Former Thomas Cook MDs thoughts on what led to its collapse
Published on Thursday, October 3, 2019
Industry stalwart and former Thomas Cook managing director John McEwan gives his thoughts on the downfall of the company he led for 15 years until 1999.
“Monday September 23 was one of the saddest days of my life. We woke up to the news that Thomas Cook, the most well known brand in travel and 178 years old, had gone into involuntary insolvency.
I had spent 35 years of my working life with the company and had a marvellous career, reaching heights I could only dream of when I started as a 16-year-old trainee in a store in Liverpool. On that morning of the 23rd, my immediate thoughts though were for those great, dedicated and professional employees who were made redundant on the day.
Whilst it was clear that the company was in difficulties, we remained hopeful that the proposed deal with Fosun would succeed and give the company a new lease of life. However, the further demands from creditors, principally banks, that another £200 million should be injected by the company was a bridge too far and resulted in insolvency.
It would be natural to blame the current executives for the collapse. However, to understand why we arrived at this point we have to go back to 2007, when the then executive and board made a series of strategic decisions, over a number of years that saddled the company with a level of debt that was so large that it ultimately brought down the company.
In 2007 a merger was agreed between the company and Mytravel. This brought together two different business models and cultures. It was poorly executed, left Thomas Cook with many liabilities and a combined retail network that was far too large that had to be subsequently rationalised at a significant cost. It also attributed a value of £1.1 billion to the merger, which it carried on the balance sheet as goodwill. This should have been written down progressively over a period of time but was only done so earlier this year. This, together with winter trading losses, resulted in an overall loss of £1.5 billion.
There will be questions of the auditors as to why the goodwill sat on the balance sheet for so long.
Following 2007, the company made a series of acquisitions without a clear strategy and in 2010 it merged its retail business with Cooperative travel. The deal was treated with bemusement by industry observers. At a time, when the internet was making serious inroads into travel distribution, the company had doubled its network of shops to 1,200. When the Cooperative subsequently withdrew from the merger this proved to be very costly for the company, which now had a huge fixed cost base.
It’s clear during this period the company should have been focussed on a longer term strategy including differentiation of product and best in class internet distribution. Instead it scaled up its traditional model.
As a consequence of these mergers and acquisitions, the company issued three profit warnings in 2011 and had it’s debt restructured in 2012 to enable it to continue trading.
Since then management have been quite limited in what it could do strategically because of the level of debt. Whilst progress has been made on product innovation it could not be done on a scale that could radically change the direction of the company.
Trading has also been difficult in the last couple of years so there was no ability to offset some of the debt and ease the financial pressures on the company. This cumulative effect over many years, resulted in its collapse last week.
The ramifications are very significant. Not only for the 21,000 employees but also for suppliers. Many countries who are heavily dependent on tourism, particularly those in destinations that relied heavily on Thomas Cook will see their economies damaged and many suppliers, particularly independent hotels, could go out of business.
The failure of Thomas Cook also raises many questions of board governance when companies fail. Also, why the government was not able to create breathing space for the company to either find a solution or wind down in an orderly fashion.
For our regulatory bodies, solutions have to be found to cover the cost of airline failures rather than some of the cost being borne by taxpayers. A simple levy on every airline ticket purchased would do the trick. Also, why did the CAA have to go out and lease planes to repatriate customers at significant cost when the Thomas Cook planes were available?
I now want to turn my attention to those great people from Thomas Cook. It’s remarkable the way they have supported each other and stayed together as part of the ‘Thomas Cook family’. The industry response has also been amazing in welcoming them, offering opportunities, holding [job] open days. What other industry would do this? I am hopeful that the Thomas Cook team obtain new opportunities, and quickly.
One final point. I am a trustee of ABTA Lifeline, a charity that exists to help people from the travel industry when they fall on hard times. We have reached out to the Thomas Cook community and invited them to contact us. Details can be found on abtalifeline.org.uk/Thomas-cook-employee-support