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Commentary: Thomas Cook’s Demise – An Eye Opener for Tourism Sector?

by EOS Intelligence

Commentary: Thomas Cook’s Demise – An Eye Opener for Tourism Sector?

by EOS Intelligence

by EOS Intelligence

There are few people who would not recognize Thomas Cook, as the company carved its name as a premier travel company in the UK as well as globally. Its name became synonymous with travel for many customers, as reminiscent from its slogan of “Don’t just book it, Thomas Cook it”. Unable to strike a deal to refinance its burgeoning debt, Thomas Cook, UK’s oldest package tour company, shut down operations this Monday, facing compulsory liquidation, and sending passengers as well as the tourism sector into panic. While the announcement may come as a shock, warning signs of the company’s jeopardized existence have surfaced several times over the past decade.

Thomas Cook has been in the news for large part of this year, as the company reported a record pre-tax loss of GBP1.5 billion, with the auditor raising concerns about Cook’s ability to manage a recovery. The company has been trying to secure funding of GBP900 million from banks and the Shanghai-based conglomerate Fosun, while also offloading parts of its packaged tours and airlines business.

However, an inability to secure an additional GBP200 million funding as working capital to cover cost of operations for winter season, which is traditionally characterized by low demand, meant that the company failed to secure its near future. As a result, Thomas Cook entered compulsory liquidation, fate it would have faced earlier, had it not funded its operations through accrued debt over the years, which eventually led to the company’s collapse.

Thomas Cook’s debt problem

It is not the first time that Thomas Cook has to run for its life, with serious doubts rising about the company’s existence already in 2011. At that point, Thomas Cook managed to survive by securing some expensive credit facilities, as well as restructuring and cost-cutting. However, all this came at a cost. High interest paid on these credit facilities left a heavy burden on cash flows.

The company showed signs of recovery in the following years, even posting a pre-tax profit in 2015 and bringing net debt to more acceptable levels. However, due to market conditions and other contributing social and economic factors, the company’s tour operator business displayed a particularly weak performance, suffering massive losses in 2018. These losses resulted in the company struggling to maintain working capital, as well as witnessing net debt increasing close to GBP350 million by end of 2018, with the trend continuing in 2019.

Other contributing factors

While debt remained the largest problem, other factors contributed to Thomas Cook’s demise. Proliferation and growth of budget airlines and hotel offerings such as Airbnb had already increased competition for Thomas Cook, impacting the company’s bottom line, as customers were shifting to these low-cost options.

Demand was also impacted by the 2018 heatwave in Europe, with customers from UK and Northern Europe preferring to stay at home instead of travelling to other warmer European countries, such as Spain and France, which are key contributors to Thomas Cook’s business. Total demand has also been impacted by the lack of clarity around Brexit, with customers delaying their travel decisions under the growing economic uncertainty.

Impact on the tourism sector

The collapse of a major player such as Thomas Cook is expected to impact the tourism sector, albeit primarily in the short term. Thomas Cook had developed relationships with hotels and businesses in key destinations, which are dependent on the company’s customers for majority of their revenue during peak seasons. Thomas Cook’s collapse will negatively impact these players, at least in the short term. In the long term, however, business is expected to return to normal as these companies will develop new relationships.

While customers may look to Thomas Cook’s competitors for their travel needs in the short term, limited capacities (or partnerships) are likely to make the competitors unable to take up this additional demand unless they are paid a premium for it.

EOS Perspective

The collapse of Thomas Cook highlights the challenge that traditional tour operators face in the current tourism market. Customers are shifting from traditional packaged tours to offers that allow them to decide their own destinations, and make bookings through lower-cost online service providers. Traditional players, which generate most of their revenue through offline sales channels, have been put under pressure to evolve their business model, to adopt an online channel that offers more convenience and flexibility to their customers.

Emergence of innovative travel platforms, such as Airbnb, has also put pressure on the bottom lines of these traditional players, impacting their ability to invest in new business opportunities without accumulating debt. Thomas Cook is not the only one impacted. Recently, SOTC (formerly known as Kuoni) has also been in the news for its negative debt position.

Thomas Cook’s case, however, comes as an eye-opener for the tourism industry players, clearly showing that they cannot continue to take on excessive debt. More conservative approaches and cost management need to be considered to build a profitable, and more importantly, sustainable business.

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