Thomas Cook was brought down by incompetence, not boardroom greed

Almost a week after the collapse of Thomas Cook, the cost of failure looks as severe as feared. Repatriating 150,000 holidaymakers could mean a bill of £100m. Hoteliers have to be compensated, probably to the tune of tens of millions of pounds. And the biggest cost involves refunding customers for future bookings. The whole bundle could run to £500m. The travel industry has an insurance scheme, but taxpayers could still be on the hook for a shortfall.

Consideration must also be given to the pain caused to employees and customers. On social media, you can find desperate former Thomas Cook airline crew and branch staff appealing for new employment opportunities. Operation Matterhorn, the Civil Aviation Authority’s repatriation effort, has been slick but holidaymakers have nonetheless suffered stress and disruption.

Should the government have saved Thomas Cook instead? No. That argument was aired immediately after the company’s collapse but its credibility has weakened by the day.

Thomas Cook was in an ugly financial state. Even a £200m contribution from public coffers to a wider creditor-led £1.1bn restructuring plan might not have been enough. The high court witness statement from the company’s chief executive, Peter Fankhauser, described a balance sheet deficit of £3.1bn. Frankly, Wrightbus, the Ballymena-based Routemaster bus company that was last week’s other major corporate collapse, had a better claim for public rescue – and it wasn’t saved.

Postmortems on Thomas Cook’s collapse, however, are essential. The Insolvency Service and the Financial Reporting Council will do their work but the inquiry by the business select committee, chaired by the Labour MP Rachel Reeves, will be the first step.

Reeves should not be too obsessed with her idea that the downfall of Thomas Cook “appears to be a sorry tale of corporate greed”. Yes, £35m in pay over 12 years for the past three chief executives looks appalling, but treat the numbers with care. Of Fankhauser’s notional £8.4m haul, about £4m seems to have been in the form of shares he held until they became worthless.

Incompetence and hubris in the boardroom look to be the direct causes. Fankhauser, in post for four years, and Frank Meysman, chairman since 2011, must explain why they didn’t fix a fragile balance sheet when it seemed possible.

The stock market valued Thomas Cook’s equity at £2bn as late as May 2018. Shareholders would not have cheered a rights issue to raise, say, £500m at that point, but the job of directors is to take the long view. Fankhauser and Meysman could have pitched a reasonable argument along these lines: repay some debt, lower the interest costs and allow more investment in new, company-owned hotels, the focus of the turnaround strategy.

In November 2017 in the annual report, Meysman wrote that “a highly competitive environment … has contributed to the collapse of a number of competitors in the last 12 months”, so he was clearly aware of the external risks. Given that Thomas Cook itself almost failed in 2011, reducing debt should have been the absolute priority. The most astonishing statistic in the whole saga is that the company paid £1.2bn in interest charges after 2010.

As for the accounting angle, Reeves’s committee must ask why Thomas Cook recorded so many one-off charges and “separately disclosed items” over the years. The company was in restructuring mode, so heavy use of exceptional items is not unusual, but EY, after it took over from PwC as auditor in 2017, challenged some of the treatments. Why hadn’t the company’s own audit committee done so previously? There must also be an explanation of why a £1.1bn goodwill writedown on the purchase of MyTravel appeared in the interim results only this year – the acquisition itself happened in 2007.

Fankhauser and Meysman, no doubt, will issue grovelling apologies to the committee. That’s the usual form for directors who have failed. It’s an explanation for their actions, though, that former employees deserve to hear.

If recession is looming, governments must start spending now

The economic optimists reject the suggestion from the International Monetary Fund and the Organisation for Economic Cooperation and Development that everyone should prepare for a global recession, arguing that these institutions missed the last financial crash and are desperate to avoid a repeat of their mistake, even if it means forecasting the next one many years before it actually happens.

In her first public statement after being confirmed as the new head of the IMF, Kristalina Georgieva said last week that the global economy needed to be ready to cope with a fresh economic downturn. The week before, the OECD’s chief economist, Laurence Boone, was notably downbeat, citing the chilling effect of Donald Trump’s trade war with China and the uncertainty created by Brexit as reasons to be gloomy.

The main message from both organisations was directed at governments, which they believe must be prepared to step up their spending now that the private sector has seen the warning signs of recession and stopped investing.

The last time the global economy dealt with a shock, governments played a part in the rescue. That was in the days when leaders such as Gordon Brown could command the attention of his peers in arguing for a comprehensive and costly lifeboat. Then, after the 2008 crash, the job of rebuilding crisis-hit economies was left to central banks. Hence the era of ultra-low interest rates.

The justified fear is that the next crisis will be characterised by governments pleading poverty to justify inaction. Either they will argue they are bereft of the necessary funds or that borrowing is already too high.

Georgieva knows central banks have little firepower left after a decade of providing cheap money, which is why she is right to call on governments to open their wallets now, and not wait until it’s too late.

EDF is well insulated from cost of nuclear power

The UK’s first new nuclear plant in a generation was once expected to cost £12bn. Today, Hinkley Point in Somerset is expected to cost almost double that, and there is no guarantee costs won’t continue to climb.

The latest estimate revealed last week by French energy group EDF piled an extra £2.9bn on to the cost of the project, which could reach £22.5bn by the time it begins powering British homes in 2025.

EDF delivered the news with a shrug. After all, it is not the first time the French nuclear giant has admitted that work on the Somerset site will cost more and take longer than it first hoped. And it won’t “add a penny” to home energy bills, it said.

But the cost increase raises difficult questions over the government’s plan to support another of EDF’s nuclear projects, at Sizewell in Suffolk, by putting the taxpayer on the hook for cost overruns.

The government argues that a funding model which shares the financial risk between EDF and British energy consumers would lower the overall energy cost. But given EDF’s track record on cost overruns, many wonder whether the risks are worth taking at all.

More worryingly, there are new questions over whether British homes are already paying too much to cushion EDF against the risks at Hinkley. A £2.9bn overspend is no small beer, but EDF will take it on the chin because, despite the multibillion-pound overrun, Hinkley is still a profitable venture. The company expects its rate of return for the project to fall from more than 9% when the deal was first struck to a still-respectable 7.7%.

Which raises the question: if the Hinkley nuclear deal was generous enough to cushion EDF against its own cost overruns, was it a good deal for bill payers? And should ministers be striking another?