We use cookies to personalise content and ads, to provide social media features and to analyse our traffic. We also share information about your use of our site with our social media, advertising and analytics partners. Read More


Log in

Don't just book it, Thomas Cook it. – Pauline Micallef

10 Dec 2019 12:00 | Deleted user
The Accountant – The Future Professional Accountant in Business. Autumn 2019 (MIA Publication)
There are a number of factors that may kill and grow a business; however, some failures follow similar routes. Both Nokia and Kodak experienced a major turmoil because they failed to understand the changing customer demands. Although this is not the only underlying cause in the collapse of Thomas Cook, analysts are saying that one of the major reasons for its downfall is the management’s hesitation in addressing technological changes allowing travellers to book their holidays online rather than buying packages from the local travel agent.

Thomas Cook started off as a family business and grew into a large corporation over the years. It has been in business for the last 178 years, selling the “holiday experience” to families. Their slogan “Don’t just book it, Thomas Cook it” communicated that holiday packages took care of everything from flights and accommodation to excursions and meals, targeting middle class travellers. Over the years Thomas Cook grew exponentially through a number of mergers and acquisitions offering diversified services and growth opportunities.
Many business analysts are speculating the reasons for Thomas Cook’s collapse, stemming from a series of internal and external events.
The Internal Context
Several management decisions have negatively impacted the business, including the lack of change management and unstable restructuring plans that took long to be implemented, lack of innovation, the shift into the digital age, inefficiencies in capacity management and overall mismanagement of the company’s profits and assets.
During the last two years top management such as the Chief Financial Officer (CFO) changed three times, the last of whom revealing that there had been too many “exceptional items” recorded in the past few years. These items included payments to directors and meeting bank liabilities, which posed a threat and raised questions on the going concern of the company.
At the end of the 20th century, the airline business was founded through a series of mergers and acquisitions. These acquisitions were funded through debt, hence the additional financial pressure. The company’s debt accumulated over ten years following a series of rapid decisions. In order to sustain this level of debt, “it had to sell three million holidays a year just to cover its interest payments.” (Holton & Faulconbridge, 2019)
In May 2019 the audit committee approved an impairment of £1.1bn on the goodwill that was acquired during the merger with MyTravel in 2007. Although this write down only affects the balance sheet, it put pressure on the company’s reputation and raised concern in the capital market where investors were reluctant to continue financing.
The External Context
We are living in a time when people are more inclined to travel than before, so how come demand for Thomas Cook decreased?
The demand for holidays is increasing, however demand for packages is not the same thing. With the rise of the internet and low-cost airlines, Thomas Cook’s bottom line continued to struggle. Although package holidays are attractive, customers are still very price elastic, thus highly sensitive to price (Prescott & Gillett, 2019). Holidaymakers prefer to make their own travel arrangements online where it tends to be cheaper than visit the local travel agent.
Management failed to listen to what travellers were demanding and persisted with the outdated strategy of opening more high street stores in different locations worldwide. The running expenses of these shops was expensive and maintaining these costs together with the other sunk costs from the airline, was making Thomas Cook vulnerable for adverse demand fluctuations.
In peak seasons, all airlines struggle with air traffic control challenges, whereas during low-peak seasons they struggle to manage the idle capacity of their resources, mainly the aircrafts. Therefore, if one season goes bust, there might be a significant impact on the cashflow of the business. This seasonal variation continued to defeat Thomas Cook and it always was a Winter’s tale for Thomas Cook which needed additional financing during the low season. On the other hand, in 2018 UK travellers were highly impacted by the Europe-wide heatwave that continued to discourage holidaymakers.
Several political issues also affected the demand for holidays in general. The Turkish coup attempt in 2016 and the recent Brexit saga have cause Europeans, especially the Brits to postpone holidays to a later, clearer period. This market uncertainty added pressure on the costs of the airline, due to the fact that currency fluctuation affects fuel prices and other material sunk costs. Thomas Cook was buying its fuel in USD, which was being varied in comparison with the Sterling.
Now what?
Now there are 20,000 unemployed personnel, 600,000 affected travellers seeking compensation, a liquidation process and a series of unanswered questions.
Among stranded travellers the question is mainly whether the EU Package Travel Directive of 2015 will be able to cover for all their repatriation costs. This directive provides refunds to travellers who book holiday packages in case a company becomes insolvent. Nevertheless, how will this affect customers who only booked flights? Is the fund enough to cover for all expenses incurred? How will this affect the future of such fund?
Other questions are now being raised on the onus of the auditors in such cases. Have the auditors reported this as a going concern on time? There have been discussions, even at EU level, on the auditor expectation gap: the gap between what is expected of the auditor as perceived by the public versus the actual responsibility of the auditor in terms of detecting going concern risk.
The Thomas Cook lesson will undoubtedly find its place in business textbooks, together with other business failures. In order to sustain your business and make it to the top of the stock exchange, management must respond to change efficiently and listen to the ongoing changing market needs. This holds even if it means the original strategy driver needs changing, because change is inevitable and failure to listen and act fast will be the beginning of a business’s demise.
Prescott, K & Gillett, F (2019) Thomas Cook: The much-loved travel brand with humble roots [Accessed 22 Oct 2019 https://www.bbc.com/news/business-49789073]
Holton, K & Faulconbridge, G (2019) Thomas Cook collapses: Why and what happens now? [Accessed 22 Oct 2019 https://www.reuters.com/article/us-thomas-cook-grp-investment-

Pauline Micallef is an ACCA Qualified Accountant and acquired her MBA from the University of Reading – Henley Business School. She has recently joined the Malta Institute of Accountants as the Technical Strategy Manager heading the Technical Department. She comes from industry with an experience of 10 years at Teva Pharmaceuticals, the largest generic pharmaceutical company in the world.


Suite 4, Level 1, Tower Business Centre, Tower Street, Swatar, BKR 4013, Malta 

E-mail: info@miamalta.org

Tel. +356 2258 1900