The Rise and Fall of Thomas Cook
Thomas Cook was known for providing affordable all-inclusive travel packages. Over time, the company had grown to serve 20 million customers a year with its 200 hotels and fleet of over 100 airplanes. But after 178 years of operations, it declared bankruptcy in September 2019, leaving 600,000 travelers stranded and 21,000 employees jobless. Let’s take a look at what happened. The company certainly did not go under out of the blue. Over the years, several signs were foretelling their downfall.
In 2011, Thomas Cook was hanging on by a thread. The company had delayed its financial results and was asking for a loan of 100 million pounds to stay afloat. Needless to say, the company’s stock price plunged by 75%. The company was blaming the floods in Thailand and unrest in Egypt and Tunisia for its lower bookings. After receiving the initial loan, lenders agreed to revise the amount to 200 million pounds. From that moment, there were two factors that helped keep its lights on: Its century old brand and customer loyalty.
In 2013, Thomas Cook managed to raise 425 million pounds from investors. At first, it seemed to put that capital to good use but the company’s stock lost 70% of its value from 2014 to 2016. The travel industry was facing pressure from online platforms such as Expedia, Booking.com and TripAdvisor. The platforms offered cheaper alternatives at the tip of customers fingers. That availability of travel information greatly reduced the power of brick and mortar travel agencies. The operating margins of online platforms were much higher than traditional tour operators.
In February 2019, Thomas Cook was considering the sale of its airline business. The company had reported worse than expected losses for the winter, led by the tour operating business. The company faced a lower pace of booking due to a number of factors: Brexit political uncertainty, weaker economic activity, lower British pound currency value and a prolonged heat wave that led customers to delay their holidays.
But the nail to the coffin was probably this. In 2007, Thomas Cook acquired 52 percent of MyTravel, the third-largest UK tour operator at that time. The thesis of the acquisition relied on projected annual cost savings of 75 million pounds. Initial reaction to the announcement was positive, with Thomas Cook’s parent company’s stock rising by 4%. However, the synergies did not really materialize. MyTravel only made a profit in 2001 and 2006.
Not surprisingly, in May 2019, Thomas cook took more than 1 billion pounds in impairment on its MyTravel business. For a brick and mortar tour operator, Thomas Cook had a relatively higher percentage of intangible assets, at 70 percent of its total fixed assets. And goodwill accounted for 85% of its intangibles. There was no equity value left after write down.
There are some articles that referenced the net debt of the company over the years. Most of them show a sudden surge in 2019 as compared to previous years. The travel business is very cyclical in nature and tour operators usually taken on debt facilities to provide liquidity for the slow winter season. In order to compare apples to apples, we need to take the net debt at the end of the same fiscal period. And when we do that, we see a less drastic fluctuation in net debt.
This means that Thomas Cook faced a structural problem. The debt financing was eating up its cash flow. It had to send 3 million customers on holiday each year only to cover the financing costs.
Recognizing the structural problem, Fosun, the largest shareholder, along with a consortium of banks were leading a 900-million-pound rescue financing plan. The deal called for a debt to equity restructuring. However, at the last minute, the banks asked Thomas Cook to secure another 200 million pounds before they could close the transaction. The lenders believed that the 900 million pounds would not be enough to keep Thomas Cook afloat. They also did not want to increase their exposure to the failing company.
At a certain point, one would have expected the government to bail the company. However, the government realized that Thomas Cook would need more than an additional 200 million pounds to stay afloat and relied on existing mechanisms to alleviate the situation. Since Thomas Cook held the Air Travel Organiser’s License, its customers were protected by the scheme that enabled them to be repatriated and reimbursed for their trips.
Apart from Thomas Cook’s competitors, there are some other parties that actually stood to gain from the company’s demise: Hedge funds.
In August 2019, there were 250 million dollars of credit default swaps, or CDS, bets on Thomas Cook’s debt. This meant that parties holding the swaps got a payout of 250 million dollars when Thomas went bust. However, the debt to equity restructuring plan of Forsun would have made the CDS worthless as there would not have been any debt to be insured. What made the situation much more interesting was that some bondholders also owned CDS, which gave them an incentive to block the restructuring deal. Thus, the request for 200 million pound of extra financing might have been a decoy to cashing in on the CDS.
The company definitely did not have a happy ending but Thomas Cook’s brand continues to live on as Fosun bought the brand assets for a mere 11 million pounds.
