In September this year, Thomas Cook, which is one of the oldest travelling companies, proclaimed that it went bankrupt. The out-of-the-business situation affected hundreds of travellers across the world and in turn, left them stranded in far-off destinations. With the intervention of the British government, 150,000 travelers were brought back to their homes. This, in turn, is described as the biggest repatriation effort in the UK, reported The New York Times.
The British tour company was in business for 178 years now. Its specialised in low-cost holiday packages which fit in the budgets of travellers. The company’s demise was a gradual process, which began with the sale of its physical stores. According to the cited media report, weakened British pound and unpredictability amid prospective travelers were some causes of the company’s collapse.
What Caused the Demise of Thomas Cook
The British tour firm, Thomas Cook was not doing well for sometime. It was unable to secure funding for its $250 million debt as creditors doubted its credibility. This, in turn, led the company’s proclamation of its poor financial health and indebtedness.
The primary cause of Thomas Cook’s failure is its inability to cope up with the changing times. When the company was striving with $2 billion pounds debt, its competitors were stepping into the virtual world. In contrast to that, It turned oblivious to digital era and operated its brick and mortar stores.
The business closure did not affect its bureaus in India, Sri Lanka and Mauritius. Thomas Cook (India) Ltd (TCIL) controls offices of the tour company in the above-cited countries. Earlier in December, TCIL proclaimed that it has inked a pact with Thomas Cook UK's appointed special managers to acquire the rights of the iconic brand for India, Sri Lanka and Mauritius markets, reported Business Today.
Indications of Poor Financial Backdrop
The increasing size of debt has primarily made it difficult to run operations in Thomas Cook UK. Incrementing debt and poor credibility of the tour company has not happened suddenly; it took a long time eventually. However, the indications were not taken seriously and no precautionary measure taken to lessen the burden.
According to S&P Global Market Intelligence’s Fundamental Probability of Default model (Fundamental PD), Thomas Cook’s probability of default (PD) has four times higher between financial quarter (FQ)3 2018 and FQ4 2018. During this time, the PD rose from 2.7 per cent (an implied credit score of ‘b+’)2 - a level that was already three times worse than the median benchmark for the UK Hotels, Resorts & Cruise Line industry to 12.31 per cent (an implied credit score of ‘ccc+’). This increase is similar to a credit score weakening by three notches. Between FQ4 2018 and FQ1 2019, the Fundamental PD then increased by more than 70 per cent, rising from 12.31 per cent to 21.09 per cent (an implied credit score of ‘ccc’; in other words, two notches lower).
According to the report, Thomas Cook’s collapse primarily happened because of company-specific and systemic problems, which resulted in increasing debts ( a large chunk increased after merging with MyTravel), falling returns, and a reluctance from lenders to extend financing. Other issues that halted the emergency funding of the company were:
The report of S&P Global Market Intelligence also states that in the last financial quarter, Thomas Cook’s return on net capital saw mainly low because of large cash outflows to hoteliers and suppliers. This led to cash and short-term investment decreasing by 106 per cent as well as operating income reducing by 38 per cent.
Similar Stories in Indian Business Ecosystem
Similar to Thomas Cook UK, dozens of the Indian companies that have doomed in the recent years. Debt-laden Kingfisher Airlines Limited, Cash-strapped Jet Airways and e-commerce firm, Shopclues are some companies that liquified as they were unable to carry out operations. All these companies closed down owing to different reasons.