City Insider: Will Thomas Cook be able to afford to reinvent itself?

City Insider: Will Thomas Cook be able to afford to reinvent itself?

City Insider - FT journalist David Stevenson on the travel industry

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Let’s get the good news out of the way first about Thomas Cook.

Cook is obviously here to stay and has an eventful couple of years ahead of it (banks and future Greek inspired economic meltdown permitting).

The appointment of Harriet Green is an interesting move, and she’ll obviously bring a huge amount of technology inspired rigour to the boardroom.

I also think it’s good news that she’s not from travel, if only because many institutional investors harbour a sense that ‘travel’ as a sector has not only under-performed but frankly fibbed to the City.

For too long the big shots in big travel have peddled the idea that it’s a growth sector whilst quietly trying to manage secular decline in certain core segments.

Other sector porkies include the idea that transforming yourself into an internet giant would just require cash and hard work (if only), as well as the notion that the big summer holiday ticket spend is relatively safe in austerity (it isn’t).

Another porky pie? That places like Sweden, the Netherlands, Germany and France will be protected from any downturn – wait for the German economy to slow down as the Euro crisis eventually smashes into the local export sector.

So, freshness and honesty is to be admired and Thomas Cook looks like it’s finally got around to clearing out the Augean stable, although most investors I talk to would rather like that exercise to have started rather higher up the pecking order of directors.

Thomas Cook has secured its refinancing and it now looks like the new executive team can be left to get on with a series of multiple tasks including getting that big red debt figure (a whopping £1.38 billion and counting) under control.

But boy does Ms Green have a daunting task in front of her – the six monthly figures released last week were enormously revealing, in a rather dreadful way.

On the surface trading looks a tad depressed but nothing we didn’t expect, especially in the UK where retail is clearly only mid-way through a very painful restructuring process – with specialist travel the stand out success.

But take a closer look at those results and then talk privately to horrified analysts and investors and the true picture becomes apparent.

Most press attention has latched on to the utterly dreadful cash position, with working capital the most obvious headache.

According to the travel giant ‘the seasonal net cash outflow from operating activities has increased by £306.9m to £449.1m” – no wonder Cook had to engage with the banks in a full and frank discussion about cashflow and debt in the last few months.

This whopping increase ‘reflects the increased operating losses for the first six months together with an increased working capital outflow resulting from reduced revenue in advance following capacity reductions and a later booking pattern’.
I have no doubt that this is true but never in my many years scouring large company accounts as both a financial journalist and an investor have I seen such a sudden step change in cash outflows for a major company that has then stayed in business without absolute drastic corporate surgery.

I’m also more than a little taken aback by the rather frank admission that Thomas Cook “suffered a weakening in brand sentiment”.

Indeed, and the cost of remedying that brand erosion is going to be very substantial – its clever marketing and advertising folk are going to have work very hard to “re-energise” the brand and that is going to cost a very large amount of money.

Yet this huge investment in marketing and advertising will come at the same time as the strategic turnaround of the UK business, explained in copious detail in these half yearly figures.

As one hedge fund investor put it to me ‘here we are, many years into what seems like a perennial strategic review, and yet we’re supposed to believe that in 2013 we’ll see a £120 million gain for just £20m cost’.

I don’t doubt that there’s a bus load of costly channel duplication going on but a 6:1 savings ratio on a corporate change management programme sounds more than a bit ambitious to me.

Another absolute humdinger comes with the admission that the recently acquired Russian business isn’t performing to plan – ‘Our Russian business, which was acquired on 12 July 2011, has been impacted by MENA as Egypt is an important destination.

‘We have implemented management change and put the business under the Central Europe management team’.

Suddenly the Emerging Markets growth story doesn’t sound quite so compelling does it? Note to those highly paid corporate mergers and acquisitions folk – less of this babble about BRICs and the amazing growth prospects for old world leaders.

The big picture though, for me, is how to manage the slow decline of a household name that is still trusted by so many.

We’ve become used to big travel cutting capacity as a way of managing core decline but Thomas Cook now seems to be in an especially invidious position.

I don’t doubt the energy of the new team but the cynic in me suggests that whatever cash efficiencies can be squeezed out will be then be used to pay down the vast debt, leaving the reinvention of the brand and investment in growing businesses as a lower priority.

I hope I’m wrong and that over the next three years the turnaround plan hatched with the banks works, but the share price – still flat lining at 17p the last time I looked – tells me everything I need to know about investor perceptions.

I never thought I’d say this but Thomas Cook desperately needs a private equity firm to buy it, to rescue it from the banks.

It needs some big bold actions, and renewed investment in the brand, all of which would require deep pockets.

Sadly, given the scale of that debt, I can’t see anyone big enough for the challenge, with the default option now being to wait on the sidelines for the inevitable slew of restructurings and disposals.


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