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5 Takeaways From the UK’s Thomas Cook Inquiry

Patrick Whyte, Skift
5 Takeaways From the UK’s Thomas Cook Inquiry

Thomas Cook’s rescue plan would have probably made it the “best-funded travel company in Europe,” but the UK government’s failure to offer a last-minute financial guarantee effectively brought about its collapse, according to testimony at an inquiry into the firm’s insolvency.

The UK government’s Business, Energy and Industrial Strategy Committee listened on Tuesday to evidence from former CEO Peter Fankhauser and former Chairman Frank Meysman on the first day of hearings that will explore the stewardship of the company in the years, months, and days before its bankruptcy.

As always when politicians and executives meet in the wake of a high-profile business failure, there was plenty of posturing from the former and grim-faced contrition from the latter. But amid this, there were some useful nuggets of information that help to better understand what happened. Here are five takeaways.

The Final Few Days

Given those appearing before the committee, it made sense for many of the questions to look at the days leading up to the morning on September 23. If decisions had gone differently, might the company still be around?

Whatever the merits of the Fosun-led rescue plan, it would have made Thomas Cook a much more financially stable business, so why didn’t it get over the line?
A major sticking point had been the emergence of a further request of $255 million (£200 million) from the banks involved.

In one testy exchange, committee chair Rachel Reeves, Labour MP for Leeds West, asked Meysman repeatedly why the company was no longer around.

“That, ultimately, at the end of that Sunday, the parties involved said that they were still willing to do the deal, provided that the government stepped in in one form or another. That was the case at 4 o’clock on that famous Sunday — that tragic Sunday,” he said.

“That was the statement from both Fosun and the representatives from the banks: ‘We are still supporting this deal, provided that the government have a role in the whole project.’”

Fosun and the banks needed the government to play a role.

Intriguingly, Meysman’s comments indicate that the government didn’t necessarily need to come up with the £200 million ($255,000) itself, claiming that Spanish hoteliers and others were willing to put the money in.

“All I would have liked to have happened on that tragic Sunday is for all the key parties to sit together. The chairman of Fosun was physically in this country. The chairmen of the key banks were physically in this country, as I was. Talking and having the government there, rather than sending an email or a telephone call — I regret that,” Meysman said.

The government and in particular the Department for Transport did not come out well.

The last meeting with the Transport Minister Grant Shapps was on September 9 and Thomas Cook subsequently met with officials from the department and the UK government’s investment unit on September 16 and 17. Then nothing.

In fact in the run-up to its collapse, Fankhasuer managed to speak to the Bulgarian minister of tourism (one of the company’s destinations) and had a text conversation with the minister of tourism in Spain.

Speaking later that day, Business Secretary Andrea Leadsom said the reason the government refused financial support was because it did not want to “throw good money after bad” although it wasn’t clear from her statement whether she understood the nature of the Thomas Cook rescue plan.

Sell, Sell, Sell

Thomas Cook’s failure stemmed from its legacy of debt, underpinning its inability to invest in the business, but might the company have been able to solve this by selling parts of its business?

It’s worth remembering that although the Thomas Cook Group is no more, some individual bits are still operating.

In contrast to how the UK arm fared, German Airline Condor secured an emergency loan from the German government enabling it to keep flying. And the Nordics business, which includes tour operators and airlines, looks close to securing a new owner. The UK retail estate has also found a new home.

So why couldn’t the company do this before the collapse? Parts of the business were offered up, including the entire airline operation.

In fact Thomas Cook had separated its airline from its other businesses in 2017 with one eye on a potential sale down the line. At the start of this year, it announced a strategic review of the airline, but no buyer emerged.

“We had talks with major airlines, but we did not come to the final point that we had to disclose something on that,” Fankhauser said.

Thomas Cook wasn’t helped by challenges in the wider industry including at some of the carriers that were potential buyers.

“That was really not helpful for the process, and the competitive tension that we were thinking to create by then going public with it didn’t happen. On the contrary, the bids, from non-binding bids to final bids, deteriorated,” Fanhauser said.

While an airline sale might have raised much-needed cash, the problem would have been how Thomas Cook then sold its holidays. It would have needed a guarantee of seats, adding complexity to the business.

That’s one of the biggest reasons why sales didn’t make sense. It’s easy to say it should have disposed of its UK retail arm, or its Nordics business now that they have found new homes (or are about to). Selling via insolvency is very difficult compared to a normal sale.

In any case, without them, would Thomas Cook have been able to survive?

Bad Goodwill

In the wake of its collapse, Thomas Cook’s financial state has attracted plenty of scrutiny, with many people honing in on its balance sheet. In May this year, the company wrote down a massive $1.4 billion (£1.1 billion) in goodwill relating to a 12-year-old merger with MyTravel — arguably the first line in the opening chapter of the company’s demise.

(In the accounting world goodwill is the name given to an “intangible asset associated with the purchase of one company by another” and is recorded when the deal price is higher than the net asset value.)

The question the committee wanted answered was why did it take so long for the write-down to materliaze. Doing so sooner might have changed the narrative. Meysman defended the company’s actions when asked whether it should have done things quicker.

“No. We wrote it down as soon as we should have done. We didn’t even wait until the end of fiscal year ’19; we wrote it down in the midyear,” he said.

Bonus Culture

When company executives get hauled in front of politicians, talk invariably turns to executive pay and bonuses. In some respects, this is pretty reasonable given the trends of the last few decades with top-level pay ballooning.

Fankhauser and the others were repeatedly asked about bonuses and whether they should hand them back.

“I fully understand where you are coming from, and I fully understand the sentiment of the public. I fully understand as well the sentiment of some of our colleagues. However, what I can say to that is that I worked tirelessly for the success of this company, and I am deeply sorry that I was not able to secure the deal, but it was not single-handedly that I failed. There were multiple parties who had to contribute to the deal, which did not finally succeed,” Fankhauser said.

The company had a clawback mechanism in place but only for a two-year period. Fankhauser did not get a bonus in 2018 so it would only apply to the 2017 figure of $1.1 million (£837,000). Of this amount, 30 percent was paid in shares — now worthless — so the total amount repayable would be around $746,0000 (£586,000).

Excessive pay is a bad reflection on corporations in general, but it doesn’t really help us get to the bottom of what happened at Thomas Cook.

More to Come

Much of the ground covered in the first hearing focused on the events immediately leading up to September 23, but Thomas Cook’s demise wasn’t a quick collapse, calling into question the actions of Fankhauser’s predecessors.

Both Harriet Green (2012–2014) and Manny Fontenla-Novoa (2003–2011) are due to appear as is former Chief Financial Officer Bill Scott, who lasted less than a year in the job.

During the session, Fankhasuer and others made it quite clear that in their view the debt pile they inherited was largely to blame for the company’s failure.

“When I started as CEO in 2014, I was fully aware of the challenge, and I tried to tackle this challenge by really transforming the business from an old-fashioned tour operator into a modern tour operator by differentiating our offering and our services, to differentiate us from companies that were better funded than we were,” Fankhasuer said.

“Obviously, the pace at which we could do that was not fast enough. It was constrained by this huge debt pile. Since 2012, we paid £1.2 billion of interest costs and refinancing costs. Imagine if only half of that could have been reinvested in the business; we could have been faster.”

Or, as former chairman Meysman put it: “The question was asked about why it started, and it basically all started in 2007 with the acquisition and merger with MyTravel.”

Thomas Cook couldn’t really compete with its better-equipped rival TUI or the lean and more technically astute online rivals. Then came unexpected outside challenges such as Brexit and the 2018 heatwave, which put even more pressure on the business.

In the end, Fankhauser and company never got the chance to work at what they hoped would become the “best-funded travel company in Europe”.

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