Two years on, following the demise of Monarch Airlines, PCR had speculated whether the disappearance from the departure boards of the once successful airliner would ease the market for the remaining carriers. In fact, this was far from the truth, as PCR Insolvency Practitioner Danny Allen hinted in an article written on 16 October 2017, that with the current volatile market, Monarch Airlines may not be the last airline casualty we would witness in the short term.

Fast forward almost two years, and Thomas Cook finds itself in the same unfortunate predicament Monarch Airlines found itself in during the latter half of 2017. When the news of Thomas Cook’s demise was confirmed in the early hours on 23 September, we were not in the slightest bit surprised to see its collapse. For industry experts observing the company’s fortunes (or misfortunes) with a microscopic eye, there have actually been several warning signs which pointed to the downfall of a company which had enjoyed an illustrious past.

Proud history

With a proud 178-year history behind the company, and having survived two world wars, depression and recession, Thomas Cook was once considered an integral part of the fabric of British life. However, having almost slipped into bankruptcy during World War Two, it was nationalised in 1948, where it remained in public hands as part of British Railways until 1972. In modern times though, with changing consumer attitudes, and the emergence of technology as well as an impossible burden of debt, the writing was always on the wall for a company which simply couldn’t afford to trade any longer.

Arab spring brings stormy weather as shares nosedive

Take a trip down memory lane – eight years ago in 2011, during the start of the Arab spring, where a series of anti-government protests, uprisings, and armed rebellions spread across North Africa and the Middle East. At the same time, Thomas Cook was coming perilously close to collapse when it had issued three profit warnings in less than 12 months. The last profit warning in July 2011, sent its share price plummeting 25% to 93p as the Arab spring drove holidaymakers away from the Middle East and North Africa. Thomas Cook had specifically stated that the impact of political unrest witnessed in the Middle East was worse than first anticipated, with demand from French customers particularly in decline. The company also warned of a declining UK market in March 2011, as a direct result of political unrest in the region. The company therefore made significantly less profit from its key destinations of Egypt, Turkey, Morocco and Tunisia.

Following the profit warnings, Thomas Cook had taken out an emergency £200m loan to fight off the threat of bankruptcy, aided by behind-the-scenes assistance from the UK government. The firm finally recovered the following year after a strategic review and a refinancing package which meant its share prices rose to a high of around £19 in February 2014.

Despite all the turmoil and upheaval faced by Thomas Cook, it did appear that the company was making a comeback, with those destinations initially affected becoming popular once more amongst British holidaymakers. In fact, Turkey had recovered to the extent that the destination became Thomas Cook’s second most popular destination. On the flip side though, it was the European destinations which had been hit hard with the company itself quoting that the groups UK performance was “particularly disappointing” and plans were announced to overhaul its UK tour operator.

Further alarm bells could be heard last year, as a further two profit warnings had been announced, which included Thomas Cook having to revise its full-year profit forecast from £323 million to £280 million, which was down 13% – blaming it on the summer heatwave.

The end of an era

With the news just over four weeks ago filtering through that Thomas Cook had collapsed, the reality was that up to a million customers would now see their holidays cancelled worldwide, including 150,000 UK holidaymakers who were already abroad having to now be repatriated. As a further blow to those holidaymakers who had pre-booked with Thomas Cook, it has just recently been announced that it could take up to two months for customers to receive a refund, with the Civil Aviation Authority (CAA) saying that direct debit customers would be refunded within 14 days but others would have to wait up to 60 days. Nonetheless, the impact on those who were employed by Thomas Cook will also be severely felt, with 22,000 employees, of which 9,000 of them are based in the UK now being made redundant. However, it had recently emerged that Hays Travel had bought 555 Thomas Cook stores which would mean former employees of Thomas Cook would be transferred to Hays Travel, potentially saving up to 2,500 jobs in the UK.

Several business experts would have been totally unsurprised by this however, as the dramatic news emerged only days leading up to its collapse that the troubled holiday giant had been ordered to find £200m in order to secure its finances in the short term. This alone meant that Thomas Cook was fighting a race against time to stop itself from going bust.

It is important to remember that there was also genuine hope for Thomas Cook in the form of a corporate saviour, the Chinese group Fosun International, run by the billionaire Guo Guangchang. Fosun, which was known at the time to have already taken over France’s Club Med and Canada’s Cirque de Soleil, had bought its first stake in Thomas Cook in 2015, as part of a plan to build a global holiday and entertainment conglomerate.

It was only as recently as two months ago, at the start of August that Thomas Cook published details of a restructuring plan which was to include a £450 million-pound cash injection from Fosun, in return for a majority stake in the group. This would have also required the banks to write off £1.7 billion in debt, whilst wiping out existing shareholders in the process. However, the reality was that Thomas Cook’s attempt to secure a £900 million rescue deal had been hampered by demands from its lending banks to secure an additional £200 million funding. The truth of the matter is that the banks walked away because they were not happy that they would put in £900 million only for the company to go bust in a year’s time.

Thomas Cook Branch - Douglas, Isle of ManDisastrous merger was the beginning of the end

To fully understand Thomas Cook’s decline however, you have to go back to 2007, after its disastrous merger with MyTravel, when the company revised down its asset values, sending its losses to an astronomical £1.45 billion. The deal was supposed to bring £75 million a year in cost savings and springboard a challenge to emerging internet rivals. However, in reality, they had merged with an organisation which had only once in the past six years made profits and thus, riddled the company with insurmountable debt.

Technology has changed things

The main issue tour operators such as Thomas Cook encountered was the way in which people were putting together their holidays. Gone are the days of an internet free society, where Thomas Cook’s business model revolved around having numerous high street outlets selling packaged holidays to the masses. Instead, only one in seven of us popped into a high street travel agency to buy a holiday according to travel agent trade body ABTA.

Of course, in business, where there is a loser, there are also winners, and the main beneficiaries of this were Ryanair, easyJet and Airbnb, with customers booking online, representing a shift in the times and offering the convenience of putting together a holiday package from the comfort of their own home.

PCR Insolvency Practitioner Sam Talby commented that the demise of Thomas Cook and its Shareholders was as a reflection of the well-publicised shift in how UK consumers buy their holidays.

 “The unfortunate truth of Thomas Cook and its stakeholders was as a business it carried too much debt and its business model was twentieth century rather than twenty-first century in perception. In the final analysis neither Financiers, Private Equity nor the State saw a future for Thomas Cook, otherwise someone would have acquired the business albeit through an Administration process”.

To conclude, in an immensely competitive and volatile market, companies that are carrying the amount of debt that Thomas Cook were carrying simply cannot survive. With the company carrying a gargantuan amount of debt on its balance sheet and seeing its share prices experiencing a steep decline since 2011, the inevitable outcome was a collapse of the company. A warning then to those firms who continue to operate with an archaic infrastructure, and who are not adapting their business plan to keep up with changing consumer attitudes.

Ahmed Ali
Practice Development Executive 

All contents Copyright © PCR (London) LLP unless otherwise noted. None of the elements on this website may be reused without permission.