No happy holidays for Thomas Cook shareholders
Posted by Liz Rees in Latest insights category on 03 Oct 19
The media has been awash with the news that Thomas Cook, Britain’s oldest travel business, has collapsed. Last ditch talks failed to come up with a rescue package, leaving 150,000 UK customers stranded abroad along with 350,000 foreign nationals. So what went wrong for this well-known British brand?
The history of Thomas Cook
The eponymous Thomas Cook, a strict Baptist from Derbyshire, is credited with coming up with the concept of the ‘package holiday’. His first venture was in 1841, when he organised a train trip for 500 fellow supporters of the anti-alcohol temperance movement to attend a gathering in Leicester.
From these modest beginnings, Cook went on to offer tours to Europe and later North America. Over the years the business venture expanded to incorporate high-street travel agents, hotels and its own airline.
The Cook family sold out to a Belgian company in 1928 and the company passed through various ownership before listing on the London stock Exchange in 2007.
End of the runway
Thomas Cook UK Plc has now entered compulsory liquidation and is under the control of the Official Receiver. This means it ceased trading with immediate effect.
Liquidation is the most abrupt end to the life of a business, compared with administration where a third party is appointed to keep the company trading while buyers are sought for the assets. The extreme levels of debt, and complex supply chains, made administration unfeasible as there was insufficient cash to pay the bills.
Was it foreseeable?
In a word, yes. This does not appear to be a case of fraud or dubious accounting, which can be harder to anticipate. Thomas Cook has had a chequered history since listing in 2007. It nearly went under in 2012, requiring a bailout, so a better question might be how the business survived as long as it did.
The travel industry has been significantly disrupted by the internet, which has lowered barriers to entry. Margins and cash-flows have come under pressure as flexible web-based operations, such as Airbnb and booking site Expedia, cut prices and took market share. Thomas Cook, with its high street shops, struggled with a high cost base.
The advent of low cost airlines also hurt the business along with volatile oil prices, terrorist attacks and the post-referendum decline in sterling. More recently, summer heatwaves in the UK prompted staycations while growing concern over carbon footprints has not helped.
However, management must take much of the blame. A string of chief executives, on handsome salary and bonus packages, failed to reposition the business quickly enough. An ill-advised merger with My Travel, resulted in a £1bn write-down despite increasing the customer base to 20m. The issue was not opportunity but execution.
Of course, when consumers hear rumours of trouble they shop elsewhere and suppliers start to demand payments up front. This decimated cash flow and debt escalated at an alarming rate; the company reported large losses and debt reached £1.2bn by May.
No white knights to the rescue
A £900m rescue proposal was on the table from Chinese conglomerate Fosun, a 19% shareholder, which offered to contribute £450m. This would have required the syndicate of banks, including Royal Bank of Scotland and Barclays, to write off £1.7bn of debt. Instead the banks demanded the company raise a further £200m in case of a further deterioration in trading.
The UK government was asked for a £150-250m lifeline but refused to commit tax-payer’s money, saying it was a commercial matter. This was a stark contrast to when Thomas Cook, faced with post war bankruptcy, was nationalised in 1948. It stayed in public ownership, as part of British Railways, until 1972.
Who are the losers?
Aside from the 22,000 workers who have lost their jobs and customers whose long-booked holiday plans have been destroyed, the pain extends through the extensive supply chain. Hoteliers, landlords, insurers and payment service providers all stand to lose out.
In the most popular destinations- Spain, Greece and Turkey- the failure will have a devastating effect on local economies dependent on tourism. Many have not been paid for the summer season and it is unclear what they might receive. At home, it’s another nail in the coffin for the high street, with 560 more empty shops hitting the market.
The biggest peacetime emergency repatriation by the Civil Aviation Authority (CAA) is expected to cost £100m, split between the government and ATOL (a CAA scheme funded by a £2.50 levy on every package holiday sold). Further compensation, amounting to over £450m for holidays booked, will deplete ATOL’s reserves. Meanwhile, those who booked flights only will have to claim on travel insurance or from their credit card companies.
Shareholders will lose everything while bond-holders and lenders will share what can be salvaged (the brand and landing slots may attract some interest) but face significant write-downs of around £1.7bn. Most active UK equity funds had exited before the shares were suspended but passive funds investing in the UK All Share index will have held the stock. Also, some high yield bond funds owned the bonds.
Are there any winners?
A few companies saw their shares rise sharply on the back of Thomas Cook’s demise. One was FTSE 100 stock TUI which has a similar business model. It may face structural challenges but has less debt and stands to pick up customers.
Also in TUI’s favour is an ageing population; it may attract older customers with money to spend on travel. TUI owns cruise ships and hotels and should benefit as capacity is removed from a saturated market place.
EasyJet and Ryanair have been at the forefront of the operation to bring customers home and will hope they will fly with them in future. EasyJet had already been expanding into package holidays. Also gaining were online competitors On the Beach and Dart Group which runs the package holiday company Jet2holidays.
What lessons do we learn?
Thomas Cook highlights the risks of holding individual stocks and shows why many investors opt for a fund instead. A portfolio of 40 or more holdings reduces the impact on the value of the fund should one or two falter. In this instance, an experienced fund manager should have been able to identify trouble ahead.
Legendary investor Warren Buffett is said to often buy shares in companies that make products he loves. Thomas Cook, however, serves as a reminder that happy holidays do not always make good investments.
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