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178-Year Thomas Cook Collapses: Here's Why

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Thomas Cook, a giant in the travel business collapsed on Sep 23, leaving thousands of tourists stranded on foreign soil and staff jobless. The huge debt burden and the changing dynamics of travel and tourism are the reasons behind the company’s falls. The United Kingdom’s administration has authorized airlift to bring back holidaymakers while the company waits to be liquidated.

178-Year Old Company Falls

On Sep 23, the 178-year old pioneer in the tours and travel industry, Thomas Cook Group plc (TCKGY - Free Report) collapsed, leaving nearly 150,000 United Kingdom holidaymakers stranded overseas and 21,000 staff from across Europe jobless.

Thomas Cook was dealing with a 1.7 billion pound debt burden and was in talks with the strategic partner Fosun International Limited and other banks and lenders. But things took a different direction at the 11th hour as the company appealed for an additional 200 million pounds to fund its winter deficits and pay hotels in advance for summer packages.

But the lenders backed out from the deal. The company then approached the ministers for a bailout, where foreign secretary, Dominic Raab made it clear that the government will not “systemically step in” unless funding Thomas Cook would benefit the nation. Hence, all doors for the giant closed and it had no other option but to enter into compulsory liquidation.

The stranded tourist whose flights were canceled and hotels were asking to pay immediately got some relief from the Atol scheme of Thomas Cook as it guaranteed their bookings. This scheme ensures that package holders get their accommodation and return flights in case the company collapses.

The government and U.K.’s Civil Aviation Authority (CAA) has initiated an airlift, codenamed Operation Matterhorn to bring back holidaymakers home.

Competitors Reap Profit

As soon as the news of Thomas Cook’s liquidation flashed, its competitors rose on the stock market and earned huge profit from high demand of flight tickets.

The Anglo-German airlines TUI AG (TUIFY - Free Report) shares soared 8.4%, while easy Jetplc’s (EJTTF - Free Report) shares gained 0.8%. The parent of Jet2, Dart Group PLC shares gained 7% and online travel firm On The Beach rose 5% after the news on Monday. TUI holds a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Moreover, Virgin Atlantic, the airlines company has opened job opportunities for Thomas Cook cabin crew after the latter ceased trading.

Factors for Downfall

But then why did the company survive even in the last two World Wars, failed to stay afloat this time around. But the debt alone was not to be blamed for the company’s fate. The changing nature of travel and tourist in the 21st century, made it tough for the company to survive. The rise in competition from online travel agents accompanied by the growing trend of independent travel planning affected the company’s business.

Several other factors prevailing in the Europe also dragged the company, especially the political and climatic factors. The heatwave across the Europe in 2018 discouraged tourist to make travel plans. Thanks to the effects of the Brexit discussions and poor economic growth, the pound weakened and raised the cost of overseas travel, eventually affecting Thomas Cook.

After all, a steep drop in the volume sales of tourism could be seen that has impacted the company’s profit margin. The company in 2007 had attempted to overcome the changing dynamics of travel by merging with MyTravel Group and focusing more on the Nordic side to expand its portfolio, but that did not help much.

In fact, younger companies like AirBnB gave a tough competition with their premium homestay and outstanding tourism experiences, without even owning any real estate.

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