It seems not even a cost of living crisis can dull the appeal of a beach holiday for the sun-starved people of the UK. Tour operator Tui (TUI) reported in January that summer bookings had exceeded pre-pandemic levels. Meanwhile, easyJet (EZJ) said that it had sold more than 60 per cent of its summer package holidays before the start of February. The travel industry itself was not expecting a rebound of this magnitude – and it’s not entirely possible to pinpoint the factors that are driving it. 

Bull points

  • Growing premium focus
  • Variable, low-cost model
  • Cash-rich
  • Rehabilitated consumer reputation

Bear points

  • Recent share price gains
  • Vulnerable to cost of living shocks

One school of thought says consumers are sitting on savings accumulated during the Covid lockdowns and they’re spending these on travelling abroad after years of restrictions. Alternatively, it could be that some people simply prioritise their summer holidays over other forms of discretionary spending. If the latter is true, then investors in travel companies can hope for a degree of resilience in the event of a lengthy economic downturn. The volume of holidaymakers might ebb and flow, but it takes a once-in-a-century event (such as a global pandemic) to ground planes and close borders.

But if remaining Covid cash reserves are driving this summer’s bookings, investors may wish to exercise a degree of caution around travel operators. While it may look as though the sector is charging towards a full recovery, it’s hard to predict what the economic backdrop will look like this time next year. Companies that have strong balance sheets today, as well as greater exposure to the premium end of the market, will be best placed to withstand further turbulence. 


Premium positioning

On The Beach (OTB), which styles itself as an online travel agent (OTA), has historically been considered a ‘value’ vacation retailer. That appears to be changing fast – with the sale of five-star holidays on its platform growing by 82 per cent in the 12 months to September 2022 compared with FY2019. The group’s average booking value (ABV) consequently grew by nearly a third, offsetting the 18 per cent drop in three-star sales. According to analysis by its broker Numis, earnings quality from the premium market “is superior given that these packages tend to be booked earlier in the booking cycle”. 

Customers who are less price sensitive have the financial headroom to make payments many months in advance. This also leaves tour operators less reliant on the notoriously variable “late rooms” market. On The Beach seems to be aware of these dynamics, and has started offering what it calls a “differentiated customer experience” that includes premium lounge access and fast-tracked security options.

These airport extras are only logistically possible because passengers flying via On The Beach depart at different times and with different airlines. Tour operators that run their own flights, such as Jet2 (JET2), can’t guarantee lounge access to passengers because there won’t always be capacity to accommodate them. In a world in which a spate of bad online reviews will cost you future business, it can pay to make customers feel valued.

On The Beach’s reputation suffered in 2020 after it failed to issue full refunds to customers who could no longer go on holiday as the pandemic spread. The group insisted flights booked via its platform were non-refundable unless the flight was cancelled by the operating airline. This meant some customers only got part of their money back once travel was halted. Perhaps predictably, the company’s rating on the all-important consumer review website Trustpilot took a turn for the worse. It finally issued the refunds in question after raising £26mn in a July 2021 share sale.


Agents vs operators

Equity investors keen for listed exposure to the UK’s travel sector have a range of choices, including airlines, tour operators and agents such as On The Beach. While each market segment has its inherent pros and cons, there’s no doubt that companies that own and operate aircraft come with a unique set of risks. Fluctuating fuel costs can eat into margins, while maintaining or expanding a fleet is a significant capital expenditure. 

Despite the cheerful news included in its January trading update, TUI is still having to issue new shares to pay back a pandemic-era loan from the German government. “Tour operators are more at risk if [business] goes belly up,” said Alex Chatterton, an analyst at investment bank Panmure Gordon. “With On The Beach, 40 to 50 per cent of its expenses are marketing, which is obviously a variable cost. [Management] can just turn off the tap.” Cutting spending is naturally more complicated for airlines, which have far larger workforces and greater fixed costs.

With its net debt still above €5bn, some corners of the market are likely to be nervous about the state of TUI’s balance sheet – particularly next to rival Jet2. Now the largest holiday company in the UK, the latter’s self-confidence has been reflected in a recent order of 35 new aircraft from Airbus at a total value of almost $4bn. Though signs of a rebound are now evident across the travel industry, would-be investors will want to know which companies are poised to realise the most significant growth. 

On The Beach – with its capital-light, cash-rich balance sheet – currently trades on 11.9 times estimated earnings for the next 12 months, which represents a premium to Jet2 on 10.3 and TUI on eight times. “Historically, the vertically integrated tour operators have traded at a low-teens multiple and OTB at high-teens, implying OTB has the greatest re-rating opportunity,” noted Numis in November, when all three companies were trading on around eight times forward earnings. Share price moves since then suggest the old pecking order is beginning to reassert itself.

Given the company has only just started pursuing the premium segment of the package holiday market in earnest, further gains seem likely. Peel Hunt analysts now see “an unprecedented opportunity to gain market share now that there are only a small number of, hopefully disciplined, large competitors left in the UK”. Its primary competition in the world of OTAs is privately owned LoveHolidays. Panmure Gordon’s Chatterton said he was “struck” by how data-led the rival business is – which shows the imperative for On The Beach to keep investing in its technology and user experience. 

Recent evidence – and the enduring memory of missed years on the beach – suggests UK consumers, especially in higher income brackets, will prioritise holidays over other forms of discretionary spending. However, the ongoing margin success of tour operators and airlines depends in part on factors well outside of their control, such as the price of jet fuel. Online travel agents merely need to prove they can connect customers to the places and experiences they dream of throughout the dreary winter months.

Company Details Name Mkt Cap Price 52-Wk Hi/Lo
On  Beach  (OTB) £284m 170p 258p / 88.8p
Size/Debt NAV per share* Net Cash / Debt(-) Net Debt / Ebitda Op Cash/ Ebitda
94p £130mn 275%
Valuation Fwd PE (+12mths) Fwd DY (+12mths) FCF yld (+12mths) P/Sales
12 0.8% 5.1% 1.2
Quality/ Growth EBIT Margin ROCE 5yr Sales CAGR 5yr EPS CAGR
4.9% 4.5% 11.5% -41.3%
Forecasts/ Momentum Fwd EPS grth NTM Fwd EPS grth STM 3-mth Mom 3-mth Fwd EPS change%
56% 19% 35.3% 11.5%
Year End 30 Sep Sales (£mn) Profit before tax (£mn) EPS (p) DPS (p)
2020 71 -1.5 -0.5 0.47
2021 31 -18 -9.7 0.00
2022 144 13 6.3 0.21
f’cst 2023 168 26 13.0 1.18
f’cst 2024 187 33 16.1 1.61
chg (%) +11 +27 +24 +36
Source: FactSet, adjusted PTP and EPS figures
NTM = Next Twelve Months
STM = Second Twelve Months (i.e. one year from now)
* includes intangibles of £74mn or 45p per share