Why did Thomas Cook fail after 178 years in business? The immediate answer is that it was unable to secure a £200m lifeline from its bankers, including government-owned RBS.
But in truth the tour operator’s woes go back much further – a victim of a disastrous merger in 2007, ballooning debts and the internet revolution in holiday booking. Add in Brexit uncertainty, and it was perhaps only a matter of time before the giant of the industry collapsed.
In May, the group reported a £1.5bn loss, with more than £1bn written off from the 2007 merger with MyTravel – better known for its brands Airtours and Going Places.
That deal was supposed to create a European giant, promising £75m-a-year cost savings and a springboard to challenge emerging internet rivals. In reality Thomas Cook was merging with a company that had only made a profit once in the previous six years, and the deal saddled the group with huge debts.
Thomas Cook’s collapse is not because the British have stopped taking holidays. Far from it, 60% of the population took a holiday abroad in 2018, up from 57% the year before. It is how we are taking holidays that has changed, with the number of city breaks now significantly outstripping beach holidays.
The beneficiaries are Ryanair, easyJet and Airbnb, with all of their customers booking online. The losers are package holiday companies shackled to expensive high street chains. Thomas Cook owns about 560 high street outlets.
Anglo-German group Tui, Thomas Cook’s biggest rival, has suffered from similar trends, issuing several profit warnings during 2019. But it has much smaller debts, owning many of its own hotels and cruise ships, and arguably could see an uplift as it takes on former Thomas Cook customers, at higher prices.
The climate crisis has also had an impact. A Europe-wide heatwave in May 2018 reduced holiday demand sharply, as customers delayed holiday decisions while enjoying record temperatures at home. Then in 2019, Thomas Cook said British customers were postponing travel plans for the summer because of worsening uncertainty around Brexit – and the way it has hit sterling’s buying power abroad.
Thomas Cook only narrowly survived a near-death experience in 2011. Its debt pile had already reached £1.1bn, and it stayed afloat only after an emergency additional cash injection - but it also meant even more debt to service.
Since 2011 Thomas Cook has paid out £1.2bn in interest, which meant that more than a quarter of the money it charged for the 11m holidays it sold every year went into the pockets of lenders.
There was – for a couple of years at least – a corporate saviour, in the form of Chinese group Fosun International, run by Guo Guangchang, a billionaire regarded as China’s Warren Buffett.
Fosun bought its first stake in Thomas Cook in 2015, as part of a plan to build a global holiday and entertainment conglomerate, having already taken over France’s Club Med and Canada’s Cirque de Soleil.
In August Thomas Cook published details of a planned restructure, which included a £450m cash injection from Fosun in return for a majority stake in the group – which also required the banks to write off £1.7bn in debt. Other existing shareholders would be wiped out.
It was that deal that fell apart at the weekend. It was not surprising that the axe fell in late September; like most tour operators, Thomas Cook enjoys revenue inflows in the first half of the year as holidaymakers book their summer breaks, but sizeable outflows in autumn and winter when flight and hotel arrangements must be paid for.
Some yearn for nationalisation. Critics say the cost of rescue flights and compensation may far outweigh the £200m that Thomas Cook needed to survive another day. But the government refused to step in, arguing that, like failed airline Monarch, it was purely a commercial matter at an individual business and that customers would be protected by the Atol protection scheme and insurance.
How different it was 70 years ago. Thomas Cook was considered such a part of the fabric of British life that it was nationalised in 1948, after facing bankruptcy during the second world war. It remained in public hands, as part of British Railways, until 1972. But now it has been destroyed largely by the internet and changing fashions, hastened along by trying to finance an impossible burden of debt.
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