Written by: Oliver Watts
It is a long-standing idiom that ‘all good things must come to an end’. Unfortunately, this came to fruition for the world’s oldest travel company – Thomas Cook, who started out in 1841 and ceased trading on September 23rd 2019. Whilst the obvious consequence is the worldwide stranding of over 150,000 customers, and the voiding of many upcoming holidays, the ramifications reach even wider. Most pertinent, is the future of package holidays themselves. It is just under 2 years since Monarch Airlines – a prominent UK holiday airline – went bankrupt. Now Thomas Cook has collapsed, the available supply of holiday flights for package holidays will significantly drop. Unless demand for these holidays also drops, the market will potentially find itself in a crisis. In order to have a wider understanding we need to consider the nature of Thomas Cook’s collapse, the current UK package holiday market, and its future in light of the former’s collapse.
Why did Thomas Cook collapse?
Companies collapse when they run out of money to upkeep their financial obligations and consequently maintain their operations. That is obvious. However, the circumstances that lead to such consequences can differ. Thomas Cook’s collapse, most notably its inevitability, has been one of debate. The competing perspectives of economic mismanagement and continuing Brexit uncertainty are summarised below:
“Good businesses are robust enough to ride out temporary problems. In contrast,Thomas Cook was carrying too much debt, partly due to the ill-timed merger with MyTravel in 2007. Above all else, it failed to keep pace with the online revolution” – Julian Jessop, Economics Fellow at Institute for Economic Affairs
“Two years ago Monarch collapsed in part because of the weak pound after the Brexit vote, while Flybmi went bust this year, also blaming Brexit” – Liz Jarvis, Writer & Liberal Democrat Parliamentary Candidate (City A.M)
Thomas Cook’s woes far predate the Brexit crisis, reaching back to November 2011 when it cheated bankruptcy courtesy of a £200 million loan facility from its lenders that included Barclays and HSBC. On that occasion they blamed the commencement of the Arab Spring – primarily in Egypt and Tunisia – for its dwindling finances and decreasing trade. Ironically it was the failure to secure a fresh £200 million loan in September 2019 that saw the firm meet its end. Thomas Cook had utilised the services of Magic Circle law firm Slaughter and May since July 2019 to advise on a major recapitalisation plan that would have seen a fresh £750 million injection. But alas, there was a caveat. Without the elusive £200 million, the £750 million injection could not proceed. In the end its debt – which amounted to at least £1 billion – became the insurmountable obstacle as last-minute talks with major shareholders including Fosun Tourism Group failed. Fortunately for Slaughter and May, and fellow lawyers from US firm Latham & Watkins, they billed Thomas Cook weekly prior to its collapse. Thus they will not join Thomas Cook’s long list of creditors. In the eight years between 2011 and 2019 Thomas Cook faced ruin twice, the latter resulting in its collapse. The firm borrowed and borrowed whilst it simultaneously failed to be profitable; its first-half 2019 results revealed a £1.5 billion loss. From 2018 until its collapse, it received three profit warnings.
The above delivers a clear verdict: economic incompetence. If it had learnt lessons from 2011, the firm could have plausibly weathered Brexit uncertainty. Evidence for this comes in the form of easyJet, the low-cost airline, who ahead of Brexit are successfully registering many of their aircraft in Austria and have reported first-half revenue growth of 7.3% for 2019. Similar to Thomas Cook, they have a package holiday arm that accompanies their airline business – easyJet Holidays.
The UK Package Holiday Market
Despite Thomas Cook’s birth in 1841, package holidays formally emerged in the UK around 1950. Horizon Holidays were one of the original pioneers who operated initial package holidays to Corsica. A surge in such holidays was significantly helped by amendments in 1954 to the Convention of International Civil Aviation. The result: mass tourism influxes via chartered aircraft to popular sun destinations including Spain. By 1994 over 27 million British holidays had been taken, with 56% being package holidays. Today the market is still busy, but not quite replicating its 1990’s heyday. ABTA’s Holiday Habits Report 2018 reveals some clear trends: 49% of UK holiday makers booked a package holiday in 2018, with 69% citing their reason as ‘value for money’. The report further notes that 81% booked their holidays online but in 2017 only 17% booked them ‘in store’ at travel agents and tour operators. The package holiday also faces stiff competition form other types of holidays taken by UK consumers. An important fact is 48% took a city break in 2017-18, crowning it the UK’s most favourite holiday type, and thus the major competitor to the package holiday.
In light of Thomas Cook’s collapse, there are now just two core players within the UK market: TUI UK (formerly Thomson) and Jet2holidays. Both have a package holiday and airline arm. The latter’s sister company is Jet2, a low-cost airline which started in 2003, before the holiday company was born in 2007. This dualist structure has helped them remain a formidable force. Beyond the remit of these tour operators, some UK airlines also provide competition. As previously mentioned, easyJet have easyJet Holidays, and British Airways equally offer ‘flight and hotel’ packages. We are very much in an online revolution, not just for our shopping and social interaction, but also booking holidays. TUI UK is the only one of the UK market players that operates holiday stores alongside the online bookings. It’s now closest competitor – Jet2holidays – is exclusively online. Thomas Cook, it must be noted, operated many holiday stores and never made the move to exclusively online sales. Fortunately, all 555 Thomas Cook stores were rescued by travel firm Hays, saving thousands of jobs.
The Future of Package Holidays
Whilst demand for package holidays by UK consumers remains relatively positive, and there remains a choice of providers, the future is not necessarily positive. Why? The reasoning is two-fold: economics and consumer confidence. The economics reason relates to supply and demand. With more supply by way of competitors, tour operators can partake in a race to the bottom to keep prices low and attract more customers. Put in the context of airline travel, this is what Ryanair has pursued, with generally successful results. In light of Thomas Cook’s collapse, available supply has decreased. Therefore it is not economic for tour operators to keep prices low, save for scheduled sale periods. It was reported that in light of the former’s demise, Jet2 and TUI were reportedly trebling flight prices to as much as £200 increases for popular destinations such as Tenerife. Inevitably this will affect the cost of package holidays.
The second and interconnected reason depends on consumer perceptions. Notwithstanding that the majority of tour operators are ATOL protected – you will not lose your money if your travel company collapses – Thomas Cook was no minor brand. Whilst its failing was due to economic incompetence, it proved that no brand is too big to fail. Combined with the rising prices in light of lower supply, this may be enough to put off consumers. Indeed many may now prefer to book their flights and accommodation separate, the latter through the likes of booking.com and Airbnb. Perhaps, as trends show, they will favour city breaks. Ryanair CEO Michael O’Leary, in his typically direct manner, has a blunt verdict for the package holiday market: “screwed, it’s over”. (The Guardian)
Thomas Cook is not the first and will not be the last prominent tour operator to fall. Analysts will continue to debate the precise economic reasoning for its demise, and if a critical step could have been taken to save it. The remaining market players have consequently been put on warning: maintain financial competence or go under. Package holidays and their future depend on this. Thomas Cook ultimately failed to handle the burden that free-market capitalism placed on them. Survival of the fittest remains the prevalent moral.