Ian Taylor examines the fall-out from the failure of the UK’s oldest travel brand
The group had no cash and few assets
Thomas Cook Group went into liquidation with barely £1 million in cash and £31 million in the bank, facing demands for almost £500 million from creditors and partners.
This was revealed in documents filed by the company in insolvency proceedings following its collapse in the early hours of last Monday. The company would have run out of cash by October 4 “and probably earlier”.
The documents show the group’s finances deteriorated sharply through the summer with payment service providers acting “to mitigate their financial exposure” by withholding transaction payments.
A source close to the insolvency described the group’s assets as “depressing”.
The lack of assets is the reason the group went into liquidation rather than administration. There is nothing to pay for an administration and almost nothing to salvage.
Thomas Cook’s UK airline had 46 aircraft, most owned by leasing companies. The group’s UK retail estate was made up of leased stores.
The airline’s airport slots, those at Gatwick in particular, may be among the group’s few valuable assets. EasyJet, Wizz Air, Virgin Atlantic and BA are likely to be keen on these.
Fosun can be expected to show interest in the Thomas Cook name. The Chinese group is left with the joint venture it launched with Thomas Cook in China in 2016 and the hotel investment fund the companies set up together to show for its 18.6% stake in Thomas Cook.
Thomas Cook’s German and Nordic businesses can continue
Liquidation of the group has not wiped out all Thomas Cook businesses. The way the group was structured and the airlines run separately, ready for a sale, means the German and Nordic brands may continue with aid to carry them through the group’s winding up.
Thomas Cook operations in the Benelux countries and Poland have ceased. But Thomas Cook Scandinavian Airlines resumed flying after just a day on the ground, having secured a Norwegian bank loan. It is now seeking a buyer.
German carrier Condor also resumed flying following agreement on a six-month, emergency bridging loan of €380 million, backed by the German government.
Condor will have legal protection in Germany while it is separated from the Thomas Cook Group and then seek new owners.
Thomas Cook Germany went into insolvency but managing director Stefanie Berk explained this was also in order to extricate itself from the parent group’s “financial tie-ups and related liabilities”.
Berk hopes to resurrect tour operator Neckermann – which with airline Condor in the merged group Condor & Neckermann (C&N) acquired Thomas Cook in 2000.
Thomas Cook Northern Europe chief executive Magnus Wikner said: “We are independent and profitable parts of the group. We have been able to continue operations with support from our banks, creditors and guarantors.”
The cost of UK repatriation and refunds will be high, but not as reported
The cost of repatriating Thomas Cook’s UK customers is put at £100 million. It’s estimated that refunds on forward bookings will cost about £420 million.
Some of the £100 million repatriation costs will be met by the government. About 60% of passengers are reported to have Atol-protected bookings, 40% not. The bill for the latter should not be covered by the Air Travel Trust Fund which backs up the Atol protection scheme.
The fund is also unlikely to pay out all the £420 million on refunding bookings. A proportion of these will be covered by consumer credit rules protecting credit card purchases, meaning consumers will be refunded by card issuers.
However, it’s likely the proportion picked up by card companies will be considerably smaller than following the Monarch collapse in 2017.
The repatriation and refunds will take a major chunk of the Air Travel Trust Fund, which had £170 million in it at March 2018 and will contain more than £200 million now.
It is funded by the £2.50 Atol Protection Contributions paid by consumers on every Atol-protected booking, of which there are about 25 million a year.
The fund is backed up by a £400-million insurance facility, due to pay out upon the failure of a company the size of Thomas Cook. So the trust’s funds will not be wiped out, but will suffer a huge hit.
It’s important to note the fund is solely to provide consumer financial protection. It does not protect the funds of partners or suppliers to a business which fails.
Media reports that funds owed hoteliers may be drawn from the fund are wrong.
The Financial Report Council may investigate
The UK accountancy regulator, the Financial Reporting Council (FRC), confirmed it is considering investigating the collapse.
The FRC said it is working with the UK Insolvency Service, which put the group into liquidation, to decide whether there is a case for investigation “as a matter of urgency”.
However, the FRC has limited powers. It can only investigate Cook’s auditors – meaning major accountancy firms PwC, which signed off Cook’s accounts from 2008 to 2017, and EY which took over from PwC – and registered accountants at Thomas Cook.
The FRC can ban individual accountants and fine an audit firm up to £10 million.
Thomas Cook has been criticised for the way it reported exceptional charges and treated historic ‘goodwill’, including £1.1 billion in goodwill from its merger with MyTravel 12 years ago which it only removed in May.
The Insolvency Service will launch a probe
Business secretary Andrea Leadsom instructed the Insolvency service to investigate. She said: “I ask that the investigation looks not only at the conduct of directors immediately prior to and at insolvency, but also at whether any action by directors has caused detriment to creditors or to the pension schemes.”
The business newspaper the Financial Times was scathing in response. It noted: “The intervention of Andrea Leadsom signals Tory embarrassment, little else. The Insolvency Service . . . has no brief to judge the morality of executive pay unless fraud is involved.”
It added: “Shareholders lost £2 billion in total, measured by a 2018 market high. That is capitalism.”
MPs will investigate too
A committee of UK MPs, the Commons business, energy and industrial strategy committee, announced an inquiry into the collapse which will focus on Thomas Cook’s accounting practices, executive pay and the role of its auditors.
Chair of the committee, MP Rachel Reeves, said: “The collapse has uncovered what appears to be a sorry tale of corporate greed, raising serious questions about the actions of Thomas Cook’s bosses and their stewardship of the business.”
The Financial Times pointed out Thomas Cook’s executive pay was “only a shade more than the median pay of a FTSE 250 CEO over the past five years”.
It concluded the investigations would find that: “Chief executives who received pay typical to their station turned out to be a bit useless.”
Ministers may finally introduce an airline insolvency levy
Transport minister Grant Shapps delivered the same speech to Parliament on Wednesday in reporting on the collapse as predecessor Chris Grayling had done two years ago upon the failure of Monarch.
Parliament had only just returned after its illegal suspension by the government so perhaps Schapps was unprepared. But his statement was identical to Grayling’s save for the names of the companies and the numbers affected.
However, the collapse might yet see industry demands for a levy on airlines to fund repatriation in the event of failures finally met.
The Airline Insolvency Review, set up by the government following the collapse of Monarch in October 2017, reported in May this year and its three key recommendations were a) all airlines operating from the UK to provide securities to fund repatriation, b) a 50p levy on every airfare to back this up, and c) for insolvent airlines to be allowed to operate “for a limited period” to bring passengers home.
This should now form part of a planned government white paper on aviation.
It has been a long time coming. The CAA advised the Department for Transport to impose a 50p levy on all airlines in 2007. The DoT rejected the advice.
The big losers apart from Thomas Cook staff and trade partners are hotels
Thomas Cook’s banks stand to lose up to £825 million, its bondholders up to £1 billion. But overseas hoteliers will be among the worst hit.
Thomas Cook would typically have settled its bills with hoteliers at the end of the summer season. Reports suggest most hotels had been paid for accommodating Thomas Cook customers only up to June or early July, so payments are outstanding for the whole of the peak summer season.
The bill across 3,000-plus hotels will run to hundreds of millions if not above £1 billion. In Greece alone the bill is put at €300 million, of which up to €100 million is owed in Crete.
Hotels will already be contemplating layoffs of staff.
Mainstream media can’t get it right
Mainstream media coverage of the collapse has been largely lousy and frequently plain wrong.
Three falsehoods stand out. First, the repeated references to “stranded passengers” are unhelpful at best when all are being flown home upon completion of their holidays. No one is stranded.
Second, assertions that passengers are being flown home at taxpayers’ expense are nonsense. The Atol scheme and the Air Travel Trust Fund, plus card providers, will pick up most of the bill. The fact that taxpayers may be saddled with any of the cost is down to the government – and to the decision of successive governments to ignore industry concerns.
Third, a wide number of media outlets have suggested the collapse signals the death of package holidays. The Financial Times reported “questions over the concept of the package holiday” and German outlet DW: “Package holidays are a thing of the past.”
All the evidence is that the failure of Monarch in 2017 produced heightened recognition of the Atol logo and a spike in consumers seeking Atol-protected package holidays.
The EU Package Travel Directive which came into force last year, and the UK Package Travel Regulations which enforce this in Britain, widened the definition of a package holiday to include about half of all European holidaymakers.
However, the directive explicitly recognises a consumer’s right to buy a flight and accommodation separately and independently and not pay for protection – which in that case they don’t have.
Not everyone has lost out
US hedge funds which bought credit default swaps on Thomas Cook’s debt are set to make as much as $250 million on the liquidation.