Taxpayers would have to foot the bill if another tour operator followed Thomas Cook into insolvency, the National Audit Office has warned, after a tourism industry fund that paid out £481m to repatriate and refund holidaymakers hit by the collapse was left severely depleted.
In a report on the shock demise of the 178-year-old tour operator last year, the NAO said the state had already borne £156m in costs, a figure it said was likely to rise in future.
And the body responsible for scrutinising public spending expressed concerns that any future tour operator failures could lead to much greater costs.
The warning comes with government finances already stretched by the £330bn economic stimulus to address the coronavirus crisis, which has also placed immense pressure on airlines and other tour operators. UK citizens are also stranded abroad after the closure of borders around the world due to coronavirus, while airlines have radically curtailed services.
The NAO’s concerns relate to Atol, the tourism industry-funded safety net that ensures customers who buy package holidays are not left out of pocket when tour operators go under.
Atol’s air travel trust fund (ATTF), backed by a £2.50-per-passenger payment from licensed tour operators, paid out £481m over Thomas Cook, the NAO said, more than any previous case.
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
“The Civil Aviation Authority [CAA] told us that it is likely that after all costs arising from the collapse of Thomas Cook have been met, there will be relatively limited resources left in the ATTF,” the report said.
“Should another Atol-licensed company collapse and costs cannot be met from the fund, the government has agreed to stand behind the ATTF.”
Atol protection does not cover people who have only bought flights but does cover the majority of the type of package holidays that were sold by Thomas Cook, protecting about 20 million people every year.
These include customers of Tui, Thomas Cook’s only major rival before its collapse. While there is no suggestion Tui is in danger of suffering the same fate as Thomas Cook, it has been one of the worst-hit companies amid the coronavirus crisis.
Its share price has declined by two-thirds since the outbreak began, with the flow of global tourism choked off by travel restrictions imposed by governments.
The NAO report detailed the costs arising from Thomas Cook’s decline, which culminated in its insolvency on 23 September last year.
The failure left an estimated 150,000 customers stranded in 18 countries, triggering the biggest repatriation effort in British peacetime history, with 746 flights from 54 airports.
The Department for Transport (DfT) is reimbursing the CAA £83m for the cost of repatriating holidaymakers who were not protected by Atol. The total cost has risen by £22m after the CAA revised the estimated proportion of customers without the cover to 55% from 40% in February.
In December 2019, the government said it was planning a new regime that would allow airlines that go bust to keep flying long enough to complete repatriations, limiting future costs to the taxpayer.
Meg Hillier, the chair of the Public Accounts Committee, said existing arrangements had let “industry off the hook”.
“The resources to cover other airlines going bust is now very limited. New regulations are urgently required,” she said.
The government has also spent £83m on redundancy payments for 9,000 staff, plus the costs of the liquidation process.
The NAO said costs were likely to rise beyond the £156m running total, including honouring legitimate claims from people who suffered injury while on holiday with the company.
