Could credit risk exposure with Thomas Cook have been handled better?

The sad demise of Thomas Cook has not only had a devastating impact on its former 22,000 employees, but also on its creditors. Any organisation waiting on payment from Thomas Cook will now be deeply affected by this recent event. But could these organisations have been better prepared? Could they have managed their credit risk exposure with Thomas Cook better?  With airports impounding Thomas Cook aircraft due to non-payment of airport fees, the fight for debts to be paid has already begun.

Traditional financial institutions, commodity and energy trading companies closely monitor credit risk to mitigate the devastating impact should a counterparty default.

Supporting their robust credit risk policies is sophisticated software that automates workflow and manages limits. Pioneering new software can also scan key market news and activity to alert on potential risks. Are the same systems embedded into businesses surrounding the travel and tourism sector? Or should this sector be looking to adopt best practises from financial markets?

Tourism is highly vulnerable and exposed to a wide range of risks, such as weather, terrorism, political unrest as well as budget online operators moving into the traditional Highstreet marketplace.  All these factors can cause financial chaos to the many firms operating at different levels within the supply chain of getting people to and back from their holiday destinations.

If you have the foresight that a counterparty’s financial situation may deteriorate you can take preventative action to mitigating risk by setting and executing a viable credit risk policy.

Key risks to monitor when trading with a counterparty in the travel and tourism sector are:

Country risk

The increase of a threat from terrorism can cause governments to advise against travel to specific regions. When this occurs demand for a particular destination plummets. We have seen this recently with holiday prices being lowered for Turkey and routes dropped altogether for Sharm el Sheik and Tunisa. Monitoring for warning signs of terrorist activity in particular countries would give an early indication of whether revenue could be negatively impacted with a counterparty. Geological scanning could quickly identify where a natural disaster has occurred which could also reduce demand for tourism in a particular region.

Sector risk

Monitoring the successes and failings of your counterparties’ competitors can also help you to gauge how much credit you are willing to extend. For example, the recent rapid growth of Jet2 did not initially impact the credit rating for Thomas Cook. However, the shrewd credit risk manager monitoring the market activity would have been able to predict the lowering of its credit rating and add restrictions to trading activity with the airline.

Political risk

Brexit has been looming for some time now and the uncertainty creates volatility in the FX markets. The value of GBP is impacted based on “no deal” being considered negative to UK growth. The result of this is an increase in holiday costs and a concern about how far GBP spending money will stretch abroad. Ultimately this affects the numbers willing to travel abroad. Constant changing of consumer behaviour has a significant impact on the financial stability of an organisation and therefore should be constantly monitored.

Weather

Local heat waves reduce the public’s desire to pay for holidays abroad. Whilst poor weather and relentless rain fuels foreign holiday sales. Monitoring of only weather is not enough, businesses should also be listening for analyst reports and forecasts that can influence public opinion. This information is also key to understanding the future financial health of your counterparties.

Safeguarding the future

Managing this level of information is time consuming and not a realistic option for most companies. However, as the fall of Thomas Cook shows, the alternative can be frightening. The best prepared firms will be those that look to technology to manage and track today’s unprecedented extent and variety of credit risk exposures.

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