This is a great example of how capitalism fails to produce good outcomes for anyone but other capitalists.
Remember: free markets make things more efficient, they say. Regulation is inefficient, they say. Regulation of markets also can prevent companies from just handing customers a great big screwing if it’s convenient for them to do so. Consider the case of Thomas Cook Travel. [nyt]
LONDON – Hundreds of thousands of vacationers were left stranded when one of the world’s oldest tour companies, Thomas Cook, abruptly announced Monday, with some of its flights still in the air, that it was going out of business.
Amid scenes of confusion at European airports, British officials scrambled to bring home 150,000 travelers, chartering dozens of jets to bring people home from as far away as Malaysia. It was described as the largest peacetime repatriation effort in the country’s history.
That’s one of those “externalities” that affects everyone’s balance-sheet suddenly. What did it cost the British government to charter jets to get citizens back home?
Please wait while we re-book you on “go hitch a ride on the side of the road.”
I particularly like the part about how they announced they were shutting down while some of its flights were still in the air. Did they expect the pilots to just slap on a parachute and jump out the door, or something? The pilots, presumably, flew the rest of the way to a safe landing and then were informed that they weren’t getting a paycheck and, oh, your benefits have all been stopped, too.
If Thomas Cook’s customers were surprised, British officials had less reason to be. The government had refused to mount a financial rescue of the battered company; doing so, Mr. Johnson said, would create a “moral hazard” by encouraging other troubled companies to take undue risks.
It was unclear, however, what steps, if any, the government took to prepare for the possibility of hordes of stranded travelers.
That’s all horseshit. Here’s why: when your business is faltering, you owe it to your customers and employees to try to protect them from exactly this kind of thing. The government failed in its regulatory capacity by not telling the company, “look, you’re headed for the big dirt nap, start trying to figure out how to cut the damage to your customers and not coincidentally to the government and wind this thing down carefully.”
Back when I was the founder and CEO of NFR, I had 15 employees at the time when we decided we needed to raise another $1.5million to grow faster and increase the size of the operation. I called a company meeting and explained the situation: we could get crushed by our competitors who had way more money and staff to get more work done and do more marketing, or raise money. And, I could wait until we had the money, or start hiring now with the risk that if we didn’t raise the money in time we’d be in serious trouble. It was not a democracy – I owned the decision completely – but it felt right that I was able to get an OK from the staff to risk their livelihoods. As it happened, the tech market took a hit around then and suddenly it was hard to raise money. I had to have another meeting 2 months later in which I said “this is how much runway we’ve got and you may want to have resumes on the street in another month because if we don’t land this in 3 we’re going to have to let some people go.” It was tough because most people who work for start-ups are not used to that level of disclosure; it’s as though some of them would prefer to show up for work and find the office locked, as has happened to a few tech companies, and – apparently – Thomas Cook. In the end, things worked out OK at NFR; I landed the money and grew the company up to another 100+ staff, unfortunately taking a tranche of money from investment bankers who put their guy in as CEO, and he burned through all the company’s capital then sold it at a fire-sale in 2 years.
Analysts said Thomas Cook, struggling with a debt pile approaching 2 billion pounds – nearly $2.5 billion – had failed to adjust to the changing times. While other travel companies went totally online, for instance, Thomas Cook held onto its extensive chain of storefronts.
In other words, the only people who were surprised by this were the customers and the other people who depended on the company. The other capitalists, the “analysts” were reading all the mandated financial disclosures and they could see what was coming. They didn’t say anything, and the government didn’t do anything, because … don’t scare the punters?
“If the majority of your business is in destinations which are in euros and you are against the backdrop where there is a lot of capacity and you cannot raise prices, then there is a cost squeeze,” Chris Tarry, an independent airline analyst, told the BBC.
That is what “being in business” means: looking ahead and trying to figure out what is changing in the environment. Executives need to expect the unexpected and not just set a course and hope for the best; that’s what being an executive is all about. I’m sure that when the Icelandic volcano Eyjafjallajökull screwed up travel in 2010, it impacted travel companies’ revenues. So what? They’re supposed to be able to deal with that by taking profits when they can and having a cash cushion that will let them weather hard times. Being able to deal with Brexit or fuel price surges or whatever – that’s what you’re supposed to do, and if it means you have to warn your customers, then you bite the bullet and discount your fares to offset their risk aversion. Or, you shut your business down 6 months earlier than Thomas Cook did, so you still have working capital to implement a graceful shutdown.
What a shithole
What really angers me about this story is that it appears to have been obvious to everyone except their customers that Thomas Cook was on its last legs. Well, if that was the case, they could have looked at their financial overhang – what services did they owe customers – and reimburse them or arrange transportation on other carriers, or whatever. Sure, it would be hard work and it would be painful for the staff, who would be told, “we’re shutting this down, you’ve got 6 months of work and it’s going to be hard work, and you should get your resumes out immediately.” Yes, that sucks. But it’s almost as if…
Wait, could it be? Could it be that the bosses kept the machine running a bit longer so they could milk it before they parachuted out? Nobody’d be that cynical, right? Not even a capitalist. [sun]
THOMAS Cook bosses raked in £47million from the doomed travel giant before it collapsed leaving 150,000 Brits stranded, it has been reported.
Chief executive Peter Fankhauser took home £8.4million since 2014, including £4.6million bonus payments.
Fankhauser’s £2m estate was rented for him by the company; I bet it was a real kick in the teeth for him to have to go on AirBNB and find another £6000/month mansion on short notice. Oh, wait, he knew this was coming. His 21,000 employees didn’t and neither did his customers.
This is also a prime example of why executive pay should have an upper limit. A CEO just should not even be legally allowed to rake in several hundred times the pay an average employee of the company has. Five to maybe ten times the average should be more than enough.
It would make it impossible to skim away money and also it would incentivize the CEOs to pay their employees higher wages since the more they pay to their employees, the more they can take for themselves.
Won’t happen. We are doomed.
Gee, it’s almost as if money and power could corrupt a person.
We are so fucked.
https://www.vox.com/policy-and-politics/2019/6/26/18744304/ceo-pay-ratio-disclosure-2018
A graph embedded in the story shows the ratio going back to 1965, when CEOs made about 20 times what their workers made. Greedy bastards.
When this story appeared I experienced that peculiar form of deja vu which occurs when you actually have seen practically the same thing happen before.
After a quick google I realised it was because Thomas Cook basically cratered in 2011, requiring a big chunk of change to stay afloat and getting it, possibly in exchange for a change of leadership. This company has been going under for close to a decade, it’s not remotely surprising.
The other thing worth noting is that the company was in talks regarding another rescue, which fell through for reasons I shouldn’t speculate about, but cynicism suggests made somebody a decent amount of cash.
This was avoidable but they chose to cause this mess. They knew, and they didn’t tell anyone until the most inconvenient moment. But because it’s a corporation, those to blame walk away blameless. If a privately owned company or small business took in revenue and then closed the doors without providing a promised product or service, there would be hell to pay. I’ve seen small businesses close, and they tell the public, “No new orders after month/date” while still fulfilling their final agreements to existing customers.
As usual, “Limited Liability Company” means **no** liability. The CEOs and shareholders assets should be seized and forced to foot the bill, but they won’t.
About the only consolation in all of this is that the £4.6million bonus payments Peter Fankhauser took were in now worthless shares and he doesn’t appear to have sold them. Still walking away with £3.8 million. And then there’s the rest of them, I think they took out around £50 million in the last ten years. There is talk of trying to get some of that back, for the Government of course, not for the poor sods who did the work.
To what end? What’s in it for you? If you’re one of those wandering CEOs who seem to go from one company to the next you probably have all the money you need to replace integrity and pride in your work. And noone in your next job interview will say, “Oh, you managed that soft landing for [company that folded], very impressive work.” By the looks of things, a proper gouging right up to the end will score far higher. A good captain doesn’t go down with the ship, he bails out buckets of cash into the lifeboat right up to the end, when he jumps in and rows away.
And now the government is still getting billed and instead of a “moral hazard”, whatever that’s supposed to be, a lot of people are having a really bad time. Well done, I guess. Hopefully those people will remember this when next they vote. But as tempting as it is to blame Johnson it’s probably an even bet that any other PM would have either bailed Cook out or let exactly this happen. It’s as you say, if only the government had bothered to actually govern.
It ought to be possible to sue the government for utterly failing to implement effective consumer protections. If there’s no company left to be liable, someone higher up, i.e. the government, dropped the ball. Consider it a market incentive for the government to actually do something.
This actually sounds like the sort of thing some EU court might be very interested in, but that would be terrible, nation-stifling overreach and tyranny. No Brit would ever stand for this, no matter where they’re stranded.
Somehow, when I traverse the cereal aisle in my supermarket and see 200 different brands of cereal, “efficient” is not the word that comes to mind.
The government’s argument against a bailout is that the company would have folded anyway, only later — so they would have spent the bailout money now, and then the repatriation costs at some point in the future. (That’s wrong on many levels.) The funny thing is that the Turkish and Spanish governments offered to contribute (lots of Brits go on vacation in Turkey and Spain), and the Scandinavian arm was actually rescued, if I understand correctly. But no, that’s socialism, we don’t do this here (unless you’re a bank that’s Too Big to Fail, and let’s not talk about how the regulator slept through you getting to that point — both the Big point and the Fail point, in fact).
They timed the announcement to early morning hours, at the point they had the fewest planes in the air. Classy, but not as classy as Christmas Eve evening layoffs (which are a thing, I’m sorry to say; perhaps they teach that in Eb Scrooge 101 in Business School).
Re: cvoinescu (#9):
Aha! A solution crystallises out of the whole mess.
1) Bail out the company
2) Attach harsh conditions: E.g. you have x [time] to turn things around or else shut down gracefully, where x may well be zero
3) You should have planned for a graceful shutdown in the first place, now you’re liable (because we said so) AND you owe us money
4) Report to the courts. Also report your finances, including all the overseas stuff, because if you don’t that’ll seriously impact the court’s mood and your future choices for where you’ll be living. Or staying, at any rate.
Not only does the government not get billed twice, there is a (mathematically speaking) non-zero chance to recoup the money it has to spend. More importantly, there are no constituents left behind and no scrambling to rescue them. And finally, there’s absolutely no sign of ill-defined moral hazards. Instead there’s a clear signal to other companies that corporate responsibility does carry over to the individuals in charge of the corporation and to their bank accounts, and that they may find their personal freedom and balance sheet severely affected by their decisions. In a negative way, for once.
Hooray! (Never ever going to happen)
Incidentally, I think Germany is also thinking about / trying to (not sure just now) rescue a local Cook subsidiary airline. This apparently provoked some eye-rolling and questions such as, “if you’re doing it for them, why didn’t you do it for [other airlines]?”, and, “will the tax payer’s money ever be paid back?”
It looks like you’re damned if you do, damned if you don’t, at least in the eyes of the public.
Couple of things:
Well, not ALL your benefits, obviously. You still get healthcare, and dentistry, and basic subsistence, because, y’know, civilised country.
Yes, that is what people in business are supposed to. But in Thomas Cook’s defence, they’ve been subjected to a perfect storm of unprecedented things happening – the collapse of the high street, the collapse of the package holiday market, and Brexit.
Consider: by definition, if you are buying your holiday by walking into a shop on a street instead of going online, then you are one of the people who is NOT paying attention. You’re probably old, or don’t have access to a computer or the ability to use one if you have. These are Thomas Cook’s customers. I’m not saying they deserve it, I’m just pointing out that that is possibly why there were 150,000 people to whom this came as a shock.
Walk down any UK high street and you’ll see the signs, if you have the wit. Where once there were travel agents, and music stores, and clothing outlets, and department stores, there are now betting shops, charity shops, pawn shop and vaping equipment vendors. And homeless people. This is what you get for voting Tory, as so many of the 150,000 will have done, and fuck them, frankly.
The other thing you get is Brexit, which will claim many more scalps than Thomas Cook in the weeks and months to come. They are far from the only business exposed, and the rank incompetence of the government has created conditions against which I cannot see how it’s possible to hedge. Are we leaving a month from now? Who knows? It’s a fucking mess, and Alexander Johnson is almost entirely to blame.
komarov:
Aha! A solution crystallises out of the whole mess
Not really, because that’s perfectly reasonable, and, as I said, we don’t do socialism here (unless you’re a bank, in which case we nationalize you, apply sane management, wait for the economy to turn around, then privatize you again. Notice how that would have worked just fine for Thomas Cook — if only they had renamed themselves Thomas Cook Bank a month ago.)
sonofrojblake:
Well, not ALL your benefits, obviously. You still get healthcare, and dentistry, and basic subsistence, because, y’know, civilised country.
Obviously. Although dentistry is kinda half-assed on the NHS, and not exactly free, and I’m not sure what’ll happen to their company pensions (state pension is not great). We’re only about three-quarters civilized.
[…] voting Tory, as so many of the 150,000 will have done, and fuck them, frankly.
This did not occur to me, but yes, there’s a much-larger-than-random-chance intersection between “people who book with Thomas Cook” and “people who vote Tory”. Definitely fuck the latter.
Also, clothing stores are doing just fine, as long as they’re Primark or TK Maxx (probably known as T.J.Maxx to Marcus, changed in the UK to avoid brand-squatting TJ Hughes).
Well, they shuttered their defined-benefit schemes back in 2011, so most employees will be in private defined-contribution schemes (like most other people these days) which aren’t actually linked to the company. The four defined-benefit schemes are being assessed by the Pension Protection Fund, but they had pretty decent surpluses and should be OK.
The Pension Protection Fund does actually offer pretty good protection to anybody lucky enough to still have an old-fashioned company-based defined-benefits pension scheme.
Oh. I know what the problem was here. It’s the definition of success in capitalism.
To the 99% success in capitalism means having some measure of ownership of or being a well paid part of a successful company.
To the 1% success in capitalism means having more money than you know what to do with.
The 1% are at the wheel, the rest of us are strapped in behind them and if we follow the rules, all we can do is scream before the end and hope the safety regs weren’t sabotaged too badly. That and wonder whether they’re incompetent or engaged in active sabotage for profit when they veer into oncoming traffic.
lanir@#14:
To the 1% success in capitalism means having more money than you know what to do with.
Exactly.
That’s why I think the approach I outlined in my structure for the goverment of Badgeria works so well – if you can’t pass your wealth on, there’s no point in accumulating it rather than spending it, because it’s going to revert to the state when you’re done. What makes capitalism so destructive is the ideology of infinite growth.