Bankruptcy in Lehman Brothers-style?
The 23rd of September will be a memorable day in the tourism industry in Europe. It is when the biggest and the oldest British tour operators, which tradition dates back to 1841, declared bankruptcy. After 178 years of running its activity, Thomas Cook will go down in history in the atmosphere of bewilderment and upheaval.
Is it another bankruptcy in a Lehman Brothers earthquake style but this time in the hospitality sector?
Perhaps, we should finally learn a lesson as this time Canary and the Balearic Islands “all-included” tour operators’ business model is at risk.
The repercussion of Thomas Cook’s bankruptcy on the European hospitality sector
Unfortunately, the downfall of Thomas Cook has had its consequences not only on holidaymakers, millions of which were left stranded in holiday resorts in Spain, Greece and Turkey but it has also reverberated in the hospitality sector and the European economy. According to the Spanish Confederation of Hotels and Tourism (CEHAT) only in Spain, about 500 hotels will go bankrupt until December. The Spanish Government has passed a special fund of 700 million euros (loans and direct aids) to cover the loss of the potential historical bankruptcy evaluated for 200 million euros. Since Tuesday, 23th of September hundreds of hotels have already been closed in Ibiza, Mallorca, Catalonia, Andalusia and it’s not over yet. The next avalanche of bankruptcies is expected in 2020 (in accordance with the President of CEHAT).
About Thomas Cook
Every year Thomas Cook sent around 19 million tourists abroad- 3,6 million of which chose the Canary and Balearic Island. According to the „El Pais”, the clients of the British tour operator in Balearic Island amounted to 15% and on the Canary Island even more- 25% of all tourists of the operator. The British giant operated in 16 countries, in 60 destinations and owned around 200 hotels across 46 destinations as well as its own airlines.
Problems of the company
The problems of the company began years before they declared bankruptcy and there were many factors that contributed to the fall of the Thomas Cook tour operator. Not only the uncertainty related to Brexit, a decline in the value of sterling but also a political situation in countries such as Turkey and Egypt left a mark on the number of reservations. The growth of online competitors such as booking.com and Airbnb and the fact that flying has become more affordable and possible to a countless number of destinations also had a significant impact. In addition, there are some controversies related to extra salaries and bonuses granted by the management board despite the deteriorating condition of the company. A series of misfortunes of Thomas Cook reached a point where in order to survive in the market, the company had to sell three million tours a year only to cover the debt interest.
Impact on the Spanish economy
In order to imagine the scale of the problem and the impact of the downfall of Thomas Cook on the tourism sector in Europe, it is necessary to understand its monopolistic character. While operating in 16 countries, Thomas Cook hired almost 21,000 people worldwide (in accordance with the financial report from 2018), owned 100 aircraft as well as operated 186 own-brand hotels and resorts. Only in the Canary Islands, the company owned 20 hotels, 29 in Turkey, 3 in the Gambia and more than 10 in Tunisia. Despite its own activity, the company also cooperated with Expedia- a travel booking website used to book holidays, cruises, accommodation, flight tickets or event rent a car.
Among many available destinations, sunny resorts in Greece and Spain were especially popular.
How will the bankruptcy of Thomas Cook affect the Spanish economy?
Until the very last moment, Thomas Cook tried to reach an agreement with banks and shareholders which would prevent the company from its downfall. Regardless of the efforts, the plan failed, and the British giant was forced to initiate the process of liquidation of the company, seriously jeopardizing the European tourism sector.
The most immediate victims are a myriad of small hotels that used to sell the whole season holiday in advanced but were paid after the guest stays. Usually, the high season payment (July and August) was to be paid in September. The payment has never been received despite the fact that clients covered all expenses for their holiday. This is a calamity for small hotel owners which poses at risk their activity.
At a macro level, considering that tourism in Spain constitutes 14,7% of all employment, it is easy to predict the repercussion of the bankruptcy on the Spanish economy. Not only employees and tourists are victims of the crisis. Also, the companies from the sector such as Aena, Amadeus, Meliá or NH Hotel Group has suffered a loss on the stock market those days.
The downfall of Thomas Cook affected the most popular Spanish resorts in the Canary Islands and the Balearic Islands including las Palmas, Tenerife, Mallorca, Ibiza and Minorca but also Catalonia and Andalusia. Therefore, a Spanish Federation of Tourist Hotels and Accommodation (CEHAT) requested the Spanish government to prepare a rescue program for hoteliers, and above all emergency tax breaks or exemption from some of the fees related to employee social insurance. The lobby has already obtained some of them.
This event must be carefully considered as a warning and an urgent call to reconsider the business model based on all-included, tour operators, and being competitive only based on price.