Introduction:

After 178 years of operation, the British tour operator Thomas Cook, one of the
world’s oldest travel brands, with 19 million annual customers, closed shop on 23 rd
September 2019. The company announced that it would be liquidating its assets
and filed for bankruptcy, despite attempts to rescue the brand.
At the moment of its collapse, Thomas Cook had a debt of 1.7 billion pounds,
about $2.1 billion, an amount the chief executive, Peter Fankhauser, had called
“insurmountable.” It had been in negotiations to obtain $250 million in emergency
financing when it declared bankruptcy.
About 600,000 travelers around the world were affected, 150,000 of them from the
United Kingdom and about twice as many from Germany, said the airline industry
analyst Bob Mann, and more than 20,000 employees worldwide found themselves
without a job.

What was Thomas Cook?

Thomas Cook Group was a British travel company which operated as both, an
airline company and a tour and travel firm. The Group was founded after the
merger of Thomas Cook AG and My Travel group in 2007. However, the brand
"Thomas Cook" is 178 years old and was trusted by travelers globally. Recently,
Thomas Cook Group collapsed due to lack of funds. They have announced their
bankruptcy.
A History of Debt:
2007
Thomas Cook Group can arguably trace its collapse back more than a decade, to a
round of leisure industry consolidation which resulted in its creation through a
2007 merger between German-owned Thomas Cook and UK holiday carrier
Airtours’ parent MyTravel Group.
Goodwill of more than £1.1 billion relating to MyTravel’s UK business,
recognised during the merger, was written off over the first half of this year,
catapulting Thomas Cook Group into a heavy interim loss, as it sought to cope
with a high debt burden and a difficult trading environment.
Thomas Cook Group’s half-year accounts illustrated the precarious position of the
company.
Intangibles had made up half its assets at the end of its last financial year, and the
write-down meant that, by 31 March 2019, its liabilities exceeded its assets – assets
which still contained considerable goodwill – by some £1.34 billion.
Among the liabilities were trade payables of £1.3 billion and long-term borrowings
of £1.6 billion, as well as more than £2 billion in revenues received in advance.
While Thomas Cook Group cited various familiar pressures – including fuel prices,
overcapacity, and uncertainty over the UK’s withdrawal from the European Union
– as reasons for its poor half-year results, the company has hardly been immune to
difficulties since the MyTravel merger.
MyTravel had been struggling with losses at the time of the tie-up, and its UK
operations were still loss-making even though the company had crept back into
overall profit.
2009-2011
Thomas Cook Group had been optimistic, expecting long-term merger synergies of
€200 million and projected an operating profit of €620 million for 2009-10.
But the figure for 2009-10 instead slipped to £167 million – only partly attributable
to the Icelandic volcanic disruption that year – and it spurred an overhaul of the
poorly-performing UK division including optimization of its airline.The air
transport industry was emerging from a global economic downturn, while regional
issues, such as the detrimental travel effects of the ‘Arab Spring’ movement in
2011, exacerbated the difficulties of Thomas Cook's “overly-complex” UK
business.
Encouraged by the fact that half its UK package holiday business was drawn from
retail outlets, the company entered a retail joint venture in 2011 with two Co-
operative travel groups, CGL and Midlands, adding some 460 stores to its portfolio
of 780 – putting faith in the customer appeal of retail stores despite the prevalence
of online booking.
Thomas Cook Group sank into losses in 2010-11, losses which persisted for five
years until the company returned to the black in 2014-15, having implemented a
transformation programme and witnessing improvement in its UK business.

2015-2019
It unveiled an extension to this transformation in 2015, a new operating model
containing initiatives intended to enhance quality and improve margins, through
better yields and cost efficiencies, achieving higher earnings and cutting debt.
Chinese firm Fosun Tourism Group lent support to the company, through a
minority investment.
The return to profitability allowed Thomas Cook Group to start recommending a
dividend in 2016, for the first time in five years.
But while the new model – which included an emphasis on own-brand hotels and
growing the seat-only flight business – aimed to reshape Thomas Cook Group over
a three-year period, operating profit margins stayed low and continued to be
hammered by a combination of finance costs, restructuring costs, and the costs of
implementing the model.
The extent of the folly of its Co-operative investment became apparent in 2017
when it revealed it had closed 45% of its stores since the expansion, cutting the
total number to fewer than 700.
Although the company was technically turning in full-year net profits, these were
barely in double-figure millions despite revenues in the region of £8-9 billion.
While its board maintained that it was pursuing the right strategy for profitable
growth, the company has remained vulnerable to external disruption, such as
geopolitical events and even the weather – last year’s summer heatwave left a
backlog of unsold holidays in an already heavily-discounted market, helping to tip
the company into losses of £163 million.
Thomas Cook Group had, at points in time over the previous decade, engaged in
renegotiation of funding facilities to shore up its finances.
But as losses continued over the first quarter of this year, the weak winter season,
the company started looking at a fundamental change to its entire business,
embarking on a strategic review to examine a sale of its airline operations, and
even a possible break-up of the tour operator business into component parts.
It was forced to retreat from this plan, however, and resort to seeking a
recapitalization after a deteriorating operating environment in Europe meant the
divestment of the airline operations was unlikely to provide sufficient value to the
company or its shareholders.

Fosun Tourism Group, the minority shareholder, led the effort to rescue the leisure
giant, but the approaching winter season and the continuing pressures on the
business gradually undermined the case for investment and, as the price for saving
the company increased, Thomas Cook Group was unable to convince lenders to
provide the funding necessary to keep the 178-year old firm afloat

Reasons Behind Thomas Cook Group Bankruptcy &

Collapse:
Debt & Funding:
Thomas Cook was brought low by a $2.1 billion debt pile that prevented it from
responding to more nimble online competition. With debts built up around 10 years
ago due to several ill-timed deals, it had to sell three million holidays a year just to
cover its interest payments.
As it struggled to pitch itself to a new generation of tourists, the company was hit
by the 2016 coup attempt in Turkey, one of its top destinations, and the 2018
Europe-wide heatwave which deterred customers from going abroad.
Thomas Cook needed another 200 million pounds on top of a 900 million pound
package it had already agreed, to see it through the winter months when it receives
less cash and must pay hotels for summer services.
The request for an additional 200 million pounds torpedoed the rescue deal that
had been months in the making.
Thomas Cook bosses met lenders and creditors in London on 22nd of September to
try to thrash out a last-ditch deal to keep the company afloat. They failed.
Under the original terms of the plan, top shareholder Fosun - whose Chinese parent
owns all-inclusive holiday firm Club Med - would have given 450 million pounds
($552 million) of money in return for at least 75% of the tour operator business and
25% of its airline.
Thomas Cook’s lending banks and bondholders were to stump up a further 450
million pounds and convert their existing debt to equity, giving them in total about
75% of the airline and up to 25% of the tour operator business.

The Model: Declining interest in package tours

The business model of a travel agency depends on segregating the different aspects
of traveling and packing it into one travel package. However, with the easy and
direct access to any service through the internet, the travel package or going
through travel agency has become obsolete.
Over the past decade, Expedia and Booking Holdings have come to dominate the
market with their search capabilities. “Instead of moving in that direction, Thomas
Cook moved toward the direction of being a tour operator. Although they had more
control over it — by owning the hotels and the airline — the market has continued
to get squeezed.
The problem is that packages have a very defined season. So if one season goes
bad — maybe because the summer is too hot, or because a key market, like Egypt,
is experiencing trouble — it affects the cash flow of a company like Thomas Cook
very badly.
And of course, one reason of its failure is the common reason of most of the
business failure, resisting change. Thomas Cook was unable to adapt the changes
according to the new generation and ended up collapsing.
Airline Expenses
In the early 2000s, Thomas Cook began moving into the airline business. The
company slowly absorbed Condor, a Frankfurt-based airline that was formerly a
subsidiary of Lufthansa. In 2003, the company began operating its own airline,
Thomas Cook Airlines, a United Kingdom-based operation with 34 planes in the
fleet traveling to 82 destinations.
However, operating an airline is not an easy task. An airline company needs a lot
of funds to bear its running cost. Costs like fuel, maintenance, crew, etc. need to be
fulfilled.
Thomas Cook’s chief competition was the German-based tour company TUI
Group, which also has an airline. When the internet threatened to eat into the
business of conventional tour operators, TUI executives started acquiring and
operating cruise ships and hotels in an attempt to differentiate their agency from
the competition.
The loss of Thomas Cook is an opportunity for TUI, Mr. Esener said. Its TUI Fly
airline has been contacted by the British authorities searching for jetliners to
charter to bring Thomas Cook’s stranded passengers back home.

Brexit
In May, Thomas Cook’s chief executive, Mr. Fankhauser, warned that “the Brexit
process has led many U.K. customers to delay their holiday plans for this
summer.”
He also blamed the uncertainty around Brexit, at least in part. He pointed to the
particular difficulty of operating an airline in Europe, a market that is awash in
low-cost carriers like Ryanair and easyJet, and where purchases need to be made in
dollars. “A lot of your bills are in dollars; you have to buy oil in dollars,” he said.
“So when there are shocks to the system, like the U.K. with Brexit and the pound
losing so much value, all of a sudden that makes the loans you have very difficult
to service.”
“Travel agencies are doing well around the world. Airlines are doing well around
the world. But combining those together with an uncertain market and a falling
currency, for a company that is saddled with that much debt, you get a perfect
storm.”

Thomas Cook Group Financial Ratios Analysis:

This Analysis shows Thomas Cook Group profitability and Management
Effectiveness through Five years compared to TTM (Trailing Twelve Months):

1) Profitability :
Gross margin TTM 20.07%
Gross Margin 5YA 22.11%
Operating margin TTM -11.51%
Operating margin 5YA 1.52%
Pretax margin TTM -12.86%
Pretax margin 5YA -0.09%
Net Profit margin TTM -14.74%
Net Profit margin 5YA -0.57%
 2) Management Effectiveness :

Return on Equity TTM -

Return on Equity 5YA -15.56%
Return on Assets TTM -24.64%
Return on Assets 5YA -0.78%
Return on Investment TTM -81.94%
Return on Investment 5YA -2.22%