OREANDA-NEWS. Fitch Ratings has revised UK-based tour operator Thomas Cook Group plc's (TCG) Outlook to Stable from Positive, while affirming its Long-term Issuer Default Rating (IDR) at 'B'. The senior unsecured notes issued by Thomas Cook Finance plc have also been affirmed at 'B+'/'RR3'.

The Outlook revision reflects Fitch's view that developing competitive trends and Thomas Cook's positioning in the tour operator and airline marketplace will continue to limit the momentum with which the business can strengthen the company's free cash flow generation and credit profile. Fitch, however, recognises the group's successful cost-cutting, which we believe will continue to be supported by an on-going fleet renewal programme.

The affirmation reflects improved results for the financial year ended September 2014, following significant further cost-cutting.

TCG continues to deliver on its Wave 1 cost-cutting programme, by achieving GBP400m cumulative savings against a previously announced target of GBP360m, while the EBIT margin improved to 3.8% at FYE14 from 2.8% at FYE13. TCG's turnaround plan is designed to improve profitability by GBP500m (recently increased from GBP460m) by end-2015.

A further GBP400m of cost-cutting (Wave 2 programme) by end-2018 has now been identified. There are execution risks, but we note management's successful track record to date and expect that it will continue to execute the plan, notwithstanding the recent change in CEO.

Competition in the holiday sector remains keen, notably from low-cost airlines and the constant growth of online companies such as Expedia.com. Against a target online penetration rate of 50% for bookings by 2015, TCG's online bookings only rose to 38% of total bookings at FYE14 (target 40%), suggesting that TCG, despite its strong brand name, is yet to be identified as a first-call online brand.

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
- An enhanced EBIT margin of close to 4%
- Positive free cash flow generation
- Improved interest cover and lease-adjusted FFO gross leverage (including GBP700m for working changes) below 5.0x

Negative: Future developments that could lead to negative rating action include:
- Deterioration in EBIT margin below 2.5%, reflecting increased competition
- Liquidity headroom below GBP200m
- Increase in FFO gross leverage (as adjusted by Fitch) above 7.0x.