Thomas Cook: Micro Example of a Macro Problem?

Poor trading conditions have been affecting all companies in all sectors across the UK and the world. This is no different in the holiday industry. As disposable income decreases, and as confidence levels decrease, the amount spent on “luxury” items tends to fall sharply. People therefore save for a rainy day, which just makes the situation even worse; this is however obvious, bad news is contagious. Simply put, Tourism as an industry is considered very cyclical - as measured by a high beta.

This rational has adversely affected Thomas Cook. Over the summer it saw 3^rd quarter results “clearly behind expectations” and a dive of 28pc

Now they have had to go back for more due to cash flow problems, this has seen a 75% drop in share prices, is this the end?

The investors (17 Banks including Lloyds and RBS) were confronted with a difficult question they may need to throw more money at the situation to get out their original loan.

The investors agreed to create a £200m loan until Apr-2013, withdrawing the original agreement, but is this good money after bad? Only time will tell.

Thomas Cooks is suffering from the same type of problem as much of the European governments, confidence. Governments see the cost of borrowing increasing as fears of their defaults increase, a normal concept that anybody applying for credit facilities will used to, this actually makes it much harder to grow and reduce these costs, as your credit rating reduces the cost of that credit increases. This seems unfair in many ways but why would you lend money to a risky person/country if you weren’t fairly compensated for that risk?

This is exactly the same problem Thomas Cook faces, peoples confidence in Thomas Cook will be reaching rock bottom. Unlike a company that sells say bread or cheese for immediate consumption of the product Thomas Cook needs you to trust them from the point of booking the holiday until the end of the holiday this could be a period of 12 months, and as Thomas Cook’s future hangs in the balance it might find it hard to inspire this level of trust.

The ramifications of this are sales at current prices will drop, leading to reduced revenues and profits, this will only add to Thomas Cook’s problems. So as countries debt costs increase, Thomas Cook may have to reduce prices too compensate travellers or “investors” for the risk of investing in Thomas Cook. The gap between original price and new pricing could be seen as the risk premium that Thomas Cook is effectively paying. This drop in price will also reduces profit making it yet harder for Thomas Cook to survive.

I don’t however expect to see a contagion through the tourism market through distrust but the days of Thomas Cook could be numbered, it depends how Thomas Cook's brand effects its subsidiaries. If the Thomas Cook brand accounts for a large percentage of sales Thomas Cook will have a hard road ahead, on the plus side for Thomas Cook is that they have a large number of subsidiaries (around 37) which could allow them to re-brand and deceive potential customers into buying holidays, watch this space….