Rescue deal fell through at the last moment. China’s Fosun and other shareholders are toast. Creditors get to fight over the debris.
By Nick Corbishley, for WOLF STREET:
Thomas Cook, the global travel & vacation-giant with its own airline and hotels, with 21,000 employees globally — 9,000 of them in the UK — and a 178-year history, ceased operations with immediate effect early Monday morning after failing to raise the £200 million of additional funds being requested by its main creditors to complete its rescue. The British government also refused to step in at the last minute to bail out the company.
The travel group has been placed into compulsory liquidation, as opposed to administration, meaning the business will be wound down. The immediate result has been chaos in holiday destinations across Europe, North Africa and North America. As many as 600,000 holidaymakers — 150,000 of them Brits — were left stranded abroad, many of them not knowing how they’re going to get home or whether they have a hotel room left to stay in.
Hotel groups are normally paid by tour operators two to three months after the travelers have already taken their holidays. Now that Thomas Cook is no longer a going concern, some hotels may ask holidaymakers either to leave, or cough up extra to remain in the hotel. In Tunisia holidaymakers at one resort said they were barred from leaving unless they paid a £1,680 fee to cover the costs of their trip.
Thomas Cook package holiday customers are covered by Atol – Air Travel Organiser’s Licence – which protects accommodation and return flights, but payment can take some time to materialize. The UK Civil Aviation Authority said it is contacting hoteliers and other companies likely to be hit by the Thomas Cook collapse to assure them they will get reimbursed.
The government is also mobilizing its largest ever peacetime repatriation plan, code-named Operation Matterhorn, which will involve planes chartered from other airlines including British Airways and easyJet and is expected to set taxpayers back at least £600 million.
“Our contingency planning has helped acquire planes from across the world — some from as far away as Malaysia — and we have put hundreds of people in call centers and at airports,” said Grant Shapps, the UK’s secretary of state for transport. “But the task is enormous, the biggest peacetime repatriation in UK history. So, there are bound to be problems and delays.”
As of midday Monday, the government has chartered more than 60 flights, Britain’s Civil Aviation Authority said. The first rescue flights have already taken off from New York’s JFK airport, for Manchester.
Many more holiday makers have bookings that will never happen. This could end up having a major impact not only on people’s holiday plans but also on the resorts, hotels and other travel-related companies that depended heavily on the business generated by tour operator.
Thomas Cook operated hotels, resorts and its own airline in 16 countries, including France, Spain, Italy, the U.S. and Mexico. One of the worst affected countries will be Spain, in particular its two archipelagos, the Canary Islands and the Balearic Islands, both of which depend enormously on tour operators like Thomas Cook to bring tourists to their resorts and hotels. Thomas Cook sent 7 million visitors to Spain last year, almost 10% of the total number of foreign tourists that visited the country.
The Canary Islands alone was scheduled to receive almost four million tourists this year via Thomas Cook. Many of those trips have already happened. Some haven’t. For the islands’ all-important tourist industry, the timing of the vacation giant’s demise could not have been worse, coming in the midst of a slowdown in the industry, due in large part to the arrival of fewer German and Scandinavian visitors.
In the first eight months of 2019, the total number of foreign tourists visiting the archipelago fell by 4%. Now, one of the biggest providers of visitors to the islands just collapsed, meaning things are about to get a whole lot worse.
Thomas Cook’s downfall can be blamed on a host of factors, including fierce competition from online operators. Shares of two of Thomas Cook’s biggest competitors, TUI and Dart Group, soared 6% today. Dart Group, a “new economy” leisure tourism company, is up about 28% over the past four weeks, given the final portion of Thomas Cook’s death spiral during the period. But that 28% gain reversed only a portion of the beating Dart’s shares have taken since August 2018. And TUI’s shares, despite the jump today, are still down nearly 50% from their peak in May 2018.
Thomas Cook was also hammered by falling demand for package holidays and the recent £1.1 billion write-down of the value of My Travel, a competitor it acquired in 2007, which left the company shouldering a £1.46 billion loss before taxes for its fiscal first half, ended March 31. The company also blamed its woes on the uncertainty generated by Brexit which, coupled with another unseasonably sunny British summer, was enough to convince many Brits to vacation at home this year.
Thomas Cook’s failure to find a buyer for its airline group at a time when Europe’s airline business is already suffering from acute overcapacity left it little choice but to ask for fresh funding from its investors and more time from its lenders.
Its biggest shareholder, Chinese conglomerate and investment giant, Fosun, said it was willing to inject a maximum £450 million of fresh funds in return for a 75% stake in the group tour operator and a 25% stake in the group airline. Banks and bondholders would match that amount with a debt for equity swap in return for control of 75% of the equity of the Group Airline and up to 25% of new equity in the group tour operator. But at the last minute, the company’s three big lenders — Barclays, Lloyds and majority state-owned RBS — demanded an additional £200 million of funding from investors to close the rescue deal.
For Fosun, it was a bridge too far. Although it had already invested heavily in Thomas Cook and it could have exploited the acquisition to pry open one of the world’s biggest tourist markets (Europe) for China’s growing ranks of big spending holidaymakers, the more likely outcome is that it would have ended up throwing good money after bad. And with Fosun unwilling to step up to the plate, the UK government unwilling to intervene, and a clutch of big hedge funds doing everything they could to prevent a last-minute rescue deal so that they could cash in £250 million on credit default swaps, the fate of the world’s oldest travel company was sealed. By Nick Corbishley, for WOLF STREET.
There has been a gigantic spike in trading interest-rate derivatives, and the UK dominates. Read… Interest Rate Derivatives Trading Explodes to $6.5 Trillion per Day
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.