“How did you go bankrupt?”
“Two ways. Gradually, then suddenly.”
This exchange in Ernest Hemingway’s The Sun Also Rises comes to mind whenever another corporate calamity strikes. The end, when it arrives, is often dramatic and apparently sudden. On closer inspection it turns out that the signs of decay have been visible for quite a while.
Thomas Cook issued two profits warnings last year, and in May revealed it was carrying huge amounts of debt – around £1.2bn. It also had to write down the value of its 2007 acquisition MyTravel by £1.1bn. It struggled through the summer to achieve a recapitalisation deal, but this crumbled over the weekend when the necessary funds could not be raised.
The immediate outlook is bleak for 21,000 employees (9,000 in the UK), 150,000 stranded UK customers and another 350,000 customers around the world. The tourist industry in popular destinations such as the Canary Islands, the Balearics and Turkey also faces worrying consequences.
But it’s not bad news for everyone. The pain of liquidation will not be felt so severely by those Thomas Cook executives who have done rather well for themselves in the past few years. Almost £20m has been paid out in bonuses. The chief executive, Peter Fankhauser, has been paid more than £8m over the past five years, including a bonus of £2.9m four years ago. With hindsight, this “performance related” bonus may have been a bit too generous and premature.
Lots of things combined to bring the company down. An old business model, with expensive to run high-street branches, could not compete in the age of the internet – when customers try to find their own holidays online. A hot summer last year was blamed for putting off potential customers, and Brexit uncertainty may have encouraged many Brits to rediscover the joys of holidaying at home.
The debts were too high and the revenue too low. This is not a recipe for business success. Thomas Cook’s Anglo-German rival, Tui, has much lower levels of debt and more cash to invest in marketing and updating its assets. There was only ever going to be one winner and one loser. (In fact, there has been another big winner: the hedge funds which have been “shorting” Thomas Cook shares – making speculative and lucrative bets on the company’s falling share price.)
Gradually, then suddenly. At this point it is customary to refer to the image of a frog slowly being boiled to death in steadily heating water – a pity, as research shows that frogs in fact hop out of heating water at the first available opportunity. In this way our amphibian friends display greater intelligence and more intellectual honesty than many a corporate leadership team.
Sometimes you have to read the writing on the wall. You have to be honest that your business is failing and quite possibly finished, and manage an elegant decline rather than making futile and costly gestures of defiance. It is wrong to continue drawing huge salaries – and bonuses, for goodness sake – when you are, in fact, losing height rapidly: prepare for an emergency landing and hope you don’t crash.
The management guru Jim Collins urges business leaders to “confront the brutal facts” of any situation. Deal with the reality. Wishful thinking – our prime minister might call this being much more “positive” – is not a substitute for a practical strategy that is based on the facts in front of you. Thomas Cook bosses hoped their business would revive without really changing how they operated – with too much debt and no banks willing to help them restructure, it was clear no one really believed in what they were doing.
The immediate crisis for Thomas Cook staff and customers is severe. Newly redundant workers are continuing to help grounded passengers, unpaid, while holiday plans are ruined and people worry about getting home in time for work or caring responsibilities. A lot of people are affected when a business goes down. Business leaders need to be more concerned about the services they provide and the jobs they create and sustain than the salaries they draw.
An almost 200-year-old company, one that shaped the way we live and experience the world, has gone. This happens. Business involves “creative destruction”, as the Austrian economist Joseph Schumpeter said. Technology, markets and customers all change. We can at least hope that bosses reflect on the duties they owe and the impact they have on the world while running their companies. They are, after all, getting very well paid to do so.
• Stefan Stern is co-author of Myths of Management and the former director of the High Pay Centre
