Is the collapse of the Thomas Cook Group a sign of trouble ahead for travel and tourism? Or an opportunity for alternative business models to take off? Charlie Mellor investigates.
Sun, sea and insolvency is all too familiar
in the travel industry. The collapse of
tour operator giant Thomas Cook is the
latest to demonstrate the consequences
of such failures, with suppliers, staff and
holidaymakers losing out.
The demise of one of UK tourism’s founding fathers has sparked intense soul-searching, including a parliamentary inquiry by the Business, Energy and Industrial Strategy (BEIS) Committee. So what brought down Thomas Cook? And what more can businesses learn about the headwinds buffeting the sector?
The demise of one of UK tourism’s founding fathers has sparked intense soul-searching, including a parliamentary inquiry by the Business, Energy and Industrial Strategy (BEIS) Committee. So what brought down Thomas Cook? And what more can businesses learn about the headwinds buffeting the sector?
Countdown to collapse
According to Thomas Cook’s chairman,
Frank Meysman, the problems started in
2007 with the merger with MyTravel.
Despite promised savings, the move
burdened the business with debts, he
explained in his evidence to the BEIS
Committee in October. Peter Fankhauser,
Thomas Cook’s final CEO, told MPs he
was “constrained by this huge debt pile”
when he took charge in 2014, adding that
the company had paid £1.2bn in interest
and refinancing costs since 2012.
Company accounts show net debt – an alternative performance measure used by the board – had fallen to £40m in 2017 from £890.9m in 2011. But some suggest this wasn’t the whole debt picture.
In August 2019, a month before Thomas Cook’s compulsory liquidation, Schroder research analyst Roberta Barr explained in a blog why the firm had shunned Thomas Cook shares. By applying an average effective borrowing rate to the interest paid totals in company accounts for six years from 2012 to 2017, an implied gross average debt was revealed. Barr estimated Thomas Cook’s gross average debt for 2017 was £2,243m – £951m higher than the £1,292m borrowings recorded as part of reconciliations to IFRS.
“The difference was significant each time but especially so in 2017, when Thomas Cook’s average annual gross debt was 73% larger than the year-end figure,” said Barr.
By September 2018, the preferred net debt measure had hit £389m in the full year accounts with borrowings of £1,212m. Pressure was mounting to generate cash. So, a strategic review of the Thomas Cook airline was announced in February 2019. According to Fankhauser, a sales and commercial agreement had been introduced in 2017 between the airline and tour operator, which “legally separated [the airline] from an accounting point of view”. This, he added, “gave us the opportunity to be able to sell it”.
But that stalled when the company’s 2019 half-year results came out in May. Net debt had ballooned to £1,247m while borrowings stood at £1,708m. These results also laid bare the extent of Thomas Cook’s reliance on goodwill. “Indeed, by 2017, goodwill comprised 68% of total fixed assets and was more than 9.3x net assets,” explained Barr. With those 2019 half-year results came a goodwill impairment of £1,104m that contributed significantly to an operating loss of £1,386m.
To make matters worse, auditor EY had raised a material uncertainty related to going concern. It centred on a £300m facility to secure extra liquidity that was conditional on the airline sale. Richard Wilson, audit partner at EY, told MPs: “The banks had placed a condition on the new facility that Thomas Cook had to have, by 30 September, a binding commitment to purchase the airline. If that was in place by that point – it did not have to be completed by 30 September – the new facility would be made available to them.”
It wasn’t long before the airline disposal floundered. “The bids, from non-binding bids to final bids, deteriorated,” said Fankhauser, adding: “We came to the conclusion that that was not going to work for our stakeholders, that we were not creating enough value to pay down the debts to the extent needed.”
On 12 July a £750m recapitalisation plan was unveiled with China’s Fosun Tourism Group taking a controlling stake, but by 12 August that was insufficient. On 28 August, a £900m recapitalisation plan was unveiled. But soon after, a £200m back-up loan was identified as being necessary. With Fosun refusing to guarantee this sum, it all rested on an appeal to the UK government for help, formally submitted on 17 September.
While Thomas Cook’s board met with its advisers, Fosun’s representatives and the banks’ advisers on 22 September, the government’s reply was ‘no’. Within 24 hours, the High Court was granting winding up petitions for Thomas Cook Group and 25 subsidiaries, marking the end of the business’s 178 years in the travel sector.
Company accounts show net debt – an alternative performance measure used by the board – had fallen to £40m in 2017 from £890.9m in 2011. But some suggest this wasn’t the whole debt picture.
In August 2019, a month before Thomas Cook’s compulsory liquidation, Schroder research analyst Roberta Barr explained in a blog why the firm had shunned Thomas Cook shares. By applying an average effective borrowing rate to the interest paid totals in company accounts for six years from 2012 to 2017, an implied gross average debt was revealed. Barr estimated Thomas Cook’s gross average debt for 2017 was £2,243m – £951m higher than the £1,292m borrowings recorded as part of reconciliations to IFRS.
“The difference was significant each time but especially so in 2017, when Thomas Cook’s average annual gross debt was 73% larger than the year-end figure,” said Barr.
By September 2018, the preferred net debt measure had hit £389m in the full year accounts with borrowings of £1,212m. Pressure was mounting to generate cash. So, a strategic review of the Thomas Cook airline was announced in February 2019. According to Fankhauser, a sales and commercial agreement had been introduced in 2017 between the airline and tour operator, which “legally separated [the airline] from an accounting point of view”. This, he added, “gave us the opportunity to be able to sell it”.
But that stalled when the company’s 2019 half-year results came out in May. Net debt had ballooned to £1,247m while borrowings stood at £1,708m. These results also laid bare the extent of Thomas Cook’s reliance on goodwill. “Indeed, by 2017, goodwill comprised 68% of total fixed assets and was more than 9.3x net assets,” explained Barr. With those 2019 half-year results came a goodwill impairment of £1,104m that contributed significantly to an operating loss of £1,386m.
To make matters worse, auditor EY had raised a material uncertainty related to going concern. It centred on a £300m facility to secure extra liquidity that was conditional on the airline sale. Richard Wilson, audit partner at EY, told MPs: “The banks had placed a condition on the new facility that Thomas Cook had to have, by 30 September, a binding commitment to purchase the airline. If that was in place by that point – it did not have to be completed by 30 September – the new facility would be made available to them.”
It wasn’t long before the airline disposal floundered. “The bids, from non-binding bids to final bids, deteriorated,” said Fankhauser, adding: “We came to the conclusion that that was not going to work for our stakeholders, that we were not creating enough value to pay down the debts to the extent needed.”
On 12 July a £750m recapitalisation plan was unveiled with China’s Fosun Tourism Group taking a controlling stake, but by 12 August that was insufficient. On 28 August, a £900m recapitalisation plan was unveiled. But soon after, a £200m back-up loan was identified as being necessary. With Fosun refusing to guarantee this sum, it all rested on an appeal to the UK government for help, formally submitted on 17 September.
While Thomas Cook’s board met with its advisers, Fosun’s representatives and the banks’ advisers on 22 September, the government’s reply was ‘no’. Within 24 hours, the High Court was granting winding up petitions for Thomas Cook Group and 25 subsidiaries, marking the end of the business’s 178 years in the travel sector.
According to Thomas Cook’s chairman, Frank Meysman, the problems started in 2007 with the merger with MyTravel
Turning around distressed companies
When troubled times beset a
business, the people at the top are
not always best equipped to turn
things around, says Tyrone Courtman,
a managing director in restructuring
advisory at Duff & Phelps.
“Most management teams are wholly inexperienced when it comes to shrinking businesses, which is often what is needed to restructure. Their skillset is really all about growing businesses,” explains Courtman, who has also served as the chair of the ICAEW Restructuring and Insolvency Community since 2017.
Battling debt is no easy task, especially when losses start to take hold, as the collapse of Thomas Cook clearly illustrates. Courtman says: “Ultimately, those trading losses are going to wash out in cash as well. If you’ve got debt servicing requirements and repayment schedules to meet and you are running losses, then your cash flow becomes doubly challenged.”
Courtman, who is also a board member of the European Turnaround Management Association, cautions businesses about the problems actually announcing a restructure may cause, such as undermining customer confidence and inviting tougher restrictions on credit lines.
“Both of these things are going to compound the problem. So it makes it almost inevitable that the restructuring actions you have to take are going to be far more severe,” he says. He advises that businesses act and engage specialists sooner rather than later.
“Invariably by the time [management] recognise that they need to bring about a change, it’s too late because they haven’t got the wherewithal and enough meat on the bone to be able to afford it,” he adds.
“Most management teams are wholly inexperienced when it comes to shrinking businesses, which is often what is needed to restructure. Their skillset is really all about growing businesses,” explains Courtman, who has also served as the chair of the ICAEW Restructuring and Insolvency Community since 2017.
Battling debt is no easy task, especially when losses start to take hold, as the collapse of Thomas Cook clearly illustrates. Courtman says: “Ultimately, those trading losses are going to wash out in cash as well. If you’ve got debt servicing requirements and repayment schedules to meet and you are running losses, then your cash flow becomes doubly challenged.”
Courtman, who is also a board member of the European Turnaround Management Association, cautions businesses about the problems actually announcing a restructure may cause, such as undermining customer confidence and inviting tougher restrictions on credit lines.
“Both of these things are going to compound the problem. So it makes it almost inevitable that the restructuring actions you have to take are going to be far more severe,” he says. He advises that businesses act and engage specialists sooner rather than later.
“Invariably by the time [management] recognise that they need to bring about a change, it’s too late because they haven’t got the wherewithal and enough meat on the bone to be able to afford it,” he adds.
40% of tour operators’ airline seats sell within three months of departure in what is known as the lates market, while 70% of these are sold at a loss
When a tour operator goes under...
Prior to its demise, Thomas
Cook employed 21,263
employees worldwide in 16
countries using 105 aircraft
to fly 22 million customers
to more than 200 own-brand hotels and resorts.
It operated flights from UK airports including Stansted, East Midlands, Newcastle, Cardiff and Glasgow, as well as holding valuable take-off and landing slots at Gatwick, Aberdeen and Manchester – Thomas Cook’s main airlines hub.
When Thomas Cook collapsed on 23 September 2019, 4,000 jobs were lost at the airline, 1,000 at its Peterborough headquarters, and more than 3,500 across its 555 retail shops.
Operation Matterhorn, the Civil Aviation Authority’s passenger repatriation operation, took 15 days and 150 aircraft to return more than 140,000 holidaymakers to the UK. Reports suggest the repatriation cost £100m while refunds to 800,000 other customers is estimated to be £420m.
But the costs do not stop there. The company’s liquidation has reportedly cost Tunisian hotels €70m and Turkey’s travel industry more than €350m, while 500 hotel closures are expected in Spain despite a €300m government cash injection.
“The big losers in this are the overseas hoteliers in Turkey and Spain,” says Steve Endacott, non-executive chairman of Teletext Holidays. “A lot of those will go bust.”
It operated flights from UK airports including Stansted, East Midlands, Newcastle, Cardiff and Glasgow, as well as holding valuable take-off and landing slots at Gatwick, Aberdeen and Manchester – Thomas Cook’s main airlines hub.
When Thomas Cook collapsed on 23 September 2019, 4,000 jobs were lost at the airline, 1,000 at its Peterborough headquarters, and more than 3,500 across its 555 retail shops.
Operation Matterhorn, the Civil Aviation Authority’s passenger repatriation operation, took 15 days and 150 aircraft to return more than 140,000 holidaymakers to the UK. Reports suggest the repatriation cost £100m while refunds to 800,000 other customers is estimated to be £420m.
But the costs do not stop there. The company’s liquidation has reportedly cost Tunisian hotels €70m and Turkey’s travel industry more than €350m, while 500 hotel closures are expected in Spain despite a €300m government cash injection.
“The big losers in this are the overseas hoteliers in Turkey and Spain,” says Steve Endacott, non-executive chairman of Teletext Holidays. “A lot of those will go bust.”
What next for the travel sector?
What are the likely results of Thomas
Cook’s collapse on the wider sector?
Well, the death of the package holiday
isn’t one of them.
“The volume of overseas package holidays taken by UK residents continues to grow year on year,” says Mintel travel analyst Marloes De Vries, who predicts the market will expand by 1.4% in 2019.
De Vries believes it was this rising competition that undermined Thomas Cook. “While the market grew, the number of authorised passengers Thomas Cook licensed under ATOL protection declined by 36.7% in the period February 2015 to April 2019. Meanwhile leading package holiday providers TUI and Jet2holidays registered an increase of 22.3% and 216.7% respectively over the same timeframe.”
This competition, however, did not materialise overnight.
Historically, the travel sector was dominated by vertically integrated businesses comprised of several companies that supplied the key services required by a tour operator, such as Thomas Cook or rival TUI. This provided access to customers, says Steve Endacott, non-executive director of Teletext Holidays since 2014. “The major groups controlled their own shop network,” he explains. “They controlled access to customers, then passed it to the tour operator, who then passed it to the airline.”
The first assault on tour operator dominance came with low-cost airlines, which do all their yield management early. Early prices are low and rise until late bookings are hit with high prices. This contrasts with tour operators’ early fixed-price flights coupled with accommodation traded at a brochure price until shortly before departure.
Endacott suggests 40% of tour operators’ airline seats sell within three months of departure in what is known as the lates market, while 70% of these seats are often sold at a loss. “They make all their money early and minimise their losses by getting rid of their committed seats in the lates market,” he adds.
Additionally, the arrival of internet booking “broke the control that the tour operators had over customer access”. Endacott says: “A customer could type in the name of a hotel and up would pop On The Beach, Love Holidays or Teletext Holidays, offering the same holiday using low-cost carriers at a cheaper price because they didn’t have any of the overheads that the big operators had.”
The final onslaught has come from dynamic packaging, which Endacott wholeheartedly embraced between leaving Airtours in 1997 and returning briefly to MyTravel in 2003. This non-risk business model relies on companies, such as an online travel agent (OTA), scanning airline websites for flights leaving the UK. These are then paired with vacancies in hotel bed stocks for sale. However, bookings are only made when the customer buys the OTA’s package. If there’s no sale, the process starts all over again, explains Endacott, adding: “They have no committed stock, which means in the lates market they don’t have to sell below cost.”
It was this dynamic packaging idea that Endacott took to Philip Meeson, executive chairman of Jet2, to help establish Jet2holidays with Endacott’s On Holiday Group providing the tech platform and purchasing function. This non-risk tour operating model gives low-cost carriers a clear advantage over tour operators with committed stock to sell. “The key point is that low-cost carriers can switch between flight-only and holidays very, very easily. They can increase capacity when they want to or they can reduce capacity when they want to,” adds Endacott.
Low-cost carriers’ interest in package holidays is clear from the latest passenger volumes they are licensed to carry under the ATOL package holiday protection scheme. Jet2holidays can carry 3.915 million while easyJet – expected to relaunch easyJet holidays by the end of 2019 – is permitted to carry 793,874 passengers. It seems the low-cost carrier package holiday is set to prosper.
And if it does, it may benefit high street travel agents too. According to Endacott, online pay-per-click advertising, which is an upfront cost no matter what the conversion rate, is now so costly that selling through travel agency partnerships makes sense. “You don’t care how many customers walk through travel agents’ doors, you only pay commission for those who end up booking the holiday,” he explains. So the decision by Hays Travel to pay £6m for Thomas Cook’s 555 retail shops – 475 of which have reopened – may prove to be a wise investment.
Questions clearly remain about Thomas Cook’s liquidation. Was the collapse a failure of corporate finance, as suggested by Abta’s chief executive Mark Tanzer at Abta’s Toyko Travel Convention in October? What more could Thomas Cook’s auditors EY and PwC have done? While PwC declined to comment, EY would only say it will be “fully co-operating” with the FRC’s investigation into its auditing of the accounts for the year ended 30 September 2018.
For Derek Moore, chairman of the Association of Independent Tour Operators, the tour operator model will continue through high-quality customer service. “Online travel agents generally know nothing about the properties they sell and provide no real contact with the client. Airbnb is the same,” he says. “Compare that with the personal service provided by specialist tour operators and independent travel agents who know the product and provide detailed advice to clients and, most importantly, if things go wrong they are there to help them. That is how tour operators will survive.”
“The volume of overseas package holidays taken by UK residents continues to grow year on year,” says Mintel travel analyst Marloes De Vries, who predicts the market will expand by 1.4% in 2019.
De Vries believes it was this rising competition that undermined Thomas Cook. “While the market grew, the number of authorised passengers Thomas Cook licensed under ATOL protection declined by 36.7% in the period February 2015 to April 2019. Meanwhile leading package holiday providers TUI and Jet2holidays registered an increase of 22.3% and 216.7% respectively over the same timeframe.”
This competition, however, did not materialise overnight.
Historically, the travel sector was dominated by vertically integrated businesses comprised of several companies that supplied the key services required by a tour operator, such as Thomas Cook or rival TUI. This provided access to customers, says Steve Endacott, non-executive director of Teletext Holidays since 2014. “The major groups controlled their own shop network,” he explains. “They controlled access to customers, then passed it to the tour operator, who then passed it to the airline.”
The first assault on tour operator dominance came with low-cost airlines, which do all their yield management early. Early prices are low and rise until late bookings are hit with high prices. This contrasts with tour operators’ early fixed-price flights coupled with accommodation traded at a brochure price until shortly before departure.
Endacott suggests 40% of tour operators’ airline seats sell within three months of departure in what is known as the lates market, while 70% of these seats are often sold at a loss. “They make all their money early and minimise their losses by getting rid of their committed seats in the lates market,” he adds.
Additionally, the arrival of internet booking “broke the control that the tour operators had over customer access”. Endacott says: “A customer could type in the name of a hotel and up would pop On The Beach, Love Holidays or Teletext Holidays, offering the same holiday using low-cost carriers at a cheaper price because they didn’t have any of the overheads that the big operators had.”
The final onslaught has come from dynamic packaging, which Endacott wholeheartedly embraced between leaving Airtours in 1997 and returning briefly to MyTravel in 2003. This non-risk business model relies on companies, such as an online travel agent (OTA), scanning airline websites for flights leaving the UK. These are then paired with vacancies in hotel bed stocks for sale. However, bookings are only made when the customer buys the OTA’s package. If there’s no sale, the process starts all over again, explains Endacott, adding: “They have no committed stock, which means in the lates market they don’t have to sell below cost.”
It was this dynamic packaging idea that Endacott took to Philip Meeson, executive chairman of Jet2, to help establish Jet2holidays with Endacott’s On Holiday Group providing the tech platform and purchasing function. This non-risk tour operating model gives low-cost carriers a clear advantage over tour operators with committed stock to sell. “The key point is that low-cost carriers can switch between flight-only and holidays very, very easily. They can increase capacity when they want to or they can reduce capacity when they want to,” adds Endacott.
Low-cost carriers’ interest in package holidays is clear from the latest passenger volumes they are licensed to carry under the ATOL package holiday protection scheme. Jet2holidays can carry 3.915 million while easyJet – expected to relaunch easyJet holidays by the end of 2019 – is permitted to carry 793,874 passengers. It seems the low-cost carrier package holiday is set to prosper.
And if it does, it may benefit high street travel agents too. According to Endacott, online pay-per-click advertising, which is an upfront cost no matter what the conversion rate, is now so costly that selling through travel agency partnerships makes sense. “You don’t care how many customers walk through travel agents’ doors, you only pay commission for those who end up booking the holiday,” he explains. So the decision by Hays Travel to pay £6m for Thomas Cook’s 555 retail shops – 475 of which have reopened – may prove to be a wise investment.
Questions clearly remain about Thomas Cook’s liquidation. Was the collapse a failure of corporate finance, as suggested by Abta’s chief executive Mark Tanzer at Abta’s Toyko Travel Convention in October? What more could Thomas Cook’s auditors EY and PwC have done? While PwC declined to comment, EY would only say it will be “fully co-operating” with the FRC’s investigation into its auditing of the accounts for the year ended 30 September 2018.
For Derek Moore, chairman of the Association of Independent Tour Operators, the tour operator model will continue through high-quality customer service. “Online travel agents generally know nothing about the properties they sell and provide no real contact with the client. Airbnb is the same,” he says. “Compare that with the personal service provided by specialist tour operators and independent travel agents who know the product and provide detailed advice to clients and, most importantly, if things go wrong they are there to help them. That is how tour operators will survive.”
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Changelog Anchor
-
Update History
- 04 Dec 2019 (12: 00 AM GMT)
- First published
- 30 Nov 2022 (12: 00 AM GMT)
- Page updated with Further reading section, adding related resources on the Thomas Cook brand's fortunes. These new articles provide fresh insights and analysis on this topic. Please note that the original article from 2019 has not undergone any review or updates.
