Thomas Cook is suffering from an interminable holiday nightmare. It has been struck by a combination of high debt, intense competition and one-off factors including last summer’s heatwave. Brexit uncertainty is also, inevitably, a contributing factor.
This welter of concerns has brought a 178-year business to the brink. Eight years after its near-collapse in 2011, the tour operator needs a bailout if it is to survive the coming winter, when holiday bookings typically tail off.
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One key problem is entirely of the company’s own making. It is buckling under the weight of a £1.6bn debt burden – the legacy of loans taken out to save it from near-collapse in 2012. The interest alone has cost it £1.2bn since then, meaning that 3m out of the 11m holidays it has been selling per year were funding debt repayments.
A fundamental long-term challenge is that the internet has made it much easier for smaller competitors to enter the market and grab market share, not just in the UK, but in its largest market, Germany.
Rival travel agents have targeted its package-holiday business, while the rise of low-cost short haul air travel has squeezed its airline, which is run as a separate business. The result is a punishing pincer move on the group.
In the face of increasingly fierce competition , Thomas Cook has had to compete to win customers by lowering prices, which has trimmed profit margins. Unlike smaller online-only players, Thomas Cook has high fixed costs due to its network of 567 high street shops.
With income under pressure and little room for manoeuvre on costs, profit margins can quickly evaporate when short-term setbacks hit.
Last summer’s record-breaking heatwave was one such setback, because people who might otherwise have booked breaks at short notice opted to stay at home. The effect was particularly pronounced in Sweden, its third-largest market, as potential customers soaked up the unseasonably warm Scandinavian weather.
Foreign trips have also become more costly for British customers due to the fall in the value of sterling against the euro. Thomas Cook said earlier this year that there was “now little doubt” that Brexit had caused some Britons to delay holiday plans.
High jet-fuel costs, as well as hoteliers demanding higher prices from the tour operator, have also added to Thomas Cook’s list of woes. All these factors mean the company isn’t making enough cash from selling holidays to pay the interest on its debt mountain.
It hopes that new money from Chinese investors Fosun – and its banks – will provide some breathing space. It hopes to sells its airline for a good price and accelerate its push into the hotel market, which should reduce its dependence on summer package deals. But first, it must ensure its survival.
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