Why did Thomas Cook Collapse?

The immediate answer is that it was unable to secure a £200m lifeline from bankers/Government or investors.

But really is that it? It goes back 12 years earlier (2007), when a merger with MyTravel proved disastrous. Then debts ballooned to £1.7 billion and the internet revolution in holiday booking upset traditional high-street sales. Add Brexit uncertainty and the heatwave last summer, you have the ingredients for a collapse.

The British public has continued to take holidays and 60% of the population did so in 2018 (up from 57% in 2017). The winners are Ryanair, easyJet and Airbnb and the losers are package holiday companies with expensive high street outlets. (Thomas Cook owns 560 such outlets). Just one in seven people walk into a high street travel agency and these are the senior citizens – 65 years and above with less money to spend.

Tui, the Anglo-German rival, has smaller debts, owns hotels and cruise ships as compared to Thomas Cook, who were not ready for the 21^st Century. Thomas Cook narrowly survived a near-death experience in 2011. Its debt pile was already £1.1 billion and stayed afloat with emergency cash injection. Since 2011, Thomas Cook has paid out £1.2 billion in interest and that is a quarter of the money charged for 11m holidays sold every year. Fosun, the Chinese group, come in 2015 as part of a plan to build global holiday and entertainment conglomerate. In August 2019, Fosun agreed to a cash injection of £450m for a majority stake with banks to convert debt into equity.

Thomas Cook employs 21,000 people and is the world’s oldest travel company, founded in 1841. The company had 19 million travellers a year in 16 countries generating £9.6 billion in revenue. More than 600,000 people used its services, including 150,000 British citizens.

What next?

AlixPartners UK LLP or KPMG will be appointed as special managers for the different parts of the business. An order has been granted to liquidate the company.

Not everyone lost out with the collapse of Thomas Cook. Speculators including Sona Asset Management and XAIA Investment GmbH stand to earn as much as USD250 million from the bankruptcy. They invested in credit default swaps (CDS). The CDS would be worthless if Thomas Cook's rescue went through. So it was in the interest of hedge funds for Thomas Cook to default.

What can we learn?

Cashflow is key to survival – six months forward in your till. Engineering change and adapting to environment are essential. In fact, leading change is important. But when you are too big, you become a little complacent. Borrowing from banks must be minimal, unless you aim to collapse the company. Bankers, world-wide, are driven by policies, credit scores, risk profile and all the rest of it! Compassion is not in their vocabulary unless a central bank steps in with debt resolution mechanisms for banks to adapt. Remain agile in a fast-changing environment. Trust in God (and not the bankers!).

References:

1. Thomas Cook collapses as last-ditch rescue talks fail, 23 Sept 2019, BBC News

2. Patrick Collinson, Why did Thomas Cook collapse after 178 years in business? www.theguardian.com

3. Kate Holton & Guy Faulconbridge, Thomas Cook collapses - What next and why? www.reuters.com