Why did Thomas Cook go bust?
Brexit, risk-averse banks, summer heatwaves, the rise of Airbnb, the long-term triumph of budget airlines. All contributed to the collapse of Thomas Cook. But one factor towers above others: the huge pile of debt – £1.7bn at the last count – that the tour operator has been attempting to shoulder for the past decade.
And the key point about the debt is that successive managements failed to remove meaningful chunks. By the time the board proposed a financial rescue package in July, Thomas Cook was desperate. It needed to hold together a wobbly collection of banks and bondholders in an industry where the whiff of instability can create panic among hoteliers and customers. The task proved impossible, but failure has been a long time in the making.
Yes, it was a problem, as weather often is for tour operators. Last year’s summer heatwave in the UK and Scandinavia encouraged would-be holidaymakers to stay at home, thereby undermining prices in the “lates” market in which tour operators try to clear unsold holidays. There also seems to have been a hangover into 2019, with customers calculating that waiting to book is a productive strategy.
But weather, like strikes by French air traffic controllers, is a known risk. Back in 2010, Thomas Cook had a bad year because volcanic ash clouds from Iceland disrupted flights across Europe. The trick is to manage for the unexpected.
A pincer movement of Airbnb and budget holidays has changed consumer behaviour, but Thomas Cook still managed to sell 11m package holidays last year. It also had a partnership deal with Expedia to try to attract the online crowd and was attempting, like Tui, to own more of its own hotels and generate loyalty through “differentiation”.
The plan was sensible but reinventing the business model required heavy investment. Thomas Cook was never in a position to throw serious sums of cash around. Fankhauser spoke glowingly about how the Casa Cook and Cook’s Club hotel brands would attract “people who may not have thought a package holiday was for them”, but Thomas Cook was a corporate pauper. It paid £124m in interest charges to its lenders last year, far more than it could spend on investment.
Banks and debt
The blame game is in full swing. Some Thomas Cook officials suspect lenders, led by Royal Bank of Scotland and Lloyds Banking Group, were never committed to the financial rescue package, and were instead trying to prolong talks in the hope the government would offer backstop funding and thereby improve the position of creditors.
The evidence for that theory seems to be spiralling value of the proposed package – it started at £750m in a recapitalisation backed by Chinese firm Fosum, Thomas Cook’s biggest shareholder; then it became £900m; then £1.1bn. For their part, the banks argue they have supported an over-stretched company for years. The detail of why the talks failed may have to await the report from the Insolvency Service.
Whatever the truth about the weekend drama, it is plain that Thomas Cook’s borrowings were too high. The underlying blame for that position goes back a decade to the deal-making era of former chief executive Manny Fontenla-Novoa.
It is astonishing now to remember that, at the end of 2007, soon after the merger with MyTravel, Thomas Cook thought it was so flush with cash that it could spent £290m on buying back its own shares. Within four years, it was fighting administration – successfully on that occasion.
The moral of the tale, then as now, is that tour operators should fund themselves conservatively. If your balance sheet is fragile, you are at the mercy of events in an industry where most of the cash arrives in the summer and then flows out in the winter.
Thomas Cook raised £425m from shareholders in 2013 and seemed to be on a path to improvement as recently as spring last year. In May 2018, the company was worth £2bn. That, in retrospect, was the moment for a shareholder fundraising to deal definitively with the dangerous debt overhang. The summer heatwave had not yet happened at the point and Thomas Cook was making £250m of profit.
The window of opportunity was missed, however.
Frank Meysman, chairman since 2011, and thus a veteran of Thomas Cook’s first brush with calamity, will have to explain why. He has been virtually invisible in recent days.