Lessons from the Thomas Cook collapse
Credit to Author: BEN KRITZ, TMT| Date: Wed, 25 Sep 2019 16:20:35 +0000
ON Monday, Thomas Cook, the world’s oldest tour operator — the company that, in fact, invented the business — abruptly collapsed, instantly putting about 21,000 people out of work and leaving up to 600,000 travelers stranded around the world. The direct impact of the debacle on the Philippines is negligible, and people in the tourism sector here, who regards others’ misfortunes with an infuriating smugness, will undoubtedly take self-aggrandizing advantage of the situation. What they really should do instead is to keep their mouths shut, and carefully assess the lessons Thomas Cook’s demise provides.
Thomas Cook founded his tour business in 1841 in London, and the omnibus vacation provider had been considered such an institution in the UK that for a period of about 24 years, between 1948 and 1972, the company was nationalized, operating as part of British Rail. For many Brits — the 150,000 or so who are now wondering how they are going to get home are undoubtedly among them — allowing the iconic company to crash is simply unthinkable.
That, however, is exactly what British Prime Minister Boris Johnson did over the weekend, refusing a £200 million government bailout of the company. Johnson has been roundly criticized for his decision — the cost of rescuing stranded British citizens, an undertaking that will be the largest peacetime repatriation in history, may well exceed that figure — but he has firmly defended it, saying that to inject taxpayer money into the failing company would be “a moral hazard.” The rejection of the company’s bailout request scuttled negotiations with shareholders and creditors over the weekend to keep the business afloat, and by early Monday morning, the company was the subject of a compulsory liquidation order, its shares removed from trade on the London Stock Exchange, and its operations worldwide halted.
What happens next is that the company will be broken up and its assets sold off to recover as much as possible of the £1.7 billion it owes its creditors. In the meantime, the UK government is using a program administered by the Civil Aviation Authority called ATOL — Air Travel Organizer’s License, a form of insurance — to retrieve its stranded citizens and ensure that at least most of their bills for their tour accommodations are paid. Citizens of other countries, mainly from Germany and Scandinavia, will have to wait for their own governments and insurance companies to assist them.
There may actually be a few Thomas Cook customers stranded in the Philippines, as the company did offer tour packages here managed through its Indian subsidiary. However, a Thomas Cook associate I was able to contact — or rather, a young gentleman who had been a Thomas Cook associate until very recently — said that any problem here, if indeed there is one, would be very minor, as “the Philippines wasn’t actually a very popular destination for our clients.”
As annoying as Boris Johnson can be, his decision not to get the British government entangled in Thomas Cook’s mess was the correct one, because it would have been throwing good money after bad. Cultural icon or not,
Thomas Cook has been in tenuous financial health since at least 2011. Thomas Cook’s demise began with a bad management decision, but is much more attributable to a lack of flexibility to deal with broad market changes and absorb the shock of unexpected market conditions.
The trouble began in 2007 with what turned out to be a poor decision to acquire a company called MyTravel, which operated the brands Airtours and Going Places, for £1 billion. MyTravel was what is known, in business parlance, as a complete turd; it had only been profitable in one year out of the previous six, and then only just barely. The merger left Thomas Cook saddled with huge debts…just in time for the global financial crisis to knock the pegs out of its market for most of the next three years.
When the market returned, Thomas Cook found itself under intense competitive pressure from the online tour industry and smaller, leaner operators such as Germany’s TUI, and weighed down by debt as it was, could not shift its outdated, “High Street” business model fast enough to keep up. In 2011, the company nearly failed under a £1.1-billion mountain of debt, but a restructuring plan saved it. All that accomplished in the long run, however, was to greatly increase Thomas Cook’s debt service burden, to the extent that fully a quarter of its annual revenues for most of the past seven years have gone to interest payments.
In May, the company reported a £1.5-billion loss, which included a £1 billion write-off from the 2007 MyTravel fiasco. From that point on it was just a matter of time until the final collapse came, which was hastened by a few unforeseen events: The 2016 coup attempt in Turkey and subsequent crackdown compromised one of Thomas Cook’s most popular destinations, a heatwave in Europe in 2018 kept many travelers home in a peak holiday season, and the ongoing turmoil over the Brexit has reduced the British market for overseas vacation travel.
The fallout
Apart from the thousands of stranded tourists, Thomas Cook’s demise is having an impact all across the globe. The small African nation of Gambia convened an emergency cabinet meeting on Tuesday to assess the situation since about 30 percent of the country’s GDP is derived from tourism, a significant part of that provided by Thomas Cook business. Turkey’s finance ministry is reportedly working with its tourism authorities to provide an emergency credit package for businesses who have been affected by the company’s collapse.
On Cyprus, officials there estimate that tourist arrivals will drop by five to six percent, and hotel owners could lose as much as 50 million euros in lost bookings and unpaid bills. Neighboring Greece is also in a state of near-panic; about 20 percent of the Greek GDP is provided by tourism. The island of Crete expects to be hit especially hard; not only were 20,000 Thomas Cook customers stranded there at the beginning of the week, about 70 percent of the island’s hotels had contracts with the company, and expect to lose millions.
In addition, dozens of major tour companies around the world are reporting potential losses from helping stranded Thomas Cook customers. The Australian operation Webjet, for example, reported on Tuesday that it “is about $30 million out-of-pocket,” and has no idea when or if it will recover its costs.
There are several takeaways in the Thomas Cook drama for tourism policymakers and businesses. First, the collapse was not that abrupt; there were plenty of signs of trouble for years, and anyone who had done their due diligence might have had second thoughts about tying their local fortunes to an unstable partner. Second, the importance of the tourism industry to a country’s economy does not necessarily mean the government will step in when disaster strikes. On the contrary, the sudden loss of a significant revenue stream likely means that it cannot even if it is inclined to do so.
Finally, the Thomas Cook collapse is yet another demonstration of just how fragile tourism is as a business. Demand for tourism is and always will be discretionary, which makes the market extremely sensitive to changes, whether of the negative sort like inclement weather or political uncertainty, or of the more positive sort like the rapid growth of “do-it-yourself” online vacation planning tools. Staying abreast of developments, planning flexibly enough to deal with rapid changes, and having workable strategies in place for when the best, or the second-best, or even the third-best ideas go awry is the only way to ensure survival.
ben.kritz@manilatimes.net
Twitter: @benkritz