Abstract
A company’s operations are the key determinant in its success. Thomas Cook’s poor operations and miscalculated moves were responsible for the eventual collapse of the airline. This paper gives important lessons that airlines can borrow from and make necessary changes. The collapse of Thomas Cook Airline in 2019 marked the end of an airline that took pride in being among the oldest in Britain and airline of choice for many passengers. At its height, it transported more than 6.5 million passengers each year. Despite the impressive figures, the company could not avoid its sinking. The paper finds six reasons that contributed to Thomas Cooks’s collapse. These are lack of innovation, the rise of the staycation phenomenon, competition from low-cost airlines, inability to handle its airline division, growing debt, and decline in the package-holiday industry. By carefully analyzing the company’s financial data, press briefings, and mainstream news, the paper finds that the company owned mistakes coupled with negative external forces were to blame for the collapse.
The Collapse of Thomas Cook Airline
The collapse of the 178-year-old Thomas Cook Airline offers an interesting lesson for aviation management. The firm collapsed despite being the chosen holiday firm for most Britons. The company was also a primary competitor in some routes, which further makes its collapses fascinating. The collapse sparked the biggest repatriation of stranded passengers in the UK since the collapse of Monarch Airlines.
This research is important in that it examines a company with a long history in the packaged-holiday as well as in the airline industries. Examining its collapse will offer an insight into the mistakes that cost the company its life. Moreover, for companies that have taken advantage of Thomas Cook’s collapse, this research offers recommendations on areas they could improve.
This research examines a brief history of the Thomas Cook Airline. It then proceeds to examine six unique reasons that caused the failure of the airline. It begins by delving into the lack of innovation by the airline and the subsequent disruption from online booking companies. The paper investigates how the company’s lack of ability to handle complex operations from two industries dearly cost it. The paper then proceeds to examine how the company’s unpreparedness to handle “staycation” a new phenomenon in Europe amplified its woes. The paper also expounds on the failure in Thomas Cook’s competitive advantage by comparing its operations to those taken by low-cost airlines, which have continued to report healthy growth. The last portions of the paper analyze the company debt and the unfortunate decline in package holidays. Lastly, the paper gives a strong conclusion.
WE’VE HAD A GOOD SUCCESS RATE ON THIS ASSIGNMENT. PLACE THIS ORDER OR A SIMILAR ORDER WITH PapersSpot AND GET AN AMAZING DISCOUNT
History
Thomas Cook Group Airlines was a British airline holding company, headquartered in Manchester, England. The company was founded in 2007 after a merger between Thomas Cook AG and MyTravel Group (Toh, 2019). In 2013, the company’s airlines, Condor, Thomas Cook Airlines Scandinavia, and Thomas Cook Airlines Belgium merged into one company (Chappell, 2019).
Thomas Cook Group named Thomas Cook Group Airlines. As of 2014, the company handled 6.4 million passengers. The company ceased operating in September 2019 after it fell into liquidation. The unexpected collapse left 165000 passengers stranded all over the world (Toh, 2019). Moreover, airlines around the world were hired to repatriate stranded passengers back to the UK. In November 2019, Thomas Cook’s air operator certificate (AOC) was revoked (Chappell, 2019).
Lack of Innovation
Thomas Cook’s airline failed to innovate its operations in a bid to have a competitive strategy (Baumeister & Onkila, 2017). In modern business, it has become the norm for any business strategy from technological innovations. Companies are investing greatly in tech solutions to help them market, drive business, and improve their offerings. Moreover, the urge to embrace innovation is further heightened by the emergence of tech companies that are disrupting unrelated industries such as Uber in the transport industry (Baumeister & Onkila, 2017). Enough literature seems to suggest that the early adoption of technology may help a company weather such kinds of disruptions (Kaminski-Morrow, 2019). Though embracing technology may appear to be a norm in the 21st business culture, Thomas Cook refused to change (Kaminski-Morrow, 2019).
In addition, while the travel booking business has gradually moved online, Thomas Cooks retained a manual booking process and relied on its high-end stores and telephone services. Worldwide, the brand operated from more than 600 physical stores well placed within the cities’ main commercial street (Kaminski-Morrow, 2019). Though the company operated a website, its focus was on these traditional processes. Moreover, prices on the company’s website varied with those in retail stores, with the latter being relatively higher. Customers who had grown aware of this booked online to save money. Booking an airline online allows the customer to book at their convenience without having to physically go to the store (Esty, Gilson & Sesia, 2016).
Failure to adopt an online booking platform means that Thomas Cook had to pay for the stores and the staff. Furthermore, by letting customers interact with staff meant that retaining a customer was dependent on how their staff treated of personalized their interaction with them (Kaminski-Morrow, 2019). However, creating an easy to navigate platform that provides feedbacks or generate reminders could have given them an assurity of customer retention (Kaminski-Morrow, 2019).
The packaged travel industry experienced disruption from online booking services. Online booking platforms such as Expedia, Booking.com, and Airbnb have brought transformations into how people book accommodation. With Airbnb, customers have the flexibility and freedom to book for as few or as many days as they like with a wide variety of accommodation to choose from (Baumeister & Onkila, 2017).
Unlike Thomas Cook that targeted wealthy travelers, Airbnb has targeted both low income and high-income clientele. For example, it acquired Luxury Retreats, a holiday site, hence bringing under it a portfolio of expensive properties (Esty et al., 2016). Airbnb strategy has shifted from just offering easy and navigable booking to one that focuses on customer “experience” in the form of tours, exercise programs, and special meals. Airbnb (2019) revealed that 700,000 firms had had employees sign up and book with Airbnb for work travel. This is a 60 percent increase from 250,000 companies it had announced in 2018.
In addition, the company has focused on the concept of “bleisure” which refers to business trips combined with leisure stays (Airbnb, 2019). By increasing its customer base, the company has successfully captured cost-conscious millennials and business travelers, avoiding hotels. Other online booking companies with better holidays such as Priceline and Expedia continued to pop up as Thomas Cook refused to innovate.
Difficulty Operating an Airline
Thomas Cook operated as an airline as well as a travel agency. In the early 2000s, the company moved into the airline sector by absorbing Condor, a Frankfurt-based airline. In 2003, Thomas Cook was already operating its own airline, Thomas Cook Airlines, based in the United Kingdom, roughly 34 planes in its fleet and serving 82 destinations.
The company found it difficult to operate as a travel agency and as an airline. Success in one segment may not necessarily be reflected in the other. Both are independent, complex businesses in their own way (Sampere, 2016). Moreover, the aviation industry is characterized by a large number of companies ensnared in a customer layer and struggling to grow in revenue (Sampere, 2016). Sampere (2016) explained that operating an airline was very difficult and that companies had to pursue aggressive efficiency, internationalization as well as engage in mergers and acquisitions.
The author noted that to minimize the cost associated with an empty seat; airline engages in partnerships such as Oneworld or Star Alliance which has enabled efficiency in the ways costs are allocated. This also allows for code sharing. According to the US Department of Transportation (2015), code sharing is a “marketing agreement in which airlines place its designator code on flights operated by other airlines and can sell tickets on behalf of those flights.” Thomas Cook Airline did not engage in partnerships with other airlines and had to accumulate the costs.
Given the difficulties it experienced, it was hard for Thomas Cook to overcome them since it was not as flexible as a stand-alone airline. Sunk cost from operating an airline coupled with operating costs such as wages and maintenance make airlines susceptible to declines in demand. Moreover, the nature of the market that Thomas Cook relies on experiences big peaks in the summer and troughs in the winter (Esty et al., 2016). This means that their planes did not have passengers during quieter months.
One of the competitors with a similar profile, like Thomas Cook, is the TUI Group. The company operates as both a travel agency and an airline. When conventional tour operators were threatened by tech companies, TUI Group acquired and began operating hotels and cruise ships. This move helped it differentiate from the competition. Today the company has 150 company-owned airlines in its fleet, 380 hotels in Southern Asia and Southern Europe as well as 17 ocean liners. The success of the differentiation is evidenced by the fact that in its 2018 financial year, 70 percent of TUI Group earnings were attributed to its hotel and cruise subsidiaries.
Staycation
Thomas Cook Airlines drew most of its revenue from international operations. However, Britain’s decision to leave the European Union brought with it unexpected challenges to the travel agency. Most Britons now chose to spend their holiday around the country. This behavior is called “Staycation” and is a new form of tourism often attributed to the Great Recession (Baumeister & Onkila, 2017).
Staycation replace traditional vacation and is a shortened trip closer to the residence of the participants. Staycations are influenced by various factors such as time, availability of discretionary income, and economic conditions, among other variables. Following the 2016 Brexit, the country has experienced a less-valuable currency and falling living standards that have greatly influenced travel plans (Baumeister & Onkila, 2017).
In 2018, the company blamed “unprecedented” continued periods of hot weather in Europe, which meant travelers spent their June and July holidaying at home and put off booking vacations abroad. Given that Thomas Cook made most of its yearly profits in the summer months. The company further warned that the impact of the hot weather would continue being felt into winter trading. The impact of staycation during such a period as evidenced by the fact that the company’s shares plunged by nearly 25 percent as investors digested the announcement (Kaminski-Morrow, 2019).
One of the reasons why staycations are becoming in Europe is the continued terrorist attacks abroad targeted at Western foreigners. In a poll conducted in Britain involving 2000 British holidaymakers, it was found that a third of Brits changed their travel plans due to fear of terrorism (Chappell, 2019). The poll also noted that holidaymakers were concerned there was a distinct lack of advice on safe destinations. In 2016, Thomas Cook had to cope with a low booking after bombings in Turkey, Egypt, and Tunisia.
The airline reduced the number of flights to these countries. In the same year, the company booked £60 million less in business from Belgium after a bombing at Brussels airport interrupted travels and made travelers unease about holidaying abroad (Baumeister & Onkila, 2017). The company’s CEO, Peter Fankhauser, is quoted to have said that they were operating in a challenging environment with repeated disruptions in some of their key source and destination markets (Baumeister & Onkila, 2017).
The staycation that characterized the years before the company’s collapse might have been responsible for the company’s decline. The company operational strategy did not factor how they could take advantage of the growing staycation trend in Europe. Compared to its competitor, TUI Group, holidaying is cruise ships that are less affected by terrorism and hence the company’s stable profits (Baumeister & Onkila, 2017).
Competition from Low-cost Airlines
Thomas Cook also competed with various low-cost airlines such as Ryanair, Lufthansa, Jet2.com, and EasyJet UK, among others. Low-cost airlines are airlines that adopt strategies aimed at reducing operating costs by eliminating some traditional services and comforts with fewer comforts, making them offer lower fares. Low-cost flights differ from other airlines for their simplicity. This ranges from their fare plan such as charging one-way tickets half that of round trips, to utilizing smaller, less congested secondary airports.
Sampere (2016) noted that the airline industry today is characterized by cost-cutting efficiencies such as smaller seats, baggage fees, and airplane food that though “awful” passengers have to pay for it. Moreover, these companies increase margins by cutting bottom-line costs. This clearly describes the low-cost airline strategies. Thomas Cook operated in the traditional scheduled segment and rarely engaged in this efficiency aggressively (Sampere, 2016).
Amidst the collapse of Thomas Cook, the low-cost airline segment in the European market experienced 4.9 percent yearly growth in 2019. The traditional scheduled segment, which Thomas Cook operated in, experienced an increase of 3 percent. Garcia (2019)noted that low-cost airlines in the European market added an average of 353 flights per day with Ryanair and EasyJet UK, contributing three-quarters of the growth.
The biggest competition from a low-cost airline came Jet2com, which also offers packaged holiday through its Jet2holidays. According to the Center for Aviation (2020), which sought to examine whether Thomas Cook airline would boost Jet2.com, it found that the two airlines had greatly overlapped each other’s routes. Moreover, the report noted that Jet2.com had the upper hand in the competition, having overlapped into 47 percent of Thomas Cook’s 225 routes compared to only 33 percent that the company had overlapped into its routes (Chappell, 2019).
In total, the two airlines had overlapped on 106 routes. In terms of capacity, Jet2.com had more capacity than Thomas Cook on 69 of the 106 routes. CAPA (2020) notes that the decision by Jet2.com to offer package holiday sales in the UK, aimed at moving its business away from reliance on seat-only sales and as a means to differentiate itself from other LCCs. The report notes Thomas Cook’s strategy was the exact opposite and aimed at moving from pure charter and embraced seat only sales for their package holiday business.
Given the difficulty in the airline industry, Jet2.com first conquered the airline industry as an LCC then differentiated into the travel industry (Toh, 2019). This means that its airplanes had customers throughout the year, and they still could capitalize on the high seasons which Thomas Cook’s relied on (Chappell, 2019). In addition, Thomas Cook’s model, parallel to charter flights than commercial airlines, did not accommodate efficiencies of scale to allow its airline to compete with LCCs.With such kind of competition, Thomas Cook Airline would inevitably collapse (Chappell, 2019).
The decline of Holiday Packaged Industry
The collapse of Thomas Cook also points out to a declining package holiday industry. Package holidays consist of travel services such as flights, accommodation, and resort transfers, among others, that have been bundled together (Kaminski-Morrow, 2019). The decline in this segment is attributed to better options from online booking services as well as the emergence of innovative and better packaged holidays from similar companies.
The managing director of Pace Dimensions, Tim Davis, is quoted to have said that the package holiday market had been squeezed since it was easier for customers to pick elements they wanted for a holiday and at a reasonable price (Garcia, 2019). Given the rigid nature of package holidays, Thomas Cook went further and even owned the hotels, further squeezing customer’s options. Expedia and Booking Holidays filled the gap by allowing travelers to choose their own adventures. Michael O’Leary, the CEO of Ryanair, reiterated this by noting the package holidays were dead in part because of the growth of digital platforms (Garcia, 2019). He explained that, like 45 years ago, where the concept of packaged holidays was appreciated for the cheap fare, people today go online and book their accommodations because of the low fares and services they can get. Put differently, new models in the travel industry are de-bundling the package holiday.
The decline in package tours is also attributed to the fact that they are seasonal. The defined season means that challenges arising in a region may heavily affect the cash flow of Thomas Cook (Chappell, 2019).
Costly Mergers and Accumulated Debts
Mergers and acquisitions can be beneficial to the airline industry only if handled carefully. Sampere (2016) observed that mergers and acquisitions allowed airlines to buy growth as it allows them to access new routes and engage in direct competition. Though Thomas Cook used this approach by acquiring MyTravel in 2007, its woes can be traced to this merger (Chappell, 2019).
The deal was both costly and badly integrated. The merger never fully sorted out the capital position or the debts of MyTravel. Whyte (2019)observes that in a year, the company moved from a positive position $484 million to a debt of $360 million in 2008. By 2010, the net debt had risen to $804 million. Yet in 2010, the company then engaged in a costly merger with is the main rival, Co-operative Group.
The deal ended up saddling the Thomas Cook with more shops than they necessary, which it had to pay to close down in years to come. In 2016, the company bought Co-op out of the partnership for $54.7 million (Toh, 2019). Between 2010 and 2019, the company severely asked shareholders for extra funds with cost-cutting only focused internally (Toh, 2019). At the time of its collapse, the company had accumulated $2.1 billion and was only negotiating to obtain $250 million in emergency financing (Chappell, 2019).
Conclusion
Overall, the paper finds that several failures were responsible for the collapse of Thomas Cook. The company failed on all of the competitive strategies by not innovating and differentiating and failing to pursue economies of scale, as is the case with LCC. It thus follows that it was heavily affected by online booking and packaged holiday airlines such as Jet2.com and TUI Group. The paper also finds that while some of the company’s strategies were well-informed, they were badly negotiated and unnecessary in some cases. The company was also faced with the difficulties of running two unrelated businesses as well as a declining package holiday industry.
The company offers lessons for Thomas Cook’s competitors and companies wishing to venture into the same business. Companies should overcome the challenges faced by Thomas Cook by innovating their products to attracted customers into the declining package holidays. Giving customers the power of their destination and price is revolutionary. They should also adopt online booking as it gives the customer a high level of convenience. A holiday company should be prepared to handle staycation by offering travelers better local experiences.
References
Airbnb. (2019, July 16). Companies Booking Airbnb for Business Travel More Than Double with Nearly 700,000 Using Airbnb for Work. Airbnb Newsroom. https://news.airbnb.com/airbnb-for-work-700000/
Baumeister, S., & Onkila, T. (2017). An eco-label for the airline industry?. Journal of cleaner production, 142, 1368-1376.
Center for Aviation (CAPA). (2019, October 28). UK Leisure Airlines: Jet2.com Boosted by Thomas Cook Exit. CAPA – Centre for Aviation. https://centreforaviation.com/analysis/reports/uk-leisure-airlines-jet2com-boosted-by-thomas-cook-exit-497161
Chappell, B. (2019, September 23). Thomas Cook Airline Collapse Triggers Largest Peacetime Repatriation In U.K. History. Retrieved February 28, 2020, from NPR.org website: https://www.npr.org/2019/09/23/763355554/thomas-cook-airline-collapse-triggers-largest-peacetime-repatriation-in-u-k-hist
Esty, B., Gilson, S. C., & Sesia, A. (2016). Thomas Cook Group on the Brink (A, B, and C Cases). HBS Case Studies, (215-008), 215-051.
Garcia, M. (2019, September 23). What Killed Thomas Cook? Brexit And Decline Of Package Holidays Undercut Venerable Travel Brand. Forbes. https://www.forbes.com/sites/marisagarcia/2019/09/23/virgin-atlantic-steps-in-to-offer-jobs-to-displaced-thomas-cook-employees/#709f17e7391c
Kaminski-Morrow, D. (2019). Thomas Cook’s failure prompts rethink: after scaling’Matterhorn,’ insolvency of holiday giant leads the UK government to re-evaluate airline collapse strategy. Flight International.
Sampere, J. (2016, May 27). The Reason Air Travel Is Terrible and So Few Airlines Are Profitable. Harvard Business Review. https://hbr.org/2016/05/the-reason-air-travel-is-terrible-and-so-few-airlines-are-profitable
Toh, H. S. (2019). Thomas Cook’s Collapse a Hard Lesson for Fosun.
TUI Group. (2019, February 6). TUI Group – The World’s Number One Tourism Business. TUI Group – Der Weltweit Führende Touristikkonzern. https://www.tuigroup.com/en-en
Whyte, P. (2019, September 30). Debt, Egos and Bad Decisions: How Thomas Cook Failed to Adapt to a New Era of Travel. Skift. https://skift.com/2019/09/30/debt-egos-and-bad-decisions-how-thomas-cook-failed-to-adapt-to-a-new-era-of-travel/
