.

Whether you’re an existing investor contemplating your portfolio and what it invests in, or you’re just starting out, you may be wondering whether airlines are bad investments. What lessons should we learn from the crash of the giant holiday tour operator, and why did it happen in the first place?  Let’s look at what happened to Thomas Cook, and examine some of the pros and cons of continuing to invest in airline stock.

What happened to Thomas Cook?

Thomas Cook went into liquidation on Sunday 22nd September 2019. The 178-year-old package holiday tour company folded following emergency talks with major stakeholders and creditors, where they tried unsuccessfully to secure £200 million to keep the company afloat.

Why did Thomas Cook go into liquidation?

While reports are saying it’s because no one came forward to save them – no man or company wakes up suddenly £200 million in debt (if you do, that’s one heavy weekend)!

Like a toxic relationship that suddenly ends, looking back all the warning signs were there way earlier than September 2019. According to the Guardian, the collapse was the result of years of trouble for the holiday package tour operator. These include:

  • An unsuccessful merger. In 2007, Thomas Cook merged with MyTravel (the company behind well-known holiday brands Airtours and Going Places), leaving Thomas Cook with huge debts.
  • A , loss of £1.5 billion reported in May 2019 – over £1 billion of this was written off as a result of the bad merger.
  • Sizeable overheads – Thomas Cook ran over 560 high-street outlets and there was a noticeable decline in holidaymakers using retailers versus booking holidays online.

Death of the package holiday?

Since the holiday tour operator’s collapse, the media has cited various market changes as leading to the decline in demand for package holidays.

According to the Telegraph and the Guardian, these include:

  • A very hot British summer, meaning that more people have taken holidays at home in 2019.
  • Climate change and the impact of higher fuel costs, causing a rise in flight prices.
  • Uncertainty over Brexit.
  • The rise in people booking their holidays online.
  • An increase in people booking city breaks versus a beach package holiday.

All that said, there are still some of us who would love a sunny beach holiday right now (did we mention we’re based in Newcastle and it’s almost Christmas? Brrrrrrr!!!). Market reports suggest that the holiday market is still quite buoyant, particularly in the UK where, in 2018, 60% of us Brits took a holiday abroad, which saw an increase of 3% on previous years (Guardian, September 2019).

If they are savvy, flexible enough, and learn from the mistakes made, package tour operators, and airline companies, could still gain from the customers that Thomas Cook has left behind.

Are airlines bad investments?

The short answer to this is ‘yes and no.’

While package holiday tour companies like Thomas Cook, who are undergoing major losses, may now be considered a ‘bad investment,’ let’s not tar all airlines, and holiday companies, with the same brush.  

The rise of the internet and people booking their own packages doesn’t mean that all airline companies, or even holiday firms, are a bad investment – just that package holiday companies like Thomas Cook, who were operating very expensive high-street brands at a loss, may be less flexible and able to accommodate changes in market trends.

That said, Thomas Cook isn’t the only airline to be facing struggles recently – with companies like International Airlines Consolidated Group (IAG), who own British Airways, EasyJet and Ryanair all facing share price plunges this year. However, the collapse of Thomas Cook could also ease concerns that the industry was facing saturation versus demand.

It’s not that we’ve stopped taking holidays abroad (our team at Carrick Financial Management definitely won’t be!), it’s just that the way we buy and choose our holidays is changing – for example the rise of ‘Do-It-Yourself’ holidays and the increase in popularity of city breaks. Budget airlines, like easyJet and Ryanair, could gain from this shift in market trends.

Should I continue to invest in the airline industry?

If your portfolio or investment fund is investing in the airline or holiday industry, rather than stop investing all together, you may want to consult your  fund manager, or  your independent financial advisor first.

Firstly, find out which companies the fund is investing in exactly. ‘Airline’ is quite a broad term – this may not refer directly to package tour operators and budget airlines, it could also include companies who make aeroplanes, and even innovative tech companies who produce the small but crucial components and software that help to fly them.

If there are holiday tour operators and airlines in your portfolio, consider their performance and the assets that they have. For example, according to the Guardian, though Thomas Cook’s biggest rival, Tui, could be the next to suffer – the tour company has issues several profit warnings this year – on paper, it’s debts are much smaller in comparison and it owns many of its own assets, including cruise ships and hotel. It is also hoped that Tui will gain from Thomas Cook’s dissolution, by taking on its customers. Only time will tell.

You might also consider whether the risk within your portfolio is off-set by investments in other, less volatile markets. If you have an independent financial advisor, chat to them about your portfolio and the risk involved. 

Why a balanced portfolio is important. 

Stories like what happened to Thomas Cook are always sad, especially with so many investors, holidaymakers and employees losing out.  For investors, they serve as a reminder as to the risks involved in investing and why we should take a look at our investment portfolios from time to time to ensure that they are balanced.

Are your investments all in one company, industry or country? Do you own stocks and shares across a balance portfolio of investment – in order to spread your risk?

If you’re unsure, perhaps it’s time you spoke to an independent financial advisor and find out?

Carrick Financial Management are a team of independent financial advisors in Newcastle. We’re here to help you to make the right choice when it comes to your finances and choosing the right investment fund.

If you want no-nonsense, straightforward advice, from financial advisors that you can trust, call our Newcastle office on 0191 217 0007 or email enquiries@carrickfinancialmanagement.net.