Saving Private Firms

I have just been watching coverage of the Labour conference and the bizarre suggestion from the Shadow Chancellor and some activists that the Government should have stepped in to save Thomas Cook. They argue that it was once a nationalised company, although this was only because it was a subsidiary of a subsidiary of railway companies that were nationalised, not because the Attlee Government thought a publicly owned travel agent was a great idea. They also mention the rescue of banks but the economic and social impact of allowing several major banking groups to collapse is of an entirely different scale to allowing a travel agency to go bust.

When it comes to Thomas Cook customers, none will lose money. The Atol guarantee protects those with bookings and currently on holiday. The Government has agreed to repatriate those on flight-only deals at no charge to them, and those with flight only bookings can claim off card companies.

But there are 9,000 employees in the UK that will now be unemployed. The collapse of their employer with no warnings will undoubtedly cause hardship for many before they secure other work. It would be wrong not to show compassion for those workers although propping up their failed paymasters is not necessarily going to provide the security they need.

There are lots of reasons why companies fail but they generally divide into mismanagement of some kind, or a major realignment of the market that the company was unable to adapt to. An example of the former would be the demise of Barings Bank; an example of the latter would be Blockbuster video rental following the trend to online movie streaming. Thomas Cook have adapted to the Internet age and online booking but still had a large and expensive high street network of travel agencies. But they had huge debts and were unable to renegotiate their loans. That’s mismanagement. So in the case of Thomas Cook it looks like a bit of both.

Whilst there are always peaks and troughs when it comes to holiday bookings, the millions of Thomas Cook customers are not going to stay at home for the rest of their lives. They will move their business to competitors, some established, some that see the loss of Thomas Cook as an opportunity to step into the market with a new offering. If it takes 9,000 people to deal with Thomas Cook’s customer base then 9,000 new jobs will be created in those competitors, and industry-experienced staff will be at a premium.

Firms going bust, even ones with the historical pedigree of Thomas Cook, but also many long-established retailers, is not always a bad thing beyond the immediate chaos that surrounds closure. Companies get fat, they get arrogant, they borrow too much, they employ mercenary Directors interested in their own enrichment rather than being deeply and personally invested in the company. They become inefficient and eventually become unprofitable when competing with newcomers. The weaknesses are often most obvious in recessions when demand falters and funding becomes tighter. Taking these basket cases into public ownership cannot possibly solve these issues. They either need radical new management, e.g. a takeover by a leaner, more innovative competitor, or to close down and allow the business to migrate to better run competitors.

There are exceptions – private companies in monopoly positions such as rail operating companies, and businesses where failure impacts on national security and defence, or where overwhelming economic and social damage would result.

What is very worrying is that John McDonnell clearly does not understand the basics of business. He does not understand that the demise of Thomas Cook will result in their business migrating to better run competitors. Would he be fit for purpose as a future Chancellor. I quite like listening to McDonnell; some things he says I agree with. But his response to the Thomas Cook collapse is very worrying. Would a Labour government nationalise every lame duck bloated and inefficient business that goes bust?

It is right that Government should ensure that employees of companies that fail are treated with compassion, are promptly compensated for arrears of wages, redundancy, holiday pay and so on (they are), and given help to find alternative training or employment. It is wrong for the Government to take ownership of failing companies where there is not a monopoly public interest and effectively subsidise the bad against the interests of new and innovative competitors.