How did Thomas Cook pave the road to insolvency?

A lesson for entrepreneurs

On September 23, 2019 Thomas Cook, one of the leading leisure-travel corporations filed for bankruptcy after a decade of financial trouble. The company was not able to secure a £200m lifeline. Thus, about 600,000 tourists were stranded around the world. It seems to be a trend, after Monarch Airlines, a British low-cost airline and tour operator, collapsed in 2017 and TUI shared a profit alert in March 2019.


The industry 


The travel agency service industry is engaged in offering tour packages, providing online information, booking, reservation and payment services. The major market players are Expedia, TUI and Booking according to IBISWorld. However, the industry is highly fragmented as the four major market players have less than 25% of the market share. The industry reached an annualized revenue growth of 0.7% in the last five years and is expected to grow 2.7% only in 2019, resulting in a revenue of 307.2 billion USD. Until 2024, an annual growth rate of 3.6% is expected to reach a revenue of 366.4 billion USD. The revenue composition is as followed: Tours and vacation booking accounts for 45.4% in 2019 followed by cruise bookings with 22.3% and airline bookings with 14.2%. Accommodation commission accounts for almost 10 % of the revenue in 2019.

The industry changed dramatically in the last years due to consumers using online channels. Hence, the market shares of online booking agencies increased strongly compared to traditional brick-and-mortar travel agencies. The global market of travel agencies consists of thousands of enterprises which are expected to drop at an annualized rate of 3.3% due to the pressure of the internet. The technology revolutionized the market providing better access to prices and travel destinations to the consumer and forced travel agents to become experts in certain types of travel and destinations. The key drivers of the market are the GDP of the BRIC nations as travel activities from those countries have risen very strong in the last years, tourist arrivals, internet usage, consumer sentiment index and income per capita. Emerging markets are coming up as South America, Asia and Eastern Europe are showing a substantial growth rate in tourism compared to western markets.


The rise of Thomas Cook 

Thomas Cook was a leisure-tour-operator and distributor of travel package services, bundling flights, hotels, financial services like travel insurance and foreign exchange, local transfers, tours and even meals through operators via its own and third travel agency parties. Furthermore, the travel agency operated its airline (Thomas Cook Airline and Condor) and hotel chain (Casa Cook, Sentido and Sunprime Hotels).


The British businessman Thomas Cook founded one of the oldest travel agencies in 1841 in Great Britain to offer a one-day rail excursion from Leicester to Loughborough. The company grew fast and after four years’ operations, he already offered his first international route from Leicester to Calais and expanded in the 1860s international with trips to Switzerland, Italy, Egypt and America. The company survived two world wars, being nationalized being part of the state-owned British Railways after the second world war and exceeded exceeding net profits of 1 million pounds the first time in 1965. It was privatized by a consortium of Midland Bank in the 1970s and sold in 1992 to a German Bank (Westdeutsche Landesbank) and LTU, a German charter airline.  In 2007, Thomas Cook, as the second-largest European travel tour operator merged with its British competitor MyTravel Group plc to create a global powerhouse of tour operators. This deal resulted in Thomas Cook plc with revenues of more than 9 billion British pounds, operating in 21 countries and with more than 21 million customers worldwide.

Thomas Cook´s key market is UK, Continental Europe and Northern Europe, with a strong focus on the UK and Germany where 49 % of the oversea holidaymaker booked a tour package. The revenue structure by business segment has been as followed:


Between 2016 and 2018, Thomas Cook made on average 30 % of its revenue by airline and 70 % by its tour operator. In 2018, more than 50 % of the revenue came from Europe Continental followed by the UK and Northern Europe. It has to be considered that Thomas Cook adjusted its revenue to the underlying revenue which does not consider the internal revenue. Thus, official numbers may be different.


The failure of Thomas Cook 

The business model worked for generations and the concept was considered as a quality brand with a solid reputation. The slogan: “Don´t just book it, Thomas Cook it” showed the all-inclusive aspect of the business model. The main question is: What happened to Thomas Cook, a 178-year-old established company?

There are several reasons which led to the end of Thomas Cook. These are the main ones:

  • Digitalization: Thomas Cook didn´t change its business models and slept over the digitalization. It announced its first alliance with Expedia in 2017 but was still heavily reliant on physical stores. The interest in package tours is declining as it is easier to organize your holidays on online platforms.
  • Competition: Companies like Booking Holding and Expedia made it easier for customers to organize their holidays. Thus, the new generations didn´t contract a full holiday package.
  • Airline operating costs: Thomas Cook entered into the airline business, acquiring the former Lufthansa subsidiary Condor, and opening its airline. Especially the airline business is quite expensive more price-competitive than the travel sector.
  • Brexit: The never-ending Brexit process weighted heavily on the pound. Thus, many British people didn´t leave the country as it was too expensive. Furthermore, the uncertainty led to a lower demand.
  • Weather conditions: The heatwave of the last summer led to a drop in the demand as many Europeans enjoyed their holidays at their sunny home.


According to the German economic magazine Handelsblatt, the bankruptcy of the British travel agency Thomas Cook was only the iceberg of the package tours. Analyzing the past of the company, it showed that the reasons above mentioned are only a part of the failure. There is no doubt that Brexit has led to a delay in holidays and the macroeconomic environment hasn´t been helpful. But according to the New York Times, the fate of the company was sealed long before the Brexit vote.

The travel agency played an expensive game which started with the merger with MyTravel in 2007. The objective to create a powerhouse of tour operators failed and it left Thomas Cook with high debt. The aftershocks of this deal are still felt in the financial statements of Thomas Cook as a big part of the losses this year. In 2010, Thomas Cook bought Corporate Travel, increasing physical stores from 800 to 1200 even if most of the customers headed online. Consequently, Thomas Cook almost went bankrupt due to the high depreciation of the British business and IT systems but banks saved the company. It started the late pivot into the digitalization age which led to higher debts. Finally, the management asked in 2019 for 200 million pounds to survive the low-season which seemed to be too much for the banks.

The impact of Thomas Cook´s failure

The day that Thomas Cook announced bankruptcy, the shares of TUI gained 10% and they will try to get Thomas Cook´s customers but Friedrich Joussen, CEO of TUI, expects strong headwinds for the travel market in 2020. At TUI, the net profits barely budged between 2015 and 2018 and in March 2019, TUI shared a profit warning and it expects a decrease of 26 % of the operating profit for this fiscal year. TUI changed earlier its strategy following the market trends. The company changed its IT systems, developed its hotel chain and entered into the cruiser business whereas Thomas Cook bet on physical stores. However, the competition with travel platforms like Booking and Expedia is quite hard as these traditional travel agencies have a structural problem.

The table below shows the result of the financial statement analysis between 2016 and 2018 of two traditional travel agencies Thomas Cook and TUI and a digital travel agency Booking. The result shows that has a higher annual growth rate than its competition. Both TUI and Thomas Cook were affected by political events in 2016 which resulted in a negative growth rate. The traditional travel agencies Thomas Cook and TUI have the same liquidity issues with the liquidity ratios below 1 which means that TUI doesn´t have enough cash to pay its short term obligations. A substantial issue of both Thomas Cook and TUI is the costs of sales which are at 80 % and 90 % of the revenue, respectively. Hence, operating and net margin are quite low. On the contrary, has a different cost structure: 60 % of the costs are administrative and operating expenses, resulting in higher margins. The cash conversion cycle of Thomas Cook and TUI is quite similar to service companies that don´t have or only have a low inventory and receive payments fast.

The analysis of the financial ratios and the Thomas Cook case shows that traditional travel agencies stand with the back to the wall because of low margins due to the cost structure. The EBIT of Thomas Cook and TUI are below 5 %. According to IBISWorld, the EBIT of travel agencies is around 7.5% in 2019 because of the high competition. To survive in the travel market, it is important to be first mover in market trends like digitalization and find new ways to generate higher margins.

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