Thomas Cook UK Fails to Avoid Bankruptcy – Market Realist

Yesterday, the worlds oldest holiday firm, Thomas Cook UK (TCG), collapsed. The company is 178 years old. The companys stocks ceased trading on the London stock exchange immediately. The company, which avoided near bankruptcies several times, finally liquidated after it failed to secure a $250 million rescue funding required by its banks.

The firms survived near bankruptcy during the Second World War. In 1948, the British government nationalized Thomas Cook UK by making it a part of British Railways. In 1972, the firm was privatized. However, an ever-increasing debt burden finally took down the firm. The changing trend of booking holidays on the internet also contributed.

BBC News said that Thomas Cook UK ran hotels, resorts, and airlines in 16 countries. Also, the firm served 19 million customers annually. The companys collapse grounded 34 planes, including Airbus A321 and A330, from four airlines. It also shut down its travel agencies.

BBC News said that the collapse has put 22,000 jobs across the world at risk. And 9,000 of those jobs are in the United Kingdom itself. This sudden collapse led to the cancellation of bookings of more than 150,000 British holidaymakers. It has impacted 450,000 customers internally.

The Thomas Cook UK collapse benefitted rival travel agencies and airlines, especially budget airlines. Budget airlines are known for normalizing overcapacity in the sector. Stocks of travel agent TUI (TUI) and online holiday retailer On the Beach (OTB) rose more than 9.0% yesterday. Stocks of budget airlines EasyJet (ESJ) and Ryanair (RYA) rose as much as 6.6% and 2.8%, respectively.

However, the Thomas Cook UK collapse has put its banks and IT (information technology) partners under pressure. Thomas Cooks IT partner Amadeus (AMADY) stock fell 2.9% yesterday. Also, the collapse is drawing attention to French budget carrier XL Airways. According to Reuters, the company is seeking $38.6 million rescue funding from Air France.

Thomas Cook UK is insured by the government-run travel insurance program. This means the British CAA (Civil Aviation Authority) will bring home over 150,000 Thomas Cook British holidaymakers.

The CAA has announced Operation Matterhorn. This is the biggest peacetime repatriation operation since World War II. Under this plan, the CAA chartered 45 jets from various airlines, including EasyJet and Virgin, on Monday. These jets flew 64 routes and brought home more than 14,700 passengers.

It aims to repatriate all affected passengers in the next 13 days by chartering more jets. The CAA plans to bring home as many Britons as they can on their booked return date. However, a small percentage of customers will still be affected.

According to The Guardian, some critics argue that the cost of bringing customers home exceeds the $250 million bailout Thomas Cook UK needed to survive. According to BBC, shadow chancellor John McDonnell said the government should have bailed out Thomas Cook if only to stabilize the situation while a real plan for the future of the company could be addressed.

The Indian newspaper The Economic Times posted British Prime Minister Boris Johnsons reply. He said the company directors were not motivated to sort such matters out. Hence, the British government did not bail out Thomas Cook to prevent a moral hazard.

Although Thomas Cook UK ceased trading, its Indian, Chinese, German, and Nordic subsidiaries will continue normal trading. These subsidiaries are separate legal entities from Thomas Cook UK and do not fall under the jurisdiction of the UKs Official Receiver.

Indian newspaper The Hindu Business Line noted that Canadas Fairfax (FRFHF) bought a 77% stake in Thomas Cook India in August 2012. Under the deal, Thomas Cook UK will no longer to be the promoter of Thomas Cook India. TCG no longer had a stake in the subsidiary. Thomas Cook India is debt-free on a stand-alone basis. It earns average annual FCF (free cash flow) of ~$35 million. Also, Thomas Cook India has a cash reserve of $195 million.

However, Thomas Cook UK subsidiaries share services like aircraft and IT with Thomas Cook UK. If these subsidiaries want to continue trading, they need to strike rescue deals. If they fail to do so, the parent company collapse will affect up to 450,000 international customers.

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Thomas Cook UK Fails to Avoid Bankruptcy - Market Realist