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Shares in Thomas Cook crashed 67 per cent on Tuesday as the British travel firm said it was renegotiating debts and delaying annual results after a sharp deterioration in business. Thomas Cook's share price slumped to 13.48 pence in midday trade on London's second-tier FTSE 250 shares index.Paul Ellis/AFP/Getty Images

Egypt was the making of Thomas Cook, the fourth-largest travel business in the world by sales. It could be its undoing. Founder Thomas Cook organized the first package holiday from the U.K. to the Pyramids in 1869. Signalling his high ambitions, the Victorian entrepreneur billed the trip as "a great event in modern travel."

This week, Sam Weihagen, interim chief executive officer of the U.K.-based company, said that a crippling cash crisis was partly the result of civil unrest in the Land of the Pharaohs. This has sapped sales of holidays to consumers in Europe, whose holiday industry is dominated by Thomas Cook and rival Tui Travel. Strolling the endless promenade of Sharm el-Sheikh – a kind of North African Fort Lauderdale – loses some of its appeal if you have watched Egyptian riot police on TV battering protesters.

With Mr. Weihagen working round the clock to secure a second £100-million ($162-million) rescue loan from banks, Thomas Cook's travails also highlight the damage that the Internet is inflicting on proud brands whose business models have changed little since the days of steam power and stovepipe hats.

A shrunken market capitalization of £161-million – down from £1.6-billion at the start of the year – rules out an emergency share issue. Thomas Cook is now effectively controlled by its lenders. Observers point to parallels between the group's plight and that of banks that faced ruin in the credit crunch. Ill-judged acquisitions have left the company with net debts just short of £1-billion. Cash is flowing out at a net rate of £30-million a week, as Thomas Cook pays for aircraft seats and hotel beds to sell next year.

Mirroring a bank run, spooked consumers could withhold bookings, fulfilling prophecies of doom. If the business failed, holiday makers who had already followed the advice of the company's advertising – "Don't just book it, Thomas Cook it" – would seek recompense from a guarantee scheme underwritten by the state.

Prime Minister David Cameron has ordered a report into the crisis, describing Thomas Cook as "an iconic and important British business." Last year, it served 22.5 million passengers and had sales of £8.9-billion, with destinations ranging from Amsterdam to Alaska. A collapse would fuel opposition criticisms of the government's austere economic policies.

There has even been talk – admittedly far-fetched – of a state bailout for the group, which employs 30,000 people and is the "official short break operator" for London's 2012 Olympics. It is more likely that ministers will put pressure on 17 lending banks, two of which the government partly owns, to extend fresh credit.

"This is not a broken company," says Mr. Weihagen, speaking with weary defiance between meetings with bankers, "It has taken millions of people on holiday for 170 years and it will send millions more for many years to come."

So it may. But the credibility of management is as battered as the shares. Mr. Weihagen's brief honeymoon with equity investors is over because only last month Thomas Cook led them to believe that a £100-million loan financing would keep the company going until the new year.

City of London commentators believe Thomas Cook has rested on its laurels, trading on its reputation and sticking for too long by its traditional business model of buying hotel rooms and aircraft seats in advance, and selling them as a package via travel agents and brochures.

Even after the business had shocked the market with its plea for fresh capital, Mr. Weihagen was insisting that Thomas Cook remained "a great brand and a great holiday maker."

Greater opprobrium is reserved for Manny Fontenla-Novoa, the long-serving chief executive officer who stepped down in August after Thomas Cook issued its third profits warning of 2011. The company had sought to play the consolidation game, merging with MyTravel in 2007. This year it perplexingly expanded a retail stores estate imperilled by Internet rivals through a merger with the travel business of the U.K.'s Co-Operative Group.

The Spaniard was a spirited front-man, but a less successful strategist. "Thomas Cook has been trying to increase the proportion of higher-margin holidays, but has still had a big exposure to the commodity end of the market," says Wyn Ellis, an analyst at broker Numis. Low-margin businesses are particularly vulnerable to disasters beyond their control, and tour operators have had more than their fair share in recent years. As well as the effect of the Arab Spring, they have had to contend with an Icelandic ash cloud, fears of flu pandemics, tsunamis and airline strikes.

Thomas Cook has meanwhile spent £500-million of cash on restructuring since 2007 and the restructuring is still under way. That is described as "a massive indictment of management" by an analyst who declined to be named.

The disparaging comparison facing Thomas Cook is with Tui Travel, whose market share of 4.5 per cent made it the world's largest holiday business in 2010, according to data company Euromonitor International. The weakness of European markets has pushed its stock down by a quarter this year. But analysts such as Mr. Ellis say Tui, which had sales of £13.4-billion in 2010, has shown far greater foresight.

Like Thomas Cook, Tui Travel was created through a big merger in 2007, when First Choice of the U.K. combined with the tourism division of Tui AG of Germany, which still owns 55 per cent of the London-listed shares. The difference is that Tui Travel has nimbly adapted to new competition. This has come from two directions. First, from low-cost airlines such as EasyJet and Ryanair. Second, from the Internet, which helps holidaymakers to find the cheapest package holiday or to book flights and accommodation separately.

Euromonitor statistics show a swing toward Web-based booking within Western Europe's €240-billion ($333-billion) foreign holiday industry. Growth, depressed by the credit crunch, averaged a sluggish 1.7 per cent annually between 2006 and 2010 in constant currencies. The growth figure for online travel sales – not directly comparable because it includes domestic trips – is a sprightlier 15 per cent, topping €38-billion last year.

A prime beneficiary is the European subsidiary of Seattle-headquartered online travel agency Expedia. Its share of the holidays market in Western Europe is just 2.6 per cent compared with Tui's 13.8 per cent. But it is growing fast. Together, online-only operators and low-cost airlines are disrupting the business model of traditional package companies, according to Andy Washington, managing director of Expedia for the U.K. and Ireland: "They have higher risks than us because they contract or own aircraft they need to fill. And while they often start with a low price for a holiday, raising it closer to departure, flights on low-cost airlines are priced the other way."

The result is a trend for last-minute, online bargain-hunting by customers that further squeezes the slim margins of traditional holiday companies.

"If you don't differentiate your product, you will be hit on price because of the transparency of the Web," says Peter Long, chief executive officer of Tui Travel. The company now books a third of its business online. It has been more effective in protecting profit margins by developing a more up-market product range than Thomas Cook has. This includes "holiday villages" – hotels with sport and entertainment for all ages.

Both Tui and Thomas Cook aim to whittle down sprawling bricks-and-mortar store estates as lease renewals come due. But banks are likely to demand far more radical retrenchment at Thomas Cook. "There aren't many options left for Thomas Cook apart from dramatically shrinking the business," says Karl Burns, an analyst with investment bank Shore Capital. Auctions to raise £200-million from selling Spanish hotels and a stake in the U.K.'s air traffic control body are only the start. Condor, a German airline, and a lucrative Scandinavian business valued at more than £500-million, could also be hived off.

Changing lifestyles, globalization and new technology have a habit of destroying consumer businesses backed by historic brands. Examples include the U.K. high-street retailer Woolworths, which closed in 2009, and tableware company Waterford Wedgwood, which collapsed into administration the same year.

The raison d'être of traditional package holiday companies is under attack too. What could prove to be their saving grace are their economies of scale in purchasing airline and hotel capacity.

That would be familiar to the original Mr. Thomas Cook, who started in the travel business buying rail tickets cheaply in bulk and selling them a little more dearly to day-trippers. The company he founded has a fair chance of survival, albeit in a diminished form. But its recent woes are a reminder of the perils of complacency within a long-established company. Hard to imagine that Mr. Cook, immortalized as a grim-faced statue outside Leicester station, would have bungled matters as badly as his successors.

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