Why did Thomas Cook collapse? And what does it mean to investors?

Why did Thomas Cook collapse? And what does it mean to investors?

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Thomas Cook, the oldest UK travel company, collapsed this week. The 178-year old company, soaked in British heritage, went into liquidation after talks of a government funded bailout failed.

The repatriation of 150,000 British citizens is well covered in the media.

But, why did Thomas Cook collapse? What does it mean to investors? And what investing lessons should we take away?

We’ll aim to answer those questions here, and explain why a Wealthify Stocks and Shares ISA could help reduce turbulence when companies, like Thomas Cook, fail.

Why did Thomas Cook collapse?
This shouldn’t come as too much of a shock as it was well sign posted, with a narrowly missed collapse eight years ago.

In 2011, Thomas Cook was pulled back from the edge of the cliff by an emergency loan provided by a bunch of banks. The blame for the company’s financial misfortunes was laid at the feet of weak trading conditions and too much debt. As a consequence, the shares lost 90% of their value before the 2011 bailout1. Fast forward to the present day, Thomas Cook shares can no longer be purchased or sold on the stock market, and shareowners of the company are likely to walk away with nothing. This time around, there is no lender or last resort.

But why did it happen, again? Since the emergency injection of cash, the company has paid out £1.2bn in interest payments to the banks that saved it. The interest payments alone are more than a quarter of its holiday sales in one year – that’s a lot of cash! But the burdensome debt pile wasn’t the Achilles heel, Thomas Cook’s big issue was that it couldn’t keep up with the technology evolution.

More Brits than ever are going away on holiday, but consumer behaviour has changed. Instead of popping down to the local travel agent, consumers are turning to their smartphones, using companies like Airbnb for accommodation, and budget airline easyJet. Thomas Cook, saddled with debt and shackled to expensive high street chains, failed to keep up with the growing demand of an online experience. It was only a matter of time for their mammoth interest payments to have an impact along with their old-fashioned business model.

 

What does it mean for investors?
Investors who own shares in Thomas Cook are unlikely to see any of their original capital back when all is said and done. Bond holders who sit higher up the pecking order when companies go bust, may have a chance of getting something back, but certainly not the loan amount in full.

So, is everyone pretty much a loser in this situation? Not quite. There is one set of investors who stand to make a lot of money – hedge funds, that are considered high risk investments, require vast sums of money to gain access, and usually have an initial 12-month period where investors can’t withdraw. Often painted as the villains, who can invest in products that succeed when companies fail, hedge funds are set to make a cool £200 million from the collapse of Thomas Cook2.

 

What investing lessons should we take away?
It’s a good idea not to invest in shares of companies that fail to keep their customers happy. If a business doesn’t remain customer centric and change with their shifting habits, it will no longer meet the customers’ demands. The rise of UK FinTech companies, like Monzo in the banking sector, or Wealthify in the investment space, are an outcome of traditional companies failing to meet the demands of their customers.

Size does matter when it comes to safety of investments. Thomas Cook listed on the stock market in 2007 and at its peak the company was never valued at more than £2.5 billion. That’s a relatively small value in the investing world when you compare it to Apple, whose value has flirted with $1 trillion dollars this year! It’s not gospel, but typically the larger the company the less likely you are to lose everything.

Diversification is important. Instead of buying individual shares in your Stocks and Shares ISA, buy one fund instead  a fund is a large basket of shares in different companies. Company-focused traumas, like Thomas Cook’s misadventure, will have a small dent in your returns because you’ll be invested in lots of other companies, that are hopefully doing well.

 

How can a Wealthify Stocks and Shares ISA help reduce turbulence with a Thomas Cook style event?
We use funds rather than pick individual stocks or bonds to build you a Stocks and Shares ISA. Using funds, which contain thousands of investments, is an easy way to diversify your portfolio. But why is diversification important? Because it’ll drastically reduce the impact of any poor performing share on the total return delivered by your ISA. With this in mind, your Stocks and Shares ISA at Wealthify can contain over 5,000 investments, within up to 15 funds that you can own in your Plan.  

Also, in our Original ISAs the funds we use contain shares of large or medium sized companies, which in football terms, is like investing in teams that play in the Premier League or Championship. When companies, like Thomas Cook, continue to perform poorly, the company goes down in value, and like a poor performing football team it’ll get relegated to a lower division.

With your Wealthify Stocks and Shares ISA our investment team are on hand to monitor your plan daily. They keep a constant eye on global markets and will make adjustments when needed to shelter your Plan from the bad times and take advantage of the good.

If you have any questions or comments, please don’t hesitate to get in touch!

 

The tax treatment depends on your individual circumstances and maybe subject to change in the future.

 

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

 

Sources:

1: https://www.independent.co.uk/news/business/news/thomas-cook-collapse-liquidation-hedge-funds-speculators-a9117106.html

2: https://uk.reuters.com/article/thomas-cook/thomas-cook-set-for-boost-from-emergency-loan-deal-idUKL5E7MR0CJ20111128

 

 

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