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Comment: Thomas Cook’s collapse shows Atol scheme’s flaw

Just as the travel giant was unwilling to make changes to survive, the industry must be frank in ensuring this never happens again, says David Speakman

It was somewhat apt that after Abta and the UK travel industry suffered a financial typhoon with the collapse of Thomas Cook, those who lingered at last week’s Abta convention, held this year in Japan, were hit by a real-life typhoon.

Abta chief executive Mark Tanzer, in his opening address came out fighting in defence of its second-largest member going to the wall. He claimed: “The failure of Thomas Cook, in my view, is more a failure of corporate finance than a failure of travel.”

Mark went on to explain the reason for his claim was that Thomas Cook paid £1.2 billion in interest charges in its last six years, money which would otherwise have been profit. Of course, it’s a lot of money, but many would claim the company had numerous ways and opportunities to reduce its debt. Some solutions would have been brutal and humiliating. Redundancies would have been widespread. But that would have been much more acceptable than the total collapse of the business and the collateral damage – yet to be realised – to the rest of the industry.


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I’m no lover of corporate finance but you don’t have to feast at their table. If you do decide ‘to dance with the devil’, then their interest rates and charges will reflect in equal measure their risk and your desperation. Ironically, Thomas Cook’s lenders have now lost their money, so it could be argued they didn’t charge enough!

With hindsight, the directors could have done things differently: a rights issue when the share price recovered; downsizing; writing off goodwill much sooner. All painful but feasible. Yet Peter Fankhauser, chief executive of the Thomas Cook Group, recently confirmed that even with the benefit of hindsight he wouldn’t have done anything different over the five years of his tenure. The genius Albert Einstein is credited with the definition of insanity as “doing the same thing over and over again and expecting a different result”.  I don’t want to be unkind to Fankhauser, as I have been similarly caught like a rabbit in the headlights of a collapsing business myself, albeit on a much, much smaller scale.

You hope something will turn up, but you have little wriggle room. You believe that persistence will win the day, when in fact a more aggressive approach to the reality of the situation would have been more appropriate.

The evidence, however, shows the Thomas Cook board believed that the appropriate course of action was not even to retain the status quo but to expand its own hotel offering. The company clearly did not have the money or headroom to succeed. It was a gamble that well-heeled companies might baulk at; with its debt millstone, Thomas Cook should never have attempted such a course of action. Reality played second fiddle to a travel brand that believed that its rightful place in the travel industry was unchallengeable. Such a high-profile travel brand found the prospect of no longer being a big player crushing. Ego played a big part in making the wrong decisions to survive.

Customer money

The elephant in the room for Thomas Cook, Abta and the travel industry in general is the mountain of debt that Thomas Cook was allowed to build. By extension, its collapse raised the issue of how most travel companies use customer money to finance their businesses.

Various estimates of Thomas Cook’s debt have been mooted. The government is being harangued for refusing to offer a “life-saving” £250 million to get the survival deal over the line. But the truth is that Thomas Cook had probably gorged on as much customer advance payments as it had in bank and bond debt. In addition it had stretched its normal credit lines with suppliers.

The reported bank debt at the end of March was £1.9 billion. Add to that a further £1.1 billion estimated for a survival deal. A revised figure of total indebtedness of £3.1 billion was suggested but that excluded the mountain of customer advance payments, which are unknown but could be in excess of £2 billion. Add to that the supplier credit proportional to such a large travel business and a much higher figure of £10 billion of debt impact across the whole group is not too far-fetched. I believe that even the industry will be shocked at the final debt liability.

The BEIS committee will interrogate the directors of Thomas Cook early this week. It’s claimed they may ask for a return of some of the generous bonuses dished out to directors over the last few years. They will also be interrogated about how they came to build such a mountain of bank debt. However, a far more important question surely hangs over the whole meeting: did the collection and handling of customer money, paid in advance for future travel, comply with correct and ethical governance? The liquidators will be able to shed more light on that.

Just as an earthquake followed the Japanese typhoon, there is no doubt that a financial earthquake in the UK travel industry will follow the Thomas Cook typhoon in the not too distant future. A company with a brand reputation such as Thomas Cook’s would demand and be given credit. It was a major player in the buying of travel supplies, and conventional suppliers of accommodation will be counting the cost of giving credit to such an ailing company. These creditors will have substantial unsecured claims.

However, the complexity of the Abta bonding of pipeline monies and the Atol scheme will be lost on many both inside and outside the travel industry.

While Thomas Cook shops sold mainly their own-brand products, they also dealt with a number of specialist operators. These operators would rely on Thomas Cook stores to collect deposits and balances on their behalf and pass that money on to them. With the collapse of Thomas Cook, the money recently collected would not be paid to the operator but the operator would still have to provide the holiday booked. In these cases, Abta would step in with its bonding that protects the pipeline money between Abta agent and Abta operator. But Abta only protects this “pipeline” money if the relationship between agent and operator is not on credit! So it’s now likely that many tour operators are now finding substantial holes in their finances that will take years to rectify.

In addition, those Atol-holders who have Thomas Cook Airlines as a component part of their “package” would now have to source alternative flights even though they have already paid Thomas Cook in advance. On the Beach estimated that it might affect their profits by £7 million in 2019, according to a report in the Financial Times.

Airline Insolvency Review

Abta’s Mark Tanzer also called on the government to launch a full consultation on the findings of the Airline Insolvency Review. This was released earlier in the year by the CAA in response to the demise of Monarch in 2017 and the lack of financial protection for flight-only.

Peter Bucks, the chairman of the relevant committee and himself a former corporate financial advisor, sets out a scheme for flight-only financial protection that would levy a charge of 50p per passenger. On page 7 of the review, under the heading ‘The Review’s Principles’, is outlined a fundamental flaw in the suggestion. It states:

The beneficiary pays for protection:

“Those who benefit ought to pay for their protection. This will require a careful balancing of the level of risk covered and the affordability of protection. The corollary of this principle is that the taxpayer’s exposure should be minimised.”

In Bucks’ ‘corporate financial eyes’, the beneficiaries of protection ought to pay for the privilege. Massive amounts of customer money are used to fund travel businesses. They lie side by side with bank debt but carry no interest charges back to the borrower. In the case of Thomas Cook, customer money is likely to be between £1 billion and £2 billion and cost the company nothing, diluting somewhat the headline interest charges that Tanzer claims.

Let’s say we call this customer money a bank and call it The Customer Bank (TCB) and let’s see if Peter Bucks’ way of dealing with customer money is consistent with how he would expect bank debt to be dealt with. A conventional bank would lend money to a borrower such as Thomas Cook. The bank would insist on an interest rate that would reflect the risk that the company poses, plus all relevant setup and legal costs incurred. TCB, however, is treated by Peter Bucks and his committee as beneficiaries of their largesse, when in fact the beneficiaries, as in conventional banking of any loan, are the borrowers, and all costs related to borrowing that money, however informal, should be at the borrowers’ expense and not the lender’s.

Peter Bucks’ scheme, just like the Atol scheme, calls for the customer who pays in advance to also pay a further premium, however small, to guarantee the safety of their up-front money. Customers get no interest payment, are unsecured creditors and are charged for the privilege of lending such sums to the Atol-holder.

The travel industry never questions its own entitlement to this mountain of free customer cash that it risks at its will. The industry gorges daily on this financial manna but fails to appreciate that customer trust is now at the centre of any transaction and customers look to the prudent handling of these funds.

Back to the review. In item 4 of The Executive Summary are the prophetic words of someone bitten once by the Monarch debacle but who believes lightning won’t strike twice. It states:

The vast majority of travellers are carried by a small number of airlines, with the top five having nearly 60% of the UK market, and 80% held by just 13 airlines. We have estimated that the likelihood of any of these top 13 airlines becoming insolvent in a given year is generally low (between 0.1% and 3% depending on the airline), but if it were to happen, large numbers of people would be affected.

Atol is fundamentally wrong

The CAA must be congratulated on a repatriation job well done for Thomas Cook customers. But continuing under Atol to allow travel companies, including airlines, to risk customer money as they do is fundamentally wrong. Apart from buying a house, buying an annual holiday is the biggest expense a member of the public might have. Buy a house and your money is placed in escrow; book a holiday and your payments can be open to the risk of incompetence, bad governance or the vagaries of the ups and downs of business.

Many travel companies have moved to protect customer money by placing the customer money in a trust. But these companies are an exception to the rule, even though there is no better way to prevent travel businesses from losing customer money than not allowing them to have it until the travel plans of the customer are completed.

In the financial crisis of 2009, banks claimed they were “too big to fail” and we know how that turned out. Now airlines claim the same, refuse to be bonded, and continue to use and risk customer money prior to delivering what the customer has bought.

As more people are able to build their own travel itineraries, they will look to book with someone they can trust to deliver on their promises – not to jeopardise all that by losing their money, with all the associated angst and inconvenience.

Of course, safeguarding client payments in this way would deny airlines and travel companies a source of cheap money, but it would lead to a more prudent and disciplined seller of travel.

To charge the customer £5, £2.50 or even 50p to protect their own money has to be a thing of the past.

The UK travel industry has, as always, closed ranks to protect those still operating within it. But we can only save our reputation for integrity, and retain the trust of customers, by being reliable and credible.

Just as Thomas Cook was unwilling to make the necessary changes to survive, we, the travel industry, must be frank and transparent in ensuring that this never happens again. The industry, including the Airline Insolvency Review, must change its behaviours in how it uses and perceives customer money. After all, we know what Albert Einstein’s definition of insanity is.

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