For the British tour operator Thomas Cook, things seem to be going from bad to worse as it struggles to reduce its reported £1 billion debt. On the back of an announcement that it’s planning to close around 200 of its 1,300 travel agents in the UK, the company has now reported pre-tax losses of £398 million after it was hit by a number of damaging writedowns totaling over half a billion UK pounds.
With more than 200 high street travel agencies under the threat of closure, Thomas Cook is likely going to shed around 1,000 jobs in the next few weeks. So far, the travel agency has already closed around 20 agencies, while another 115 closures are reported to be imminent, claims the TSSA travel-sector union.
Paul Hollingworth, Thomas Cook’s finance director, said that the latest writedowns came about after the company discovered a number of over-optimistic projections on its balance sheet following a review last week. The company previously anticipated income from a number of sources, such as new businesses it had recently acquired, an outstanding tax dispute with the HM Revenue and Customs department, outstanding invoices and expensive IT development projects, all of which is far from guaranteed.
The writedowns, in the region of £524 million, couldn’t have come at a worse time for Thomas Cook. Britain’s most famous travel agency has already had to go cap in hand to its banks twice in recent months; first to request an extension on a £100 million emergency loan and then to ask that the terms of its loan agreements be loosened.
The company, which also operates under the guise of Cresta, Co-op Travel and Club 18-30, has already made huge cuts to its businesses as it attempts to pay off some of its £1 billion debt. Despite taking more than 6.6 million Brits on holiday so far this year, the company has announced that it will reduce the number of summer holiday packages on offer in 2012 by 8%.
Hollingworth revealed he slashed a record £520 million from the company’s balance sheet just last Wednesday, yet it still faces writedowns totaling some £1.2 billion. Significant cuts have been made in all areas of the business – as well as reducing the number of summer holidays on offer, the company has also slashed its airline fleet from 41 jets to 35 jets, and is currently planning a £200 million asset sell-off, yet even these efforts are unlikely to be enough to restore confidence, say analysts. In order to survive and make the business sustainable, it’s likely that Thomas Cook is going to have to hand over control of the company via a debt-for-equity swap to a number of banks and bondholders.
Thomas Cook is currently valued at just £127 million, yet it faces debts that are expected to reach £1.5 billion by the end of the year.
Shareholders of the company were outraged to discover the level of exceptional items on the company’s books, with some reacting by short-selling their shares in order to wash their hands off the company altogether.
Hollingworth’s record debt reduction is being seen by analysts as an attempt by the company to put an end to the flow of exceptional charges Thomas Cook is facing, something which suggests that responsibility for the company’s problems lies with the previous management, which was replaced earlier this year.
That suggestion is underscored by the abrupt departure of Manny Fontenla-Novoa, the former chief exec., who jumped ship in August just one month after the firm was hit by a major profits warning. His move was met with surprise at the time – in May of this year Fontenla-Novoa had spoken about how he was “impressed at the resilience of the business and its people to ever-changing business conditions”, before predicting further progress for the company this year.
Nowhere is Thomas Cook’s slump more evident than in its share price, which has hit rock bottom, losing about 90% of its value since the summer.
But while the company can point to unforeseen events like the Arab Spring and the volcanic ash cloud over Iceland earlier this year for its poor trading performance, mismanagement has also played a huge role, says Sam Weihagen, the interim chief executive of Thomas Cook.
Weihagen was due to retire this year until being called on by Thomas Cook’s chairman Frank Meysman to take over the role in a caretaker capacity until a suitable replacement can be found.
