Thomas Cook collapse: why working capital optimization matters

David Venables

Following the collapse of Thomas Cook, it’s more crucial than ever for companies to take advantage of industry solutions that can help them optimize working capital and support their supply chains.

On 23rd September, 178 years of history came to an end when UK travel giant Thomas Cook went into liquidation, leaving over half a million holidaymakers stranded.

Most of the 150,000 UK holidaymakers affected by the fall of Thomas Cook have now been brought home by a major repatriation initiative. However, the impact on the company’s 21,000 former employees may take longer to overcome. And like many companies in the travel industry, Thomas Cook had a complex supply chain spanning numerous countries – meaning the repercussions of the company’s demise will be felt far and wide.

What happened?

Thomas Cook may have had a long history, but in recent years the company struggled to keep pace with changing consumer behavior. The arrival of low-cost airlines – not to mention internet-based firms such as Airbnb – prompted many holidaymakers to move away from the package holiday model favored by Thomas Cook, instead preferring to book their own flights and hotels.

Another factor was the company’s 2007 merger with UK holiday company MyTravel – a move that was expected to deliver annual savings of £75 million, but which ultimately led to a £1.1 billion write-down. Meanwhile, uncertainties around Brexit and the weakening of the pound following the 2016 referendum may have reduced the appeal of foreign travel for UK consumers. On 16th May, an announcement of the firm’s half year results noted, “In the UK, the political uncertainty related to Brexit over recent months has led to softer demand for summer holidays across the industry.”

With the situation looking increasingly uncertain, the last few months brought numerous efforts to stave off disaster: in February, Thomas Cook announced it was considering selling its airline, while July and August saw the company engaged in talks with Fosun – the group’s biggest shareholder – over a proposed £750m recapitalization deal. But in late September, ongoing rescue talks ultimately failed when the company was unsuccessful in securing a further £200m bailout.

Far-reaching impact

While it will take time for the full ramifications of the collapse to become clear, Thomas Cook had a complex global supply chain – and many suppliers, such as hoteliers, are now finding their own businesses at risk as well.

Consequently, the travel giant’s collapse may have a considerable impact on overseas economies. Savvas Perdios, Cyprus’ deputy tourism minister, estimated that hotels in Cyprus will lose €50m owed by Thomas Cook, according to Reuters . In Turkey, meanwhile, the Hoteliers Federation TUROFED  said the company’s collapse could result in the loss of between 600,000 and 700,000 tourists a year.

Many other economies are also set to be affected by the collapse of Thomas Cook: in Tunisia , for example, 45 hotels reportedly had exclusive relationships with the travel company. And in Spain, Juan Molas, head of Spain’s Confederation of Hotels and Tourist Accommodation , has warned that 500 hotels are now facing imminent closure

Taking control of working capital

The fate of Thomas Cook – and the repercussions now being felt around the globe – underlines the importance of managing cash effectively and having suitable systems in place.

The challenges faced by Thomas Cook may have proved insurmountable. But for the many other companies facing uncertainty in the current market, early payment programs such as supply chain finance can bring numerous benefits.

For one thing, supply chain finance can provide an effective means of freeing up working capital in order to pay down debt – an invaluable opportunity for companies that may be seeking to bring their debt levels under control. The ability to strengthen supplier relationships by offering early payments can also be attractive for major travel companies, which tend to have complex international supply chains.

On another note, the seasonality of the travel business means that some companies in this sector may benefit from being able to switch between self-funded dynamic discounting and third-party funded supply chain finance – an opportunity that is offered by Taulia’s flexible funding model.

With economic uncertainty continuing to present considerable challenges for companies around the world, it’s clear that buyers have much to gain by tapping into solutions that can provide greater insights into their own working capital, as well as their suppliers’ payment behavior. In this market, the importance of effective working capital management cannot be overstated.