Why did Thomas Cook fail?
Thomas Cook’s trading demise last week is just the latest example of the type, that when the end comes for a household, high street name it’s the suddenness that’s most shocking.
On reflection however, the seeds of decay and demise are apparent for all to see and usually have been for some time.
Now forensic experts have had the chance to go through the available accounts and the main question that emerges is why things didn’t come to a head sooner.
There’s heated talk about why the government couldn’t step in and save the company with the same speed and planning that was evident with Operation Matterhorn, the Civil Aviation Authority-led effort to repatriate the 150,000 stranded holidaymakers.
The bill for this was in the area of £100m and once compensation had to be paid to hoteliers and customers refunded for future bookings the total may run as high as £500m, even with industry insurance protection public funds would be needed to make up any shortfall.
The company had recently secured a £900m rescue deal led by its largest shareholder Fosun in August but a recent appeal for a further £200m of contingency funding from lenders proved to be too much.
This would have been in addition to existing debt and new equity which according Peter Fankhauser, the company’s former Chief Executive, was already £3.1bn in deficit.
Inquiries are already underway with investigations by The Insolvency Service and the Financial Reporting Council and a publicly announced inquiry by the Business Select Committee will get underway soon which the media assume will focus on boardroom pay and bonuses.
The simple answer may be an old-fashioned lack of prudence with the company failing to pay down debt and clear commitments when it had the opportunity.
There will also be additional scrutiny given to how airline insolvencies are handled in future with Transport Secretary Grant Shapps saying: “Firms need to be able to look after their customers and we need to be able to ensure their planes can keep flying in order that we don’t have to set up a shadow airline.
“This is where we will focus our efforts in the next couple of weeks. We will require primary legislation and, dare I say it, a new session of Parliament.”
R3, the trade body for Business Recovery Professionals urged caution.
President Duncan Swift said: “During an airline or travel company insolvency, planes are vulnerable to being held hostage by overseas creditors, suppliers and other stakeholders, which puts aircraft, crew and passenger safety at risk. Using chartered flights avoids this scenario.
“Changing the law in the UK won’t necessarily change the behaviour of creditors overseas and we’re yet to see a convincing solution to this potential problem.
“Prioritising passenger repatriation is practical if there’s a means to pay for doing so. Without some form of insurance scheme, repatriation efforts would need to be funded by the insolvent airline itself. This would completely deplete what could be repaid to the airline’s creditors, and would make lending to or trading with an airline a very risky business.
“ATOL protection could provide funding for repatriating package holiday travellers, but a solution is needed for flights-only travellers too. Like most areas of insolvency, airline and travel company insolvencies are complex and need legislation that considers and caters for the full breadth and depth of people and groups affected, rather than something focused just on passengers.
“Repatriation of passengers is understandably an early priority, but they’re not the only stakeholders that have to be considered in the overall process.”
There is also the additional dimension of what will happen with the group’s property portfolio. They had 588 stores in the UK alone which will add to the already strained high street occupancy figures for the third quarter of the year not to mention 9,000 highly unfortunate members of staff now looking for new employment.
There is no magic bullet to ensure that everybody from staff to customers to shareholders are protected but it reminds everybody that risk is always an element and it has to be assessed and managed.
If you think the risks facing your business are rising then get in touch with us today.
A free initial consultation with one of our team of expert advisors can help find strategies to secure your business before the tough last quarter of the year or find and plot a path to recovery if possible.