Will tax losses save the Thomas Cook brand?

Steve Endacott sees a future for the oldest name in holidays

There has been much speculation about the future of the Thomas Cook brand, given the recent £1.4 billion write down of assets and first-quarter loss.

The company is clearly seeking to reduce its debt mountain, by selling some core strategic assets in the form of its airline division and potentially its Nordic business.

But what does this leave of any value? Its tour operations may end up locked into a deal for airline seats at uncompetitive prices with the buyer or need to be dramatically reshaped in order to work with fewer fixed seat allocations and more flexible flight stock bought on the fly from low-cost airline partners like easyJet, Ryanair and Jet2.

The more flexible ‘dynamic packaging’ model has the attraction of removing the need to sell holidays in the lates market at a loss, but it may also reduce Thomas Cook’s ability to operate ‘differentiated hotels’.

These hotels are normally ‘guaranteed’ and need to be matched with flight seats to maximise yield. This is easily done in destinations with large low-cost flight capacities like Mallorca, but will be much harder in smaller Greek Island destinations which have traditionally depended on charter flights.

The sale of the airline is also likely to see the tour operations shrink in size if Thomas Cook stays an independent force, which in turn is likely to lead to further high street shop closures.

However, I don’t believe Thomas Cook will stay independent.

My experience at MyTravel, which I re-joined in the weeks before its own financial meltdown occurred, made me realise how resilient major tour operators like Thomas Cook are.

Investors owed billions are unlikely to try to enforce the repayment of the debt if they believe it will cause a collapse and lead to them getting nothing back.

As long as they are not forced to put in more cash, they will wait and hope for a rescuer to come over the horizon.

Similarly, although the CAA may be tempted to take action as Thomas Cook’s overseas customers decline rapidly at the end of the summer, pulling the bond will trigger a claim on the Atol fund that could easily wipe out most of its healthy reserve. Again, there will be a natural inclination to wait for a rescuer to emerge over the winter months.

Even overseas hoteliers have little ability to force overdue payment, unless they have leverage in the form of customers in the winter who they can threaten to throw on the street at a time when Thomas Cook cannot just move them to other hotels, for example at peak Christmas dates.

So the question is who could save Thomas Cook and why?

The answer is the same as why MyTravel was saved – the accumulated tax losses.

Thomas Cook this year alone has created tax losses of £1.4 billion that can be used by a profitable player in the same sector to offset any profits they make and remove all tax payments.

However, if Thomas Cook is allowed to collapse the brand equity is destroyed and the tax losses are lost.

In the longer term, the obvious buyers for Thomas Cook are the highly-profitable Jet2holidays or easyJet Holidays. You could even see a game of chess developing similar to when the big four became the big two.

The development of easyJet Holidays would be dramatically brought forward by the acquisition of Thomas Cook’s tour operations and high street distribution, in both the UK and other European source markets like Germany.

However, would Jet2holidays sit back and allow its major competitor in one swoop to catch up on its own massively successful tour operation or would it be forced to block the move by buying Thomas Cook itself?

Just imagine Thomas Cook’s strategic strength, if had preferential access to easyJet’s flight network at a £36 per booking price advantage over other OTAs (easyJet charges OTAs a £6-per-sector API fee).

It’s also easy to see how hoteliers would be attracted to working with a tour operation with access to such enormous and flexible aircraft lift.

However, as usual in these situations, the initial buyer may be a venture capitalist firm that can see the long-term strategic play and is willing to take the short-term restructuring pain to make Thomas Cook a more attractive proposition to an even wider range of potential buyers.

This could easily include the US Booking and Expedia groups, both of which are under-represented in the European holiday markets compared to North America.

Thomas Cook may be on the ropes, but I would not count this historic UK holiday brand out any time soon.

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