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Thomas Cook: Why Did They Fail?

Thomas Cook: Why Did They Fail?

Thomas cook, established in 1841, was widely regarded as the father of package holidays ferrying over 20 million people annually to their overseas adventures. It was one of the best known and most highly admired brands in an extremely crowded market, a brand with whom many, myself included, associated and continue to associate some of their fondest memories. How therefore did it come to the most abrupt end leaving 150,000 Britons stranded abroad and its 21,000 employees potentially jobless? Furthermore, does its demise represent a wider set of circumstances that are strangling travel agencies across the country, or were the internal issues unique to Thomas cook to blame for its collapse? In short was Thomas cook a victim of market trends or was it in fact the villain of the affair? 

Regardless of the cause of the demise the ramifications of Thomas Cooks collapse has extended well beyond its customers and staff. Its collapse will significantly damage the hotels whom they supplied along with many of the UK’s smaller regional airports that relied on their package holidays to remain competitive. Yet unknowingly to much of the public this was not the first occasion in recent history during which Thomas Cook has been forced to ask for bank support to try and stay afloat financially. The famous travel company nearly went bust in 2011 but the cause of the company’s financial difficulty can in fact be traced back even earlier.

In 2007 Thomas Cook engaged in a merger, more characteristic of a takeover, with MyTravel in a deal intended to help them dominate the European Market. The deal included Thomas Cook spending £290 million on buying back its own shares given their high confidence of their future growth post-merge. However what Thomas Cook failed to adequately account for was the large amount of debt they were taking on through the merger with MyTravel having only made profit once in the six years prior to the merge. In addition, due to poor structural reforms following the takeover the £75 million a year cost savings envisaged at the time of the deal never materialised. As a result, the company was left in a precarious financial situation that the financial crisis of 2008-9 only magnified. Despite this Thomas Cook continued its quest to expand its market share merging with the Co-operative Travel in late 2010 to create the UK’s largest high street travel agency. However, the high cost associated with running over 1000 shops as town centres began to decline in popularity deepened the financial stress on the company eventually culminating in their near collapse in 2011.

Nevertheless, the company survived with optimism surrounding the recent Co-op merger largely responsible. However, the legacy of their 2011 financial scare helped contribute towards a far deeper internal issue at the company - their business model. Post 2011, as other firms such as TUI were responding to changing consumer habits by investing in end products to secure higher profit margins (e.g hotels) as well as new expanding markets to reduce risk through diversification (e.g. cruise), Thomas Cook was now saddled with even greater debt after their 2011 bank bailout and were left unable to follow suit as the majority of their profits were being used to pay off debt year on year. Consequently, the company was effectively left paralysed in a fast-moving market and subsequently it quickly fell behind its rivals. In the meantime, their debt continued to spiral upwards eventually reaching an unmanageable level of debt estimated at £1.7bn.

Nonetheless, as it became increasingly apparent that the company was once again going to require a sizeable financial injection those in charge were quick to attribute the cause to factors external to the company. For instance, in May this year the chief executive, Peter Fankhauser, blamed lower sales on Brexit uncertainty saying that  “There is now little doubt that the Brexit process has led many UK customers to delay their holiday plans for this summer,”. Furthermore, the warm summer and subsequent staycation experienced last year is believed to have contributed to lower than anticipated sales in the last-minute market which Thomas Cook is disproportionately reliant upon. Popular Thomas Cook destinations such as Turkey have also seen demand fall over the past few years due to perceived terrorist risks whilst the rise of online platforms such as Airbnb has increased the competition and consumer choice in the marketplace.

However, whilst the external factors noted above have likely contributed to lower than average sales experienced by Thomas Cook prior to its collapse, most travel companies have a business model adequately designed to absorb such external shocks (Brexit aside of course). As a result, market competitors with sound and secure business models have been able to ride out the current market storm. Thomas Cook, on the other hand, had an out-dated model due to its financial mismanagement.

As a result, Thomas Cook was disproportionately impacted by these external shocks which, when combined with their already precarious financial situation, was enough to cause its downfall. These inherent structural issues also go a considerable way in explaining why the company was unable to raise sufficient funds from banks or investors who recognized the deeply ingrained issues of the company which were practically impossible to resolve. Transport Minister Grant Shapps succinctly summed up the situation stating in an interview that “Governments don’t run travel agents, if you tried to prop this company up then not very far down the line we would be right back where we are today.”

Therefore, whilst the collapse of Thomas Cook is widely shocking and saddening due to its historical pedigree it was and has for some time been inevitable. The long series of poor financial decisions taken by the company saddled the company with immense levels of debt that trapped the company in an out-dated and disproportionately risky business model. Consequently, it was a matter of when not if the company went bust with recent circumstances coming together to finally create the conditions to bring about the end for the iconic brand. Sadly, Thomas cook can therefore only be cast as the villain of the affair as ultimately it was the architect of its own disastrous downfall.

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