Extended-form Case Study

Thomas Cook: flying into trouble

Published on June 30, 2021   12 min

Other Talks in the Category: Management, Leadership & Organisation

Hi, I'm Dr. Susan Smith, an Associate Dean at the University of Sussex Business School, and also a senior lecturer in accounting. I'm an ICAEW chartered accountant, and have a career of over 20 years in industry. Today we're going to look at Thomas Cook, and how it flew into serious financial trouble.
Thomas Cook was a UK-based travel company, with a heritage of over 178 years. It sold package holidays, that's the flight plus an accommodation in a bundle, via its network of high street shops. It also operated a charter airline, selling excess flight capacity to other operators.
In September 2019, it entered liquidation, leaving 600,000 holiday makers stranded, and sparking the largest ever peace-time repatriation of British citizens, at a cost of 83 million pounds to the UK government. Its failure affected around 22,000 employees, of which around 9,000 were based in the UK. It also affected its lenders and suppliers, and led to a Joint Parliamentary committee into its failure. Whilst the committee hearings were truncated by a general election, the evidence it heard and the recommendations of its chair (the right honourable Rachel Reeves, MP) were damning.
Thomas Cook's decline can be charted all the way back to its 2007 merger with MyTravel group, and then its subsequent merger with Co-operative Travel in 2011, which expanded the store footprint to 1,200 stores. The Co-op retained a put option for its remaining share, and at the time the Co-op's option was exercised, the store footprint had reduced to around 764 stores. At the time of its failure, Thomas Cook still retained 500 stores. This was against the backdrop of a changing market, and ailing finances. It had increased its debt in 2011, but it ultimately burned through the available lines. The interest costs since the 2011 rescue amounted to 1.2 billion pounds, and a further 425 million in funds were raised from shareholders in 2013. Ultimately, the company's capital structure, with a significant debt burden and attendant interest cost, was a major contributor to its failure. The 1.1 billion pound write-down in the six months to May 2019, combined with the ongoing trading losses, led to Thomas Cook's liquidation. The write-down was related to goodwill on acquisition, as we've seen in many recent failures. Goodwill on acquisition is created as the difference between the sum paid on acquisition and the assets acquired. The travel market had changed significantly with the advent of the internet, and low-cost carriers. People could put together their own holidays in a more flexible, and often cheaper, way. Those who relied on the store network were typically older travellers, with smaller budgets. Then there were the immediate shocks. A hot summer in 2018, which led to delays in customers booking holidays, and Brexit concerns, which also delayed bookings. As the company was already financially weak, those factors contributed to significant losses in 2018, and a large negative cash flow.