Thomas Cook is suffering from an interminable holiday nightmare. It has been struck by a combination of high debt, intense competition and one-off factors including last summer’s heatwave. Brexit uncertainty is also, inevitably, a contributing factor.
This welter of concerns has brought a 178-year business to the brink. Eight years after its near-collapse in 2011, the tour operator needs a bailout if it is to survive the coming winter, when holiday bookings typically tail off.
One key problem is entirely of the company’s own making. It is buckling under the weight of a £1.6bn debt burden – the legacy of loans taken out to save it from near-collapse in 2012. The interest alone has cost it £1.2bn since then, meaning that 3m out of the 11m holidays it has been selling per year were funding debt repayments.
A fundamental long-term challenge is that the internet has made it much easier for smaller competitors to enter the market and grab market share, not just in the UK, but in its largest market, Germany.
Rival travel agents have targeted its package-holiday business, while the rise of low-cost short haul air travel has squeezed its airline, which is run as a separate business. The result is a punishing pincer move on the group.
In the face of increasingly fierce competition , Thomas Cook has had to compete to win customers by lowering prices, which has trimmed profit margins. Unlike smaller online-only players, Thomas Cook has high fixed costs due to its network of 567 high street shops.
Thomas Cook owes its name to a humble and deeply religious 32-year-old cabinet-maker who, one June morning in 1841, hiked the 15 miles from his home in Market Harborough to Leicester, to attend a temperance meeting.
The former Baptist preacher believed that the ills of Victorian society stemmed largely from alcohol and, presumably fatigued from his walk, realised he could deploy the power of Britain’s flourishing rail network to help spread the word.
Addressing the temperance meeting, he suggested that a train be hired to carry the movement’s supporters to the next meeting in Loughborough.
Thus, on 5 July 1841, some 500 passengers travelled by a special train for the 24-mile round trip, paying a shilling apiece.
Over the next few years, Cook laid on ever more trains, introducing thousands of Britons to train travel for the first time. The first such outing to be run for commercial purposes was a trip to Liverpool in 1845.
Over the next decade or so, the business expanded to offer overseas trips, to France, Switzerland, Italy and beyond, to the US, Egypt and India.
His more business-minded son John expanded the tour operator and its reach was such that the government enlisted its expertise in an effort, ultimately in vain, to relieve General Gordon at the siege of Khartoum in 1885.
John’s three sons inherited the business, which incorporated as Thos Cook & Son Ltd in 1924 and benefited from the increasing ease of international travel.
Its first flirtation with collapse came during the second world war, when the government requisitioned some of its assets and it was sold to Britain’s railway companies, effectively a nationalisation.
But it boomed in the postwar years as growing prosperity fuelled the appetite for holidays and it returned to private ownership in 1972.
Since then, it has changed hands and changed shape via a series of mergers and takeovers. It nearly collapsed in 2011 but averted its demise with a bailout deal funded by banks.
Now, after 178 years of operation, it has ceased trading.
With income under pressure and little room for manoeuvre on costs, profit margins can quickly evaporate when short-term setbacks hit.
Last summer’s record-breaking heatwave was one such setback, because people who might otherwise have booked breaks at short notice opted to stay at home. The effect was particularly pronounced in Sweden, its third-largest market, as potential customers soaked up the unseasonably warm Scandinavian weather.
Foreign trips have also become more costly for British customers due to the fall in the value of sterling against the euro. Thomas Cook said earlier this year that there was “now little doubt” that Brexit had caused some Britons to delay holiday plans.
High jet-fuel costs, as well as hoteliers demanding higher prices from the tour operator, have also added to Thomas Cook’s list of woes. All these factors mean the company isn’t making enough cash from selling holidays to pay the interest on its debt mountain.
It hopes that new money from Chinese investors Fosun – and its banks – will provide some breathing space. It hopes to sells its airline for a good price and accelerate its push into the hotel market, which should reduce its dependence on summer package deals. But first, it must ensure its survival.
