City Insider: Travel suffers a nasty strain of ‘Exceptionalitis’

City Insider - A City perspective on the travel industry from FT journalist David Stevenson

Tui’s Q2 results have prompted a depressing new outbreak of exceptionalitis – but Travelzest’s performance offers a ray of light

So much for the shareholder revolt at Tui Travel.

Clearly a handful of institutional investors are annoyed at the accounting mess up, the subsequent switch of auditors (from KPMG to PricewaterhouseCoopers) and the directors’ share option scheme, but nowhere near as many as the media had imagined.

Last Thursday only 58 million votes (just over 6% of the total) voted against the appointment of PwC and an even smaller number (44 million , just under 5%) vetoed the directors share allotment (which included a slug of equity for the former finance director).

In shareholder activist terms that’s a very small revolt especially when you consider that Tui Travel had been targeted by a number of corporate governance outfits for a big show of force. 

Frankly if I was an institutional shareholder I’d have found myself fuming about the trading numbers disclosed on the same day.

The key point here is that we’ve had yet another nasty outbreak of the frequently spotted “exceptionalitis disease”, which is a nasty, chronic and debilitating ailment pulverising the travel industry’s reputation in the City.

This time we’ve got Egypt and Tunisia to blame for a £25m to £30m hit in Q2 – over the last few years travel has blamed everything from inclement weather, through to adverse currency movements and geopolitical risk for material hits on the P&L.

What else could possibly go wrong?

Personally I found myself far more interested by a series of numbers released on the same day by Travelzest,.

Travel industry insiders will know all about the comings and goings at this small travel operator – the various litigation actions involving family members of the CEO as well as the controversial share allotments to key directors to pull off a takeover.

Yet, amazingly, none of these not insubstantial challenges seems to be derailing what is clearly a very impressive trading machine.

Let’s repeat the top line numbers, numbers that make Tui Travel look like a complete laggard:

• With exceptionals stripped out, profit for the last year increased 11% to £6.1 million (2009: £5.5 million)
• There was record level of total transaction value, up 15% to £217.6 million (2009: £189.5 million)
• Revenue value increased 14% to £43.8 million (2009: £38.3 million)
• Net debt fell from £9.6m to £8.8 million
• Cashflow at the group operating level increased from just over £750,000 to just under £5 million

Looking at the core business Travelzest seems to be benefitting from a big upsurge in business in North America and especially Canada but even in the UK the group seems to be cleverly rationalising its operations, launching new luxury brands and getting on with the boring job of growing organically.  

Clearly  Travelzest still has its own fair of ‘exceptional’ challenges not least the fact that although net debt is heading in the right way, its cost of servicing that declining debt is actually increasing. Me thinks it’s time for some smart refinancing.

Yet the most interesting final twist to this tale was the City’s reaction – or lack thereof. With trading numbers like this you’d have expected some doubters to return to the fold and start to bid up the share price which has slumped below 15p in recent months.

Yet the last time I looked the share price had barely budged more than a penny.

Inflation

One last observation this week on everyone’s favourite economic bogeyman – inflation. The mere mention of this word seems to be able to cause panic in the markets.

Here in the UK the poor old governor of the Bank of England has to write grovelling letters explaining why RPI is so stubbornly high and investor’s are making a stack load of bets on even higher rates, possibly hitting double digits next year.

If I were you, I’d be profoundly suspicious about making any broad, medium term assumptions on pricing.

There’s a wealth of data which suggests that deflationary pressures are still very intense in the UK and the US economy.  Commodity prices are indeed causing havoc and energy costs look very toppy but if you ignore these highly volatile numbers, a more worrying picture emerges.

The most obvious danger signs are in the US – every month the Department of Labour releases its eagerly awaited CPI report and the latest report makes miserable reading.

Once one excludes energy costs, nearly every major expenditure category in the US is showing either deflationary trends or very low, sub 1% increases (with the honourable exception of medical costs which seem to be endlessly increasing).

In the US, as in the UK, everyone seems fixated on energy costs but even allowing for these volatile price spikes, trend inflation rates summarised in the table below look profoundly worrying.

Service price inflation is still severely restrained and although energy and food prices are hammering consumers, there’s evidence that US consumers at least are responding by cutting savings rates and accepting a poorer standard of living.

This is a grim omen for big ticket non-essential discretionary spending, especially in travel. And before you console yourselves that the US is just an exception, consider the medium term deflationary impact of the coming UK government spending cuts.

We’ll be taking consumer spending out of the UK economy at a massive rate and encouraging long-term savings and investment. If I were a betting man, I’d be wagering a stack of money on a sharp reversal in energy prices in coming months and a deflationary upsurge later in 2011 and in 2012.

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