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Flight Centre could profit from the $14.5 billion revenue gap left by Thomas Cook

The collapse of giant UK travel agent Thomas Cook showed the risks for investors in buying companies with too much debt that employ aggressive acquisition strategies.

Other factors people blamed on its collapse were Brexit as the weak pound put UK holidaymakers off travelling overseas. While even the hot weather of 2018 was blamed by the management team, although this seems a stretch given the company had navigated 178 years of variable weather previously. 

Notably, rival UK and global travel agents actually saw their own valuations lift in repose to Thomas Cook’s collapse. That’s because the removal of a giant player from the market means its customer base including holidaymakers, tour groups, and hotels is looking for new service providers. 

UK listed travel stocks Tui, Jet2 and online only player On The Beach all climbed in response to the news. 

Flight Centre Travel Group Ltd (ASX: FLT) is also a potential major beneficiary of the collapse as it is a direct competitor with Thomas Cook in providing, flights, hotels and package holidays to UK consumers.

The UK is Flight Centre’s third-largest market and in fiscal 2019 it posted EBITS of $57 million on total transaction value of $2.3 billion.

Thomas Cook’s travel business (ex airlines) had 11 million customers in fiscal 2018 and posted revenue (not TTV) around A$14.5 billion. As such we can see it absolutely monsters Flight Centre in the UK and leaves a huge available travel market for Flight Centre to soak up.

Flight Centre also has a super strong balance sheet with $336 million cash on hand thanks to the conservative management of it founder unlike the debt laden Thomas Cook that was subject to a number of mergers and takeovers prior to collapse.

Therefore Flight Centre is also well positioned to take advantage of large gaps now in the market. 

Webjet Limited (ASX: WEB) has taken a direct $7 million EBITDA hit on its B2B business from the Thomas Cook collapse. However, over the long term the opening up of the UK travel market may not prove such a bad thing for it. 

Overall then as one door closes, another door opens, and Flight Centre in particular could profit from the restructure of the UK travel scene. It’s a stock I quite look given its valuation, balance sheet, track record, and handy dividend yield.

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Motley Fool contributor Tom Richardson owns shares of Webjet Ltd.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited. The Motley Fool Australia has recommended Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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