Two hours of testimony from the failed bosses of Thomas Cook confirmed what we had suspected: the level of delusion in the boardroom was spectacular.
On one hand, the former directors argued to MPs that their self-help plan for the business was a rip-roaring success, right up until the moment it wasn’t. In the next breath, they suggested their jobs were always near-impossible because £150m in interest costs had to be paid every year to banks and bondholders.
Neither the former chief executive Peter Fankhauser, nor Frank Meysman, who was chairman for eight years, explained why they did not de-risk the balance sheet when they had the chance. As recently as May 2018, remember, Thomas Cook’s equity was worth £2bn, which was an opportunity to cajole shareholders into backing a decent-sized rights issue to take a chunk out of a debt pile that eventually surpassed £1bn.
Meysman’s account of that period was particularly feeble. He said a plan to reduce debt by £100m a year looked solid in late 2017 and early 2018 “if there would continue to be progress” in operations. The conditional “if” was the critical word. External events – from terror attacks to exploding volcanos in Iceland – regularly derail the best-laid plans in the tourism business. If the possibility of safer funding exists, grab it.
Brexit
“There is now little doubt that the Brexit process has led many UK customers to delay their holiday plans for this summer,” said the chief executive, Peter Fankhauser, in May. But it cannot be the whole story - arch-rival Tui has coped because its finances are healthier.
Weather
The summer heatwave of 2018 encouraged would-be holidaymakers to stay at home, undermining prices in the “lates” market where operators try to clear unsold holidays. There seems to have been a hangover into 2019, with customers calculating that waiting to book is a productive strategy.
Competition
A pincer movement of Airbnb and budget holidays has changed consumer behaviour, though Thomas Cook still managed to sell 11m package holidays last year.
Banks and debt
The tour operator has been attempting to shoulder a huge pile of debt for the past decade – £1.7bn worth at the last count. Successive managements failed to remove meaningful chunks. The banks argue they have supported an overstretched company for years and the details of why it could not be saved may have to await the report from the Insolvency Service.
Bad management
Thomas Cook’s borrowings were too high. The moral of the tale is that tour operators should fund themselves conservatively. If your balance sheet is fragile, you are at the mercy of events in an industry where most of the cash arrives in the summer and then flows out in the winter.
Nils Pratley, financial editor
Meysman pointed to a few debt-reduction measures he did oversee. The largest was a £425m placing and rights issue – but that was back in 2013. The second largest was the sale of £350m worth of businesses, but that was clearly insufficient given Thomas Cook’s need to invest in new hotels.
After a summer heatwave in the UK, the optimism of spring 2018 was replaced within six months by a crisis in the form of “enhanced monitoring” by the Civil Aviation Authority. Cue a doomed attempt to flog the airline, and then a desperate effort to secure a £900m restructuring with the help of lenders and the Chinese group Fosun International.
According to Meysman’s version of events, all would have been well if only the government had stepped up with an extra £150m to £250m in the form of a “last draw, first payback” backstop. Both he and Fankhauser seemed incapable of understanding that, if backers will not commit until they see public money at risk, the plan is fundamentally weak.
There is no doubt that lenders’ late demand for the £200m backstop was a serious and sudden setback, but being taken by surprise seems to have been a regular occurrence in Thomas Cook’s boardroom over the years. The trick is to have a plan B. Listening to the directors’ testimony, one could understand why ministers declined to back a bailout. It is hard to justifying risking money when financial visibility is so poor.
Fankhauser, at least, conceded that different choices could have been made, such as putting the airline up for sale earlier. But, as if to sum up proceedings, he did not foresee the obvious question about whether he will pay back the cash element of his last bonus. He said he would go away and think about it. His prepared answer should have been: “Of course I will.”
Sympathy in short supply for Woodford
Even as he was fired, Neil Woodford could not resist a last growl. The decision to wind up his flagship fund was “one I cannot accept, nor believe is in the long-term interests of LF Woodford Equity Income Fund investors”.
He may have a marginally credible point about the interests of investors since it is not obvious that Link, the administrator, will produce better value for them via a wind-up. But on every other score, Woodford should recognise he is the author of his downfall.
Specifically, he believed his record in spotting investment opportunities among large companies qualified him to fish in the shallow waters of small and unquoted stocks. The sports are very different.
Worse, he overloaded with unquoted investments to the point where he could not comfortably meet redemptions when performance fell flat and investors wanted out. The liquidity mismatch will lead, almost certainly, to reform of rules for open-ended funds. Quite right, too: the Financial Services Authority was shockingly slow in spotting the problem.
Woodford could attempt to relaunch his career with a new venture but he may have irretrievably annoyed the last members of his fan club by continuing to charge £65,000-a-day management fees while the Equity Income fund was gated.
That decision was disgraceful given the many millions paid in dividends to Woodford’s management firm in the past. No wonder the financial establishment did not lift a finger to prolong the life of his flagship fund. Sympathy is roughly zero.
