Will Thomas Cook go into a death spiral? If so, what are the implications?

There is a horrible phenomenon when a company’s financial difficulties get into the public domain. Customers and suppliers start to give it a wide berth. This then hurts the company’s financial performance yet further which leads to more bad press and the spiral continues.

When a company reaches this tipping point it is virtually impossible to recover. The question is whether Thomas Cook has reached this point.

It has just asked for £100m from its lenders to help with its cash flow which was on top of a further £100m request just 4 weeks ago. It would not be difficult to infer that this further cash request is as a result of poor trading over the last 4 weeks which was on a scale not imagined just 4 weeks previously. If there has been this sort of collapse then it could have been a result of customers and suppliers reacting to the poor financial news.

Now some supplier failure insurance companies are telling their clients not to book with providers within the Thomas Cook group as they will not be covered for bookings from today’s date. If travel agents start to take this advice and withdraw their support for Thomas Cook, then this could easily tip it over the edge.

With debts reported to be as much as £1bn people some people are saying though that surely there is too much at stake for its lenders to allow it to fail? They have the option to support the company with a view to fully recovering their loans in the future or simply ordering a fire sale and cutting their losses.

It is hard to imagine that such a big company with 15,000 staff would dissapear altogether but it is pretty certain that if it survives the current cash crisis it will do so on a much scaled back footing. Plans such as the recent aquisition of the Co-op travel could easily be reversed and many other recent acquisitions may well have to be sold.

Should the worst come to the worst and Thomas Cook does enter administration/receivership then customers should be covered under their ATOL protection. However compensation can often take many many months to materialise. Customers may feel that with so many other travel companies out there wouldn’t it just be eaiser to book with another company rather than run the risk? That’s the problem that Thomas Cook is going to face now.

Thomas Cook going bust would have far reaching implications for other travel companies. While some short sighted competitors may relish it, they have to realise that it would probably produce the biggest possible hit for travel consumer confidence that the industry has ever seen. Consumers could rightly say “I booked with the biggest, they went bust and so who can I trust?” Consumers could easily decide to holiday in the UK, not holiday at all or book the holiday direct with hotels and airlines. All three of these options could have potentially disastrous consequences for other holiday companies.

So there is a pretty strong argument for the travel industry to rally around and do what it can to stop one of its giants entering this terrible death spiral.

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