Travel Economy

‘In the current environment, the CFO should care more than ever about the funding of the whole organisation,’ says Ludger Heuberg. ‘That means trying to provide a very sound cash forecasting system by giving the operating units the right tooling to make this happen. It also means providing additional data on the provision of cash money from external sources if needed.’

TGC runs, he says, a very disciplined cash forecasting system, which has recently been enhanced by extra treasury functions on the firm’s SAP system.

‘We are still working on even more precise cash forecasting, exceeding six, seven or eight-month periods. One of the peculiarities of our business is our seasonal liquidity curve which reaches a very low point in late December, early January. For these weeks we are even trying in the short-term daily forecasting. It ties up some experts for sure, but not the operational individuals who run their businesses in front of customers.’

Heuberg does not think it sufficient to merely hit the right ratios with TCG’s core banks.

‘It is crucial that we have the right strong relationships for us to get the money that we would like to have. TCG’s relations with its bankers had not come under strain but he says it is notable how lending strategies have changed.

‘Banks are often coming back to the very old-fashioned kind of syndicated loan, which is far easier to understand and clearer on the risk structure. Banking aversion to risk means they want plain vanilla.’

Heuberg believes that in time more structured vehicles will return but only if the embedded risks are clear and can be followed up. But even simple syndications were difficult in markets likely to be crowded with government paper. He points to November’s expensive issue by BMW. Indeed the yield gap between government and corporate paper has widened dramatically. In that month the gap between US Treasuries had widened from 50 basis points 18 months before to 415.

‘Even the better corporate risks are finding it hard to get funding in place cheaply,’ says Heuberg, ‘and the fees, especially the underwriting fees are going up appreciably. Time will tell but in the next couple of months I would not expect any cheap buys. Thereafter, I am sure that the spreads will be widening between those companies that are highly rated and those that have medium or even poor ratings.’

In his view the ratings agencies are of little help to companies, because they work within cycles and any kind of long-term corporate rating was only moved over time.

‘These cycles maybe twice a year or so, might have been sufficient in the past, but in these volatile times they are not good enough. Indeed if they could not get it right in relatively benign circumstances, they are going to be under even greater pressure now. I believe that if rating agencies want to survive in their core area, they are going to have to change in the way they carry out their assessment of corporate ratings.’

TGC says Heuberg has completed the sometimes difficult process of renegotiating payment terms on running contracts with service providers. That is to reduce the risks of pre-payment to airlines and hoteliers who might cease trading.

‘This means that some payments will be a little earlier than in the past. Our main target is to ensure that both before and after exceptions, the cash flow from operations is coming through to the bottom line of our cash flow statement.’

Still acquisitive

Despite the economic downturn, Thomas Cook is sticking to its strategy of organic growth coupled with acquisitions. In December 2008 it paid £87 million for a majority stake in the privately owned Gold Medal International, the UK’s fourth biggest tour operator and the biggest operator to Dubai.

However, explains Heuberg, ‘We want to increase our business volume by targeting M&A opportunities, especially in emerging markets. But some of those markets are close to collapse or experiencing a sharp downturn, as we see in Russia.’

The challenge, he adds, is to work out if the markets are about to hit their low point. He believes that it is currently better to wait but suspects that Thomas Cook will be looking for more acquisitions before the end of 2009.

Funding an outright purchase ought in principle to be no problem but the outlays may not have to be big. Some new businesses, he says, could be acquired by way of merger. Other opportunities would probably command relatively low prices.

‘If you look at Russian opportunities for instance, the cost would be fairly low. We would not be too worried in getting funding in place for that. The same would apply to a Chinese operation. Obviously we would always agree on certain earn-out models, which might mean a quite substantial final cash payment, but the initial payment to be made in 2009 would be very limited.’