Written By: Tom Ogg
The failure of Thomas Cook, a 178-year old travel company stranded some 500,000 people across the world and left millions with future travel plans booked with Thomas Cook up in the air. And, this wasn’t the first large financial failure during 2019. In March, Iceland’s WOW Airlines closed its doors forever with virtually no fore-warning. India’s once largest private airline Jet Airways collapsed in April.
So How in the World Did Thomas Cook go Bankrupt?
There are actually several reasons why and how a travel company goes bankrupt. So let’s quickly go through the most obvious in 2019.
Cash Flow: Having owned and operated a wholesale tour company, I can tell you without question, that Thomas Cook was operating on cash flow – not profits. Virtually all tour operators are on an open account with their suppliers and are billed based on voucher lift from the client. The client pays a deposit to the tour company (usually within 14-days of confirmation) then they pay final payment at least 30-days before departure. When the client presents the voucher while using the services, that voucher makes its way through the supplier’s accounting process and subsequently issues and invoice to the supplier for the services used by the client. The tour operator then reconciles the invoice with the client’s file and pays the supplier. This process usually takes 2 to 3 months.
While the ethical way to treat these funds is to hold them in trust until disbursed to the supplier providing the services, many tour companies use the cash flow without distinguishing that it is actually not their funds. In the case of Thomas Cook having stranded 500,000 passengers, that is fully funded 500,000 individual files. Even at a minimum of $1,000 per file, this represents at least $50 million dollars in cash flow at any given time. At some point the CFO, CEO and board made the conscious decision to start using the cash flow, or client deposits and final payments, to run the business.
This works until there is no more cash to pay bills with. Hence, 500,000 people are stranded somewhere in the world with travel vouches that suppliers know are no good. And, this doesn’t account for the hundreds of thousands of people that have both deposited and paid final payment for future travel that they will never see.
The Sharing Economy: When Airbnb launched in 2008 it was hard to conceive how the sharing economy would impact the travel industry at large. The sharing economy started with virtually no market penetration and very little revenue.
Fast forward today and it is huge companies like Airbnb, VRBO, HomeAway, Flipkey, Uber and many other companies cashing in on this paradigm. Projections are that by 2022 the sharing economy in travel will represent over $40.2 Billion dollars in revenue. The leaders in this fantastic growth will be Airbnb, Uber and a host of other companies that have evolved.
Hotels, resorts, sightseeing companies, tour operators and travel agents have felt the blunt force of the sharing economy which moves consumers that may have purchased a tour or made a reservation at a resort to have them deal directly with the owner of a property. This reality represents a huge drain of revenue away from orthodox industry distribution to a process which bypasses it.
Millennial Travel: The Millennial generation (born between 1981 to 2000) represents over 25% of the total U.S. population and has significantly different travel patterns than former generations. Millennials were brought up online and also during a recession. Their social media experience on Facebook, Instagram and Snapchat tend to define their view on travel.
Millennials seek unique and experiential travel events that will make great social media posts. Many time millennials will see Instagram pictures from a friend’s vacation post and make a decision to visit the destination based solely based on the pictures. While they do think nothing of booking online they do seek the specific knowledge and experience of a travel professional. They look for local experiences and will not take an organized tour at all cost.
A New Paradigm
These three elements of the Thomas Cook failure are affecting all travel companies. They are affecting hotels, resorts, car rental companies, sightseeing companies, tour operators and a vast network of organizations in the various travel distribution channels. And, the expansion of the sharing economy and millennial travel is only going to impact travel distribution even more dramatically.
Will there be more failures on behalf of travel distribution companies? Of course there will. So the questions becomes “How do I protect my client from a potential failure of their travel supplier?” There are three things that you should do on every sale to every client.
Sell Third Party Travel Insurance
Talk to your travel insurance provider to see exactly how your clients are protected in case of the financial failure of one of the suppliers that makes up your client’s vacation. This is just one of the many benefits travel insurance will offer, but it is an important one during this current paradigm. Remember that each client has a different tolerance to risk, so completely understand your client’s and make sure that you are offering the insurance policy that meets their specific requirements.
If your client declines travel insurance be sure to have them sign a waiver disclosing that they are not covered in case of supplier financial failure. If a travel insurance company is not willing to insure a specific supplier, do not book that supplier even if the offer to the client is too good to be true. The insurance company knows who may be having financial difficulties and who isn’t.
Have Your Client Use Their Credit Card Only
Do not issue an agency check to pay suppliers and do not let your clients use cash, checks or debit cards to pay suppliers. Many credit cards offer substantial travel benefits such as bonus miles, free checked bags, trip cancellation or delay, lost luggage, luggage delay, auto rental primary insurance, emergency medical evacuation, emergency medical and travel accident insurance. The very nature of using a credit card for travel indicates that a charge (even if the client has already paid) may be disputed for “Failure to Provide Services”.
Be Cautious About What You Sell
Remember that a company operating on cash flow rather than profits will likely offer travel deals “to good to be true”. This happens when a tour company, hotel, resort, airline, sightseeing company or whatever is running out of cash and their position is becoming critical. I well remember before Hawaii Express closed its doors it was offering two free round trip tickets for future travel to Hawaii with the purchase of one ticket now. Just remember that if it sounds to good to be true, it probably is.