Thomas Cook bosses face scrutiny, but are they just scapegoats?

“The news at the beginning of the week was briefly dominated by the demise of the 178-year-old travel operator Thomas Cook.  The press included stories of wedding plans being disrupted, hotel bills being unpaid and even a case where the holidaymakers were held ‘hostage’ briefly.  Then attention shifted to the largest peacetime repatriation of British residents which will be completed by early October.  The initial experience of this exercise suggests that it will go smoothly.  This would be expected given the insurance arrangements that exist for package holidaymakers.  Those who have booked travel and accommodation separately will have to rely on travel insurance or the protection offered by credit and debit cards.  The people who are most likely to lose out are those travellers who had booked holidays for after the 23 September – they will be refunded, but given the loss of such a large tour operator prices are likely to rise.

However, attention has also focussed on the actions of the management and the directors of this iconic British company.  The narrative that the collapse was the fault of the bosses fits with the prevalent populist strategy and the government is not averse to finding scapegoats.  Business Secretary Andrea Leadsom has announced that she wants the Insolvency Service to examine the conduct of the firm’s directors and whether their actions ‘caused detriment to creditors or to the pension schemes’.  The Insolvency Service has the responsibility to investigate every company collapse and whether the directors have behaved responsibly.  Unfortunately, their investigations can last years and while there is plenty of public opprobrium at the present time, it is unlikely the management deliberately drove the company into bankruptcy.  The Insolvency Service has no power to judge the morality of executive pay as such.  The current CEO earned in excess of £2m each year, but his stock options will be worthless now.  In relation to the debts of Thomas Cook, executive salaries represent a fraction of the losses incurred by the company.  The travel group faced demands of almost £500m from creditors at the end of September and was weighed down with debts in excess of £1bn.

The faults identified with the company are long-standing and management has failed to reshape the business.  Whether Thomas Cook could have survived if different decisions had been made is a matter for discussion.  Managements make mistakes, but that does not mean that the decision-takers have malign intentions.  They may be incompetent, but in a capitalist system there will be a price to pay, namely decline relative to rivals, takeover and possible bankruptcy at the extreme.  Thomas Cook operated in a market undergoing change.  The advance of the internet has forced many travel agents to adapt or die.  Thomas Cook faced specific problems associated with international tensions and the sharp decline in sterling in the past three years has squeezed the margins in an industry where the margins were already thin.  The company had experienced difficulties a decade ago and engaged in restructuring the business.  However, management proved to be either too timid or unjustifiably optimistic when pursuing necessary policies to turn around the business.  Its presence on the ‘High Street’ remained extensive and served a declining segment of the market.  In the last few months, the classic squeeze on the company became apparent as creditors demanded prompter payments for supplies and customers became more hesitant about placing orders.

In the end, the problem for Thomas Cook was that it operated in an industry undergoing rapid change.  In a dynamic environment firms must adapt or die.  Some tour operators will survive.  Thomas Cook’s great rival TUI thrives despite facing similar challenges.  Even if the management of the failed company had pursued a strategy more similar to its main rival, there was no guarantee that there was room for two large operators in the market.  In the capitalist system, the birth and death of companies is on-going and it is a sign of a well-functioning system.  The demise of some companies, identified as intrinsically ‘British’, may well cause angst for stakeholders including politicians needing to demonstrate that ‘they are doing something’.  However, would we really contemplate bailing out a travel company that has been in difficulties for much of the past decade? Or even nationalise it?”