Chapter 6: Thomas Cook - Catalyzing Change

In April 2003, Stefan Pichler, CEO of Thomas Cook AG,^[*] looked over the interim financial report from the UK and Ireland business with satisfaction. Despite savage shocks to the travel industry over the past two years, the organization he had bought was now turning in the kind of profit he had projected. He had supported the bold steps the Thomas Cook UK and Ireland leadership team advocated to transform the operation from a sleepy, fragmented operation to a successful player in the competitive UK travel industry. His international company had not only adopted the Thomas Cook name but also was watching its subsidiary’s transformation program with increasing interest.

Manny Fontenla-Novoa, Thomas Cook’s new CEO, was extremely gratified with the organization’s accomplishments to date. It had taken out 140 million ($233 million) in costs over the past 20 months. He knew, however, that slimming down the cost structure was only the beginning of the journey. He considered how to achieve a second step-change in the organization’s performance: a radical improvement in top-line growth.

Background

In early 2003, Thomas Cook, headquartered in Peterborough, UK, employed over 13,000 people and operated through a network of 650 travel shops. Wholly owned by Thomas Cook AG (formerly C&N Touristic AG), Thomas Cook was part of one of the world’s largest travel groups (see Exhibit 6.1).

Exhibit 6.1: Selected financial statistics.

As well as having 650 Travel Shops and over 700 Bureaux de Change, the organization operated a tour-operations business that included brands such as Signature, Cultura, JMC, Sunset, Neilson, Club 18–30, Style Holidays, Sunworld Ireland, and an airline with a fleet of 24 aircraft— Thomas Cook Airlines. Thomas Cook also had one of the largest direct travel businesses in the country, taking bookings over the phone and teletext. In addition, it boasted one of the leading Internet travel businesses and a television channel.

For decades, Thomas Cook Group had been used by a series of clever parent organizations in a variety of ways, from a source of cheap capital to a strategic foothold in the travel industry. From 1948 through the mid- 1990s, as it was traded from team to team, it continued to buy up smaller UK companies in retail travel, package tour operations, and charter airlines (see Exhibit 6.2). In 1999, it was owned by Carlson Leisure Group (22 percent); Westdeutsche Landesbank (27.9 percent), Germany’s third largest bank; and Preussag AG (50.1 percent), a German industrial and steel company that was in the process of converting itself into a travel operator.

Exhibit 6.2: Thomas Cook (TC) key events, 2000–2002.

By early 1999, Thomas Cook had been managed for 20 years by financiers. In addition to offering travel in the UK, Ireland, Canada, India, and Egypt, it also included a financial company that issued travelers checks and exchanged foreign currencies worldwide. The 162-year-old company’s brand was widely known and well regarded, but its leadership had never seen the merits of integrating all the acquisitions they had made over the years. Alan Stewart, the chairman of the financial services side of the company at the time and chief financial officer of the group, recalled: ‘‘I pushed our shareholder company to take the decision to split the business into two halves. So we put a legal structure in place that allowed us to operate as two separate companies. When we pulled the travel business out from under financial services, we realized it was losing money.’’

The ‘‘battle for the beaches’’ reached fever pitch in 2000, when C&N Touristic AG, one of Germany’s largest travel groups, made a bid for Thomson Travel, the UK’s holiday travel market leader since 1974. Preussag stepped into the bidding, ultimately paying 1.8 billion ($2.995 billion) for Thomson. However, to get EU approval for the acquisition, Preussag agreed to sell its stake in Thomas Cook. In a complex deal, the financial services half of Thomas Cook was sold to Travelex for 440 million (732 million) and the travel half to C&N Touristic for 550 million ($915 million). According to Stefan Pichler, C&N’s chief executive, ‘‘Preussag have paid DM 189 million [$432.5 million] per percentage point of UK market share [for Thomson]. We will pay DM 121 million [$276.9 million]. Preussag bought Thomson on a multiple of 17.5 times earnings. We will pay 12.5 times earnings.’’^[1] The deal was final on April 1, 2001. Within a few months, C&N Touristic had adopted a new corporate name, Thomas Cook AG.

^[*]For simplicity’s sake, I will refer to the parent company as ‘‘Thomas Cook AG,’’ and the UK and Ireland subsidiary as ‘‘Thomas Cook’’ throughout the book.

^[1]Dominic O’Connell, ‘‘Proposed Takeover Would Put German Firms Ahead in European Holiday Industry,’’ Sunday Business, December 24, 2000.