Western European countries have been continuously experiencing a rise in in corporate
collapses by a margin of 0.3% in the last decade (Bloomberg, 2019). A rise in the number of
corporates filing for bankruptcy is associated with an increase in the number of insolvency
–related occupations lost. No sector in the economy is immune to this type of phenomenon
and hence the tourism and travel industry is thus among the major sectors affected (Bredar,
2014). Previously, scholars have looked much unto the issue with an aim of investigating
business creation procedures, growth strategies adopted and market expansion techniques
used by firms to maintain their market positions. One thing however that has kept scholars in
the darkness is the existence of risks that mature and effectively result to the failure of firms
(Balcaen et al., 2012). Failure of a firm is considered when the firm exits its industry of
operations or ceases to run its business operations within its specific industry (Breder, 2014).
The major causes thought to cause exit of a firm from business operations include
underperformance that result to the firm’s incompetence in the business environment due to
bankruptcy (Balcaen et al., 2012).
Bankruptcy is a business risk that affects both companies and their shareholders. An analysis
into the impacts of bankruptcy have been found to affect how various companies formulate
their strategies more particularly firms operating within a certain economic sector (Arroyave,
2018). The concept of bankruptcy can be defined as a system that analyses the firm’s
financial crisis development. Different scholars have come up with various models to help
companies to calculate their possibilities of running bankrupt in the near future however
different models demonstrate various results especially when it comes to pinpointing the
various causes of bankruptcy among companies (Armeanu et al., 2015). This research
therefore is aimed at conducting a deep investigation into the main causes of bankruptcy
among firms while using the case of Thomas Cook for purposes of research.
The case of ‘Thomas Cook Group’s’ bankruptcy has gained a lot of attention from both
scholars and practitioners who have come up with different causes that are thought to be
behind the giant’s failure (BBC News, 2019). Thomas Cook Group was formed by Mr.
Thomas Cook who was a cabinet marker way back in the year 1841. The company has its
first operations in carrying train supporters in the cities of Derby, Nottingham, Leicester and
Birmingham. The company has been running its operations within the hospitality and tourism
industry by providing its customers with airline services, cruise lines, resort services, hotels
and holiday packages (Cadler, 2019). Due to the company’s competency in providing
customers services in the hospitality and tourism industry around the globe, the company was
being given the tittle ‘The father of tourism’. Thomas Cook Group however started facing
difficulties in meeting customer transition in consumer buying behaviour years later
(Bloomberg.com, 2019).
1.2 Research aim and question
The main aim of this research is to investigate the causes of bankruptcy among firms while
using Thomas Cook Group as the case study. In achieving its main aim, the research will seek
to answer the following research question.
What are the main causes of bankruptcy in Thomas Cook Group?
1.3 Research rationale
The collapsing of Thomas Cook, a travel agency that was most acclaimed in Britain is being
viewed as among the largest corporate Disasters that the country has ever experienced. The
company’s fall led to a number of foreigners in the UK remaining stranded as a result of job
loss (Amankwah-Amoah & Wang, 2019) Different scholars have made tremendous attempts
of looking unto the matter with the aim of establishing the major causes behind collapsing of
firms within the hospitality and tourism industry giant in the UK. According to scholars the
strength of any company in terms of ways through which customers identify themselves with
the brand name can be used in predicting future collapsing of a firm (Amankwah-Amoah &
Wang, 2019). This works in the sense that consumers wish to identify themselves with strong
brand names. The strength of a brand name is determined by factors such as the listing of the
brand in international stock exchange markets and formation of partnerships with
international and well known firms (Inmaculada, 2017). Other factors that are used in
predicting the collapsing of a business firm include the company weaknesses, which result
from high operating costs, opportunities which are associated with the company’s ability to
venture into new market segments and threats which can be explained as the changes
experienced by firms within their business environments (Alaminos et al., 2016). With all
these however, there is little and undependable research that has been conducted to
specifically identify the causes of corporate collapse. Consequently, much of previous studies
conducted under this particular topic concentrated mainly on prediction of firm failure using
different models (Adalessossi, 2015). This study therefore is aimed at identifying the major
causes behind corporate failure. Findings from this study can be used by corporates to predict
failure thus issues like cause of firm failure remain largely understudied. They can also be
used by future scholars who will be interested in studying corporate failure and bankruptcy
and therefore they can use this research as a point of reference and to identify future research
gaps.
1.4 Structure of the research
This research is presented in three sections that are divided into chapters. The first chapter
entails the background of the study, research aim, research question and rationale of the
study. The second chapter highlights work of previous scholars who took time to look into
depths of the topic under study. The last chapter presents the methodology part where steps
taken by the researcher ducting data collection have been highlighted and research
conclusions drawn.
Chapter two: Literature review
2.Introduction
This chapter was aimed at developing a theoretical framework through reviewing previous
literatures as far as causes of bankruptcy are concerned. The first part of the chapter looks
more unto the concept of bankruptcy and the second part give brief explanations on the
causes of bankruptcy.
2.1 The concept of bankruptcy among firm
During the identification of studies that have been conducted to investigate the causes of
failure among corporations, the various definitions given for the term failure are depended
upon (Altman, 2017). Therefore, the concept of firm failure varies from the shallow
definition given for the concept of bankruptcy or rather permanent firm insolvency to a
simple description of poor firm performance that hinders the firm from achieving its goals
(Altman, 2017). Under normal firm circumstances, firms do not just become bankrupt
instantly but they tend to go through a process leading to failure whose length varies from
one firm to another (Rahms et al., 2013). Notably the failure of large corporation is
characterised by a lengthy process while small medium enterprises failure emerges in a quick
manner (Trott et al., 2016). Bankruptcy is being viewed to the final process which the firm
undergoes in the decline process which is thought to have a total of five stages (Trott et al.,
2016).
A good number of theoretical studies have failed in the definition of measures undertaken in
predicting a firm’s health during the process of failure however their suggestions are that
there are various indicators used to predict bankruptcy in firms (Prusak, 2018). Bankruptcy
has been suggested by different scholars to be an indicator of business collapse. Bankruptcy
can be predicted using deterioration of firms’ financial situations whereby firms try to escape
bankruptcy by taking corrective measures (Prusak, 2018). Effective tools for failure forecast
have been introduced with aim of helping firms predict the risk bankruptcy so as to mitigate
any losses that maybe incurred (Soo, 2018). The tools are also effective in acting as warnings
to insolvency as well as allowing firms to familiarise themselves with a crisis while it is at
early stages (Tian & Yu, 2017). Bankruptcy prediction tools have also been essential in
helping firms to take actions in favour of recovering their financial situations so as to realize
the company’s going concern.
2.2 Causes of Thomas Cook Group’s failure
Research has it that various reasons are anticipated to push the collapse of firms around the
globe. Among the most commonly mentioned causes for the collapsing global corporations
worldwide is Brexit (Cadler, 2019). Business scholars researching unto the impact of Brexit
in businesses have concluded that Brexit process has impacted negatively on many UK
corporations among which firms from hospitality and tourism industry are included ( Garcia
et al., 2019). This is because the business environment is facing uncertainty resulting from
the delayed Brexit negotiations. Thus one can easily conclude that Brexit contributed in one
way or the other to push firms such as Thomas Cook which has already started teetering
closer to the edge. Firms such as Thomas Cook Group have not been able to keep up with
changes regarding consumer preferences. According to Garcia et al., (2019) another way that
Brexit contributed to collapse firms the likes of Thomas Cook is due to summer holiday
delays that were delayed by Brexit in May 2019. As a result, the business environment
experienced uncertainty whereby the company’s Chinese Shareholder ‘s efforts to save the
company was unfruitful since the company had had uncontrollable debts that has been laid to
the company’s liquidation (Cultera, 2017). Another aspect termed by researcher to have
contributed significantly to the collapse of Thomas Cook, is the concept of weather. Weather
is an essential determinant of business performance especially among tour operators such as
Thomas Cook (BBC News, 2019). The year 2019 had the UK experiencing summer
heatwave which encourages holidaymakers to remain at home and thus pushing up of flight
prices of tour operators. Research also has it that in the year 2010, Thomas Cook Group
experienced a bad year as a result of volcanic ash clouds which emerged from Iceland and
brought a disrupt in flight operations across Europe (Bredart, 2014). However, scholars again
suggest that firms should find new tricks to manage such risks.
Competition from other firms operating within hospitality and tourism industry is another
factor that led to the collapse of firms within hospitality and tourism industry. The business
environment has experienced various changes which most of them are as a result of
technology that had changed consumer behaviour trends (Cultrera et al., 2017). Online
competition is the most commonly discussed form of competition among firms. The 21 st
century, has brought a lot unto the consumer buying behaviours whereby consumers value
digitalisation of company services. According to previous studies on the failure of Thomas
Cook, the company solely depended on its own physical shops, consumer word of mouth and
their own travel endeavours (Cadler, 2019). These techniques contributed greatly to the
firm’s lagging behind while competitors had gotten themselves deep into the online presence
where they reached out to potential clients and provided them with fair deals a far as air flight
tickets and holiday packages were concerned (Grunberg & Lukason, 2014). The dependency
of firms on their physical activities with consumers switching their buying behaviours to
online purchasing led to the demise of different companies’ capital reserves. The company
hence lacked financial fronts as debts kicked in and started burdening the firm. As stated by
Cadler (2019), Thomas Cook Group failed simply because of issues concerning its finance.
The company had also spent the profits it had gained in the previous years to pay off fines.
Consequently, Thomas Cook had huge supplier debts. The week UK, (2019) found out that
Thomas Cook’s failure resulted from piling of debts and its inefficiency to enhance customer
retention. With the UK having over 560 stores, consumers have consistently shifted their
shopping trends from high steer to online shopping (Farah, 2018). Researcher have done
investigations and found out that in the year 2007, Thomas Cook Group merged with a UK
based travel company (MyTravel) a merger that ended up a disaster. This is because Thomas
Cook had huge debts which proved that the firm had no ability to manage the merger.
Besides MyTravel has been incurring losses over and over since the year 2001 and they have
only reported profits once (Grunberg & Lukason, 2014). The effect of the merger was felt
later in May 2019 when Thomas Cook Group recorded a loss of $1.5billion and had no
ability of handling any debts.
The company’s business model greatly affected the rescue of falling firms once the decline
process begun. Thomas Cook’s business model for instance deals greatly in makes of
purchase of bulk holiday purchases in months’ advance and then sealing the deals (Liang et
al., 2016). Previous scholars in business term such actions as extremely risky as in case of
disruptions resulting from terror attack, unanticipated heat waves, cash flow variation and
occurrence of uncertain situations which may cause inconvenience in the travel industry can
easily weaken the company’s financial strength (Liao & Mehdhian, 2016). Alongside the
company’s business model, greed of the company’s executive is another aspect that has
contributed to the collapsing of companies. According to investigations, scholars revealed
that the Greed among management individuals can lead to financial distress within a
company (Nik et al., 2016). For instance, the company’s chief executive officer in the case of
Thomas Cook has been previously involved in an £8milliom fraud in terms of salary and
bonuses associated with the company for a minimum of four years (Bloomberg.com, 2019).
When greed and dishonesty is demonstrated by the company’s management its leads to
depletion of organisational interests as far as company management is concerned hence
bringing the firm down at a quicker rate (Farah, 2018).