Home Brokerage The Collapse of Thomas Cook: What Happened and Why

The Collapse of Thomas Cook: What Happened and Why

by internationalbanker

By Valerie Hernandez, International Banker

In the early hours of Monday, September 23, the UK company that revolutionised the package holiday filed for compulsory liquidation. Following the failure of last-ditch rescue negotiations, the UK Civil Aviation Authority (CAA) announced that Thomas Cook had “ceased trading with immediate effect”. The tour operator had collapsed after a mammoth 178 years in business. In the words of Thomas Cook Group’s chief executive officer, Peter Fankhauser, the demise of the company was a “matter of profound regret”.

Founded back in 1841 by businessman and Baptist preacher Thomas Cook, the company is widely considered to be the world’s oldest travel firm. It began life by organising railway excursions and expanded steadily to develop a broader range of travel-related businesses. The most recent financial year even saw the firm recording revenues of £9.6 billion, mainly on the back of its hotel, resort and airline businesses, which serviced nearly 20 million travellers across 16 countries. It also employed more than 21,000 people, 9,000 of whom were located in the United Kingdom. In an era when more people than ever are able to travel abroad, it seems scarcely conceivable that one of the industry’s longest-running stalwarts could end up closing down.

Failure to adapt and stay competitive with a new generation of more flexible travel companies, travel-related online services and low-cost airlines, such as easyJet and Jet2, meant that it became gradually tougher for Thomas Cook to win business throughout the decade. To compound matters, potential customers were becoming increasingly accustomed to devising their own holidays rather than using travel agents. The environment in which Thomas Cook operated “radically changed with the advent of budget air travel, online travel services and easy access to private accommodation through online platforms like Airbnb,” noted Professor John Lennon, director of the Moffat Centre for Travel and Tourism at Glasgow Caledonian University.

The situation only worsened in 2016 when political unrest in Turkey eventually led to an attempted presidential coup, meaning that a country that represented one of Thomas Cook’s top customer destinations experienced a pronounced downturn in tourist numbers. Fast forward two years, and 2018’s heatwave only amplified the company’s woes, as more European holidaymakers than normal opted to stay at home. And with Brexit adding further problems to the mix, including a drastic weakening of the pound hitting UK customers’ purchasing power abroad and the climate of uncertainty causing a drop in summer-holiday bookings, Thomas Cook ended up being on the receiving end of drastically tougher headwinds that ultimately could not be overcome.

But it was insurmountable debt that sealed Thomas Cook’s fate in the end. The company failed to clear a debt burden of £1.1 billion that had almost destroyed it back in 2011. Several ill-advised deals, especially its 2007 merger with MyTravel Group—a company that had achieved a profit only once in the previous six years—saddled the group with excessive debt. And despite raising £425 billion from shareholders in 2013, this ultimately proved insufficient in pulling the company out of the red, with vast sums of money being paid out just to service outstanding debt. Indeed, £1.2 billion was paid in interest alone from 2011 onwards. And by the end, it had racked up debts of £1.7 billion, meaning that it needed to sell three million holidays a year just to cover its interest payments. Reports of company mismanagement at the top, as well as a ceasing of dividend payments—and a decidedly odd timing of their resumption—raised further red flags of Thomas Cook’s deteriorating health.

By August 2019, a £900-million funding package was secured as part of a rescue deal led by Thomas Cook’s main shareholder, the Chinese conglomerate Fosun International, the parent company of which owns the all-inclusive family holiday company Club Med. The original terms of the plan would see Fosun inject half of this amount into the business and, in return, receive at least 75 percent of Thomas Cook’s tour-operator and 25 percent of its airline businesses. The remaining £450 million would be provided by Thomas Cook’s creditor banks and bondholders, converting the existing debt into a 75-percent stake in the airline and up to 25 percent in the tour-operator unit. Fosun also said that it would “continue to increase investment and cooperation in the UK market”.

But an eleventh-hour request from the creditor banks to obtain a further $200 million in contingency funding to sustain them during the quieter winter months precipitated the collapse of the deal—and with it, Thomas Cook itself. Although company bosses met with creditors on September 21 to try and negotiate a last-minute turnaround deal, they were unsuccessful. As acknowledged by aviation analyst John Strickland, the efforts to rescue Thomas Cook were “too little too late”.

The impact of the collapse since then has been sizeable. The following two weeks saw the CAA complete the country’s biggest peacetime repatriation, returning 140,000 UK-based Thomas Cook customers who were still abroad when the collapse occurred. It has also begun working on refunding those holidaymakers covered by ATOL (Air Travel Organiser’s License)-protected insurance for the cost of accommodation and return flights, although only around two-thirds of outstanding refunds had been processed by the deadline.

As far as the impact on the tourism sector is concerned, moreover, shockwaves should be felt across much of Europe. On the Beach, the online travel agent that was booking around 15 percent of its customers onto Thomas Cook flights, recently announced that its profits for the year to September nosedived by 26 percent to £19.4 million. The company’s chief financial officer, Paul Meehan, has since noted that the collapse has shrunk the number of airline seats available in the market, and as such, has pushed ticket prices higher. The tourism sectors in Thomas Cook’s biggest markets, such as Greece, Spain, Turkey and the Canary Islands, are also expected to feel noticeable pain in the long run, especially as numerous hotels in such countries had exclusive arrangements with the travel company. And aircraft-leasing companies have also had to reclaim their planes. “This is an earthquake on a scale of seven, now we are waiting for the tsunami,” was the sobering assessment by Michalis Vlatakis, president of the Association of Travel Agents of Crete, soon after the collapse.

But while Thomas Cook itself may be no more, its name is not about to be forgotten any time soon. Fosun International has spent $14.4 million to buy the brand, in addition to the hotel brands Casa Cook and Cook’s Club. According to Fosun’s chairman, Qian Jiannong, the group “will focus on business expansion, using the newly acquired Thomas Cook brands to create synergies with the existing businesses of the group”. Meanwhile, Thomas Cook India, which was under independent ownership separate from the group, will acquire the Thomas Cook name for its Indian, Sri Lankan and Mauritian markets. The purchase will cost $2 million, and according to the company, will prevent “possible new entrants into these markets, using the brand name”.

Existing competitors in the space should receive a boost in business and market share following Thomas Cook’s demise. Major Anglo-German rival TUI Group, for instance, the shares of which surged more than 10 percent on the day of the collapse, is touted to be among the companies that will most directly benefit. That said, TUI has also faced challenging operating conditions of its own, having issued several profit warnings throughout 2019. But with much smaller debts, the company is not expected to suffer the same fate as Thomas Cook.

To date, it seems that independent travel agent Hays Travel has been the most visible beneficiary. Hays has paid just £6 million to acquire all 555 of Thomas Cook’s UK retail travel agencies, and by late November, it had opened 450 of those stores, offered permanent contracts to 2,330 former Thomas Cook employees and announced plans to recruit some 1,500 more people to take its total workforce number up to 5,700. According to Managing Director John Hays, the company is increasing staffing “to ensure we have the highest customer service levels across all of our stores and our head office functions”.

European airlines should also experience more breathing space, although this is a sector that still remains firmly overcrowded.


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