The Failure Of Thomas Cook: Inevitable, But A Long Time Coming

Forbes Finance 2 weeks ago
GERMANY-TRAVEL-THOMASCOOK
This picture shows an aircraft of Thomas Cook airline on September 24, 2019 at the airport in ... [+] Duesseldorf, western Germany. (Photo by INA FASSBENDER / AFP) (Photo by INA FASSBENDER/AFP via Getty Images)

Thomas Cook’s dramatic collapse, which activated the biggest airlift ever undertaken in peace time, returning holiday makers to the U.K. organised by the U.K. Civil Aviation Authority was inevitable. And it has been inevitable since the deregulation of European air transport in 1991. That it stayed in business as long as it did is a credit to it and its famous brand and reputation.

It is difficult for an observer in the U.S. to appreciate how important aviation industry deregulation was to Europe. In effect, it turned Europe into single aviation market, something that the U.S. always was. Before that, all flights across Europe were subject to the restrictive framework built up around aviation’s regulatory cornerstone, the Chicago Convention of 1944. For many years, services between two countries (even as close as, say, France and Germany) were limited to the number of services agreed between the governments of France and Germany. Those governments then allocated the services negotiated to airlines designated to fly those services. A designated airline had to be ‘substantially owned and effectively controlled’ by nationals of the country bestowing those rights to operate.

Thus, to overlay a map of Europe over continental America, flights between New York and Chicago, for example, would require specific approval from both the states of New York and Illinois. The opportunity for each state to try to limit the other state’s airlines was seldom overlooked. The airlines themselves suggested only agreeing to volumes of new services that they knew they could operate profitably. Almost inevitably, the airline that took advantage of these rights was state-owned and incorporated the name of the country in its name: think British Airways and Air France.

Given the airlines had locked capacity down to the level at which aircraft were always full, the summer peak period was a problem. How to accommodate holiday makers wishing to find sun and sand? The solution was to give authorisation to charter airlines to serve that market. Charters have always been outside the exchange of rights regime of the Chicago system. They were always acknowledged as a thing, but granting a charter a route authority did not count against the capacity exchanged formally. That allowed the summer peak to be addressed, but it did require that those getting this capacity to be ‘charters.’

Once, that meant that all of the passengers had a common reason to be together – they were members of a club, or an association or something like that. Into that space rode the package tour companies. Their definition of a common cause was that all of the passengers on the flight were going on a package holiday. Sometimes, even to the same hotel. Thomas Cook, the oldest and most venerable of package tour arrangers started its own airline to meet their demand. Other charter carriers, like Monarch, also profited from this loose definition. In the strictly regulated world of European aviation, this was a helpful escape valve for summer peaks.

In Europe, deregulation came in the form of the Single European Aviation Market in 1991, which allowed a European airline to establish itself in any European country and to fly between any two European points.  More importantly, it also took away any and all capacity limits between member states. The charter carriers lost their U.S.P. Once the low cost carriers arrived, the game was up for the Charter operators. They gamely plugged on, trying to find markets that they could sell, and to behave like any other airline in the market, with scheduled services (in the case of Monarch) and promoting their package tour offering (in the case of Thomas Cook). The internet did not help either. Increasingly, package tours are a thing of the past, as consumers do their own research and booking of the various elements of their holiday. 

The CEO of Ryanair, Michael O’Leary, said that the package tour market was ‘finished.’  In part, for that we can blame the internet, but also the fact is that the generation new low cost carriers do not have to carry all those years of built up work practices and pensions and older aircraft. They can fly to any sun and sand, or sun and snow, market and inevitably, do so with lower costs. 

There is now a hue and cry about why the U.K. Civil Aviation Authority renewed Thomas Cook’s licence at the start of this year – to be a financially fit and proper person is one the tests the CAA is supposed to apply. Perhaps it was for old time’s sake. Maybe the CAA could not imagine a world without a Thomas Cook. But O’Leary is right. The low cost carriers and the ubiquity of information make being a charter airline a very difficult road to hoe.  

Tags: Business

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