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Thomas Cook faces long-haul struggle to profitability

The travel firm has axed its dividend, and the departed chief executive could help by waiving his payoff

Its chief executive was dropped last month, now Thomas Cook is getting rid of its dividend. Shareholders should not expect to see it again soon: the struggle with debt will be a long haul.

The bald arithmetic looks like this: at the seasonal high point at the end of this calendar year, borrowings should peak at £1.4bn-£1.5bn (from almost £900m now), which is clearly too much for a business that will make top-line operating profits of about £315m. Even with the benefit of lower levels of borrowing during spring and summer (when punters pay for their holidays), interest payments are consuming about a third of profits – that’s a risk too far in an industry where fuel prices, and even volcanic ash clouds, can cause havoc.

The solid element in Thursday’s self-help plan is Thomas Cook’s ability to raise at least £300m quickly to reduce debt. Scrapping the dividend will save £90m; £200m will come by flogging a few hotels; and unprofitable shops can be shut when their leases expire. That should reassure the company’s bankers, with whom “constructive” discussions are taking place. And, for shareholders, there is hope that a panicky rights issue can be avoided.

But Thomas Cook still has deep problems. Even before paying its monstrous interest bill, it is making only £16.45 profit per passenger. The internet and low-cost airlines have transformed the industry, and Thomas Cook has been too slow to respond. Its troubles are most acute in the UK, where staff will presumably bear the brunt of the “efficiency” drive. If those margins could be improved to, say, £20-£25 per holiday, the debt challenge would look less daunting. But, given the squeeze on consumers, there’s no knowing when the destination will be reached.

Mind you, Thomas Cook – having suffered a 90% collapse in its share price since 2007 – could save a few bob by asking Manny Fontenla-Novoa, the departed chief executive, to waive his payoff, said to be as much £1m. After earning £14.5m in four years in pay and bonuses, the charming fellow surely would wish to show solidarity with his former staff. Wouldn’t he? © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds