Financial resilience before bankruptcy: case for Thomas Cook
Financial stability is one of the key indicators that determine the financial condition. In this sense, managing the financial stability of a company is an important management task to ensure independence from external conditions (external financial stability) and the rationality of financial policy (internal financial stability) to maintain integrity in the process of structural changes. Financial sustainability determines success and competitiveness. The reasons for bankruptcy can be indicated as follows: decrease in profitability, transfer of capital to non-working state, access of imported goods to the domestic market, difficulty in market control, insufficient capitalization, inadequate financial control and others.
The tourism sector is one of the fastest growing and largest sectors. The results of the analysis showed that the problems encountered in 2015–2016 increased the risk of bankruptcy of Turkish tourism companies using the Altman model. The countries that attract the most tourists are France, USA and Spain respectively. Turkey, occupying the 6th place in the world ranking in 2013, gradually took this position thanks to initiatives that have been undertaken since the 1980s. The highest growth in the ranking of the top 10 countries was noted in Mexico from 20,5%.
One of the oldest tour operators in the world, Thomas Cook, was unprepared for changes in the industry, remaining inflexible in the new high-tech world, among online aggregators, ambitious low-cost airlines and more flexible competitors. Tourism seemed to be one of the most stable sectors of the economy. Today it’s different: the decision to travel is made almost instantly, and prices change literally every minute, like on an exchange. The most difficult times for English tourism came with the Brexit agenda. After the agenda for leaving the EU on the eve of the summer season, many British consumers simply did not know what would happen next with the country, and postponed their trips. In 2016, the demand for trips to the UK fell by 10–15%, which violated the plans of all international operators in this market.
Another key moment was the coup in Turkey of the same year, then the summer of 2018 turned out to be abnormally hot, and most of Europeans and Scandinavians decided to leave the country for a vacation in the countryside. In the period 2017–2018 Thomas Cook decided to increase its share in local markets by purchasing control of a network of travel agencies in the UK from partners and increasing its 100% stake in Russian Intourist. All this cost the operator hundreds of millions of pounds and created a high debt burden. Since 2011, Thomas Cook has worked only to pay off debts.
Moreover, Thomas Cook practically did not have its own hotels (mainly rental properties managed by a tour operator), no transport companies, no guides — as a rule, they worked with all their colleagues in outsourcing. But the fleet totaled more than 100 aircraft. “Thomas Cook” was significantly affected by the fact that in the aviation market the competition of low-cost airlines, which already offered not only low prices, but also the services of a tour operator, became very fierce.
Thomas Cook was a leading European travel company. Recently the company has bankrupted. Before the lawsuit, the media wrote about financial problems. For the development of the group, various scenarios for reducing excessive debt were envisaged, including a partial sale of assets. However, the recapitalization option was chosen as the main scenario. This is better for customers and partners, as well as for debt holders and large shareholders, but not desirable for minority shareholders. There will be many more negative messages on the way to closing deals. According to the BBC, Thomas Cook has asked the UK government to provide financial assistance in the form of an additional £ 200 million to meet the demands of several credit banks, including Lloyds and RBS. Bankers insist that Thomas Cook should create additional reserve funds in such a volume that it functions normally during the winter season of 2019–2020. After the bankruptcy of the parent company, the subsidiaries began to actively declare themselves bankrupt.
With a debt of 1.6 billion pounds, Thomas Cook was doomed. The average value 𝑍0 of the Altman model before bankruptcy for the period is 1.15, which puts financial position very close to the bankruptcy zone. According to the revised Altman model in 2014, values of Z2 turned out to be negative, which corresponds to an average of -0.12. This also indicates a high risk of bankruptcy. As for the Altman-Sabato logit model, the average probability of an organization’s bankruptcy over a period is 0.99 — a high probability of bankruptcy.
According to calculations by the DuPont formula, the company’s profitability was racial. However, from the DuPont formula, a high indicator value may be the result of excessive leverage. Most of the debt and a small part of capital affect the financial stability of the organization. This reflects the basic law of business — the more income, the greater the risk. It can be assumed that the recovery rate was too low, that when a default occurred, the company would not be able to pay all its obligations through its assets. Sustainability is extremely low, which also affected the credit rating. The best solution for Thomas Cook would be to change the business model, but the tour operator was not ready for such transformations and lost in the competition.
If the company could reduce loans at its own expense, and this was possible only at the expense of specific advantages that it did not have, then many financial indicators could improve. Another option is to reduce accounts payable by limiting the terms of payment of contracts. In most cases, low sales profitability indicates an incorrect pricing policy and an unfavorable competitive position. To increase the profitability of sales, Thomas Cook could use the following actions: reduce production costs without reducing quality (thanks to various progressive management methods).