As package holiday giant Thomas Cook struggles to survive, what are the long-term prospects for the industry?

AS NEWS of the crisis at Thomas Cook emerged on Tuesday, even those familiar with the firm’s difficulties were astonished at how swiftly the situation had deteriorated at the world’s oldest holiday company.

Analysts jaded by this year’s string of profit warnings from the company launched a volley of downgrades after it confirmed it would be seeking another £100 million just 32 days after securing a similar amount from its bankers.

Thomas Cook’s stock – already down 80 per cent since the start of the year – lost a further three-quarters of its value on the day.

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The alarm was not restricted to City traders. Holidaymakers planning some relief from the gloom of the economic downturn began asking whether their bookings were safe.

Tom Rees, senior travel and tourism analyst with Mintel, said there was a growing view that another great British institution might disappear.

Politicians caught the general mood the following day when David Cameron was asked by fellow Conservative Stewart Jackson whether the Prime Minister would help support “this great British institution” whose headquarters employs 1,600 people in Jackson’s Peterborough constituency. Cameron replied: “I have obviously asked the business department to give me a report on what is happening in terms of Thomas Cook because I think it is important to make sure this business is in a good healthy state.”

The reality is that politicians will play a negligible role in the saga of Thomas Cook, whose eponymous founder led his first excursion in the form of a rail trip from Leicester to Loughborough in 1841.

An unnamed member of the Department for Business was quoted last week as saying that Thomas Cook’s fate was “not really a matter for the government”. The department’s role is limited to compiling a factual account of events and circumstances to present to the PM.

Part of that will deal with the changes taking place in the travel sector, where the structure of Thomas Cook’s bread-and-butter package holiday sector is being dismantled by the rise of online specialists such as Expedia. Low-cost airlines are supporting the trend towards DIY holidays as they extend their routes and launch rival hotel booking services.

Meanwhile, the economic downturn is forcing people to cut back on holidays as stagnant wages and rising energy costs hit disposable income.

According to research from Mintel, package and independent holidays declined by one-fifth in the UK between 2008 and 2010. Within this, package holidays dropped to 14.1 million trips, a level not seen since the mid-1990s.

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Thomas Cook carried more than 22 million passengers last year across Europe, North America, the Middle East and India, but the core of its business is in the UK, where more than 35 per cent of the group’s £8.9 billion in revenues were generated. “From what I have seen, there really isn’t anything to suggest that there will be a significant improvement in the market any time soon,” says Rees at Mintel. “For the whole of this year, we will be looking at pretty much the same number of overseas holidays being taken as there were last year. There is no real reason to say there is going to be any upturn next year.”

Under former chief executive Manny Fontenla-Novoa, Thomas Cook tried to diversify its earnings through overseas acquisitions. This led to the £56m purchase of France’s Jet Tours, a £57m deal for TriWest Travel of Canada, the £26m acquisition of Germany’s Oger and last year’s £28m joint venture with Intourist of Russia. The spending spree included a £290m share buy-back in 2008, plus aircraft purchases and IT investments. From cash holdings of £394m in September 2007, Thomas Cook has sunk to a net debt estimated at £900m which is expected to rise to £1.5bn by the end of the year.

Accused of playing fast and loose at a time when a conservative approach was required, Fontenla-Novoa fell on his sword when Thomas Cook issued its third profit warning of the year in August. Critics say the travel company – Europe’s second-largest after Thomson and First Choice owner Tui – was allowed to amass more debt than its volatile seasonal earnings can handle. “There were some wrong decisions and now they are paying the price of not having enough money in the bank,” says Bill Munro, founder and chairman of Scotland’s Barrhead Travel.

Munro concedes that no one in the industry could have anticipated the events that Thomas Cook interim chief executive Sam Weihagen insists are at the root of the turmoil: civil unrest in Egypt and flooding in Thailand, which have put off Russian tourists; while continuing strife in North Africa, a favourite destination among the French and Belgians.

However, industry experts say firms must prepare for the unexpected, particularly when heading into the lean winter months when few are looking to book a holiday. Without a financial buffer, Thomas Cook has been forced to publicly acknowledge its fragile position. The danger is that the downturn in bookings will be exaggerated as customers flock to seemingly safer bets, a situation that should benefit Tui and others. “Your holiday is guaranteed or your repatriation is guaranteed or your refund is guaranteed if the company goes bust,” says Rees. “But why would you put yourself at the risk of that sort of stress when there are viable alternatives out there?”

Any successor to Weihagen – who was due to retire before his temporary draft into the top post – will have to come up with a compelling plan for a solvent future at Thomas Cook. That will probably entail a downsized operation, as the syndicate of 17 banks that lend to Thomas Cook appear to be pushing for restructuring.

Finance director Paul Hollingworth has outlined plans for asset sales that could raise up to £200m, though more will likely be required on this front. Questions remain over the future of the group’s UK high street shops, which number 1,200 following a merger this year with the Co-Operative Group. Thomas Cook was expected to announce the closure of 200 of those outlets on Thursday, the scheduled date for the release of its year-end results. Those figures, which will show a 30 per cent drop in profits to £190m, have been delayed until banking arrangements are finalised.

Whatever shape Thomas Cook may have in the future, Munro at Barrhead Travel says it shouldn’t be viewed as a portent for the industry as a whole. Firms like his, which don’t have the major upfront costs of large, vertically-integrated travel companies, will adapt to changing consumer demands.

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“Modern travel agents like us will survive,” says Munro. “We have a role to play, we have expert knowledge, and we absolutely understand our market.”