With pressure on household incomes, many have had to forego spending on luxuries and travel is seen by many as just that – a luxury they can no longer afford. Add on to this some unexpected external shocks and it’s unsurprising to see a company such as Thomas Cook, the second largest holiday business in the world, in talks with banks. It provides some 19 million holidays per year, but has seen a relatively rapid deterioration in its finances.
Its debts total in September 2011 was some £900 million and the value of the company has declined significantly in recent times. However, the most notable decline has been since it emerged that Thomas Cook was in talks with its banks in preparation for tougher times to come. It is hoping to receive £100 million from a range of banks including HSBC and Lloyds, but on this news Thomas Cook share prices fell by some 75%. However, Thomas Cook has said that the company is simply requesting money as a cushion and that it is not in a desperate financial situation. As the Acting Chief Executive, Sam Weihagen said, ‘I think investors should have confidence in Thomas Cook’.
Many factors have contributed towards Thomas Cook’s current situation – volcanic ash clouds, political unrest and unkind weather, but also some internal strategic decisions, such as their continued focus on package holidays, despite the fact that data suggests 2 in 3 people that go to Spain (a popular package destination) are actually not on a typical package holiday. The key thing with travel is that it is very much based on confidence (as we have also seen with the banking sector). If confidence in a company declines, people stop booking holidays with them and so further financial issues are created. This issue is even more significant when a well known brand name, such as Thomas Cook is the company in trouble. Nothing else makes such great headlines as a well known brand in trouble. So, should holiday makers be concerned? The following articles consider the situation that Thomas Cook faces.
Thomas Cook makes it hard to see the funny side Telegraph, Alistair Osborne (22/11/11)
Thomas Cook dives on bank talks BBC News (22/11/11)
How Thomas Cook shares dive 75% on new of bank talks BBC News (22/11/11)
Thomas Cook reassures holiday makers after shares plunge Guardian, Simon Bowers and Patrick Collinson (22/11/11)
Thomas Cook risks customer exodus during bank talks after stock plunges Bloomberg, Armorel Kenna and David Altaner (23/11/11)
Fears for Thomas Cook after shares sink 75% Independent, James Thompson (23/11/11)
Thomas Cook shares crash after default warning Reuters, Matt Scuffham (22/11/11)
Questions
- Explain the reason why share prices have fallen for Thomas Cook. Use a diagram showing the demand and supply of shares to support your explanation.
- Distinguish between the internal and external factors that have contributed to Thomas Cook’s current position.
- Under which aspect of PEST and STEEPLE analysis would you place the above influences?
- In the Telegraph article, an industry source says: ‘In a business like this you need a very conservative capital structure because you don’t know what’s going to come and bite you.’ What is meant by ‘a very conservative capital structure’?
- What action can Thomas Cook take to try to improve its current financial position? Think about both costs and revenues.
- What type of good would you class a holiday as? Based on this, what sort of figure would you place on the income elasticity of demand for holidays?
- How likely do you think it is that other travel companies are also experiencing similar financial issues to Thomas Cook?
UK unemployment is rising. According to figures released by the Office for National Statistics, in the third quarter of 2011 the unemployment rate was 8.3%, the highest since 1986. The number unemployed was 2.62 million, up 129,000 on the previous quarter.
The figures for those aged from 16 to 24 are particularly worrying. If you include those in full-time education but who are looking for employment and are available for work, the unemployment rate in this age group was 23.3%. If you exclude those in full-time education, the rate was 20.6% (up 1.8 percentage points since the previous quarter).
The government was quick to blame the eurozone crisis for the rise in unemployment. The Minister of State for Employment, Chris Grayling, said, “What we are seeing are the consequences of the crisis in the eurozone.”
But is this true? Unemployment is a lagging indicator. In other words, it takes time for unemployment to respond to changing economic circumstances. Thus the rise in unemployment from quarter 2 to quarter 3 2011 was the result of the economic conditions at the beginning of 2011 and earlier – a time when growth in the eurozone was faster than that in the UK. The eurozone economy grew by 2.4% in the 12 months to 2011Q1, whereas the UK economy grew by only 1.6% over the same period. Even taking the 12 months up to 2011Q3, the eurozone economy grew by 1.4%, whereas the UK economy grew by only 0.5%.
Of course, if the crisis in the eurozone leads to another recession, then this will almost certainly lead to a rise in unemployment. But that’s to come, not what’s happened.
The following articles look at the rise in unemployment and especially that of young people. They examine its causes and consider possible solutions at a time when governments in the UK and around the world are concerned to reduce public-sector deficits and debt.
Articles
Youth unemployment breaks 1m mark Independent, Alan Jones (16/11/11)
UK unemployment increases to 2.62m BBC News (16/11/11)
Youth unemployment reaches 1986 levels The Telegraph, Donna Bowater (16/11/11)
Over a million young people are jobless BBC News, Hugh Pym (16/11/11)
Unemployment figures rise ‘related to eurozone crisis’ BBC News, Employment minister Chris Grayling (16/11/11)
Labour’s Liam Byrne: Young jobless paying ‘brutal price’ BBC News, Shadow Secretary for Work and Pensions Liam Byrne (16/11/11)
UK unemployment ‘nothing to do with eurozone’ BBC News, Lord Oakeshott (16/11/11)
Coalition sheds crocodile tears over young jobless Guardian, Larry Elliott (16/11/11)
Is youth unemployment really rising because of the eurozone crisis? Guardian, Polly Curtis (16/11/11)
Eurozone and the UK: A tale of two crises BBC News, Stephanie Flanders (15/11/11)
Data
Latest on the labour market – November 2011 ONS on YouTube (16/10/11)
Labour Market Statistics, November 2011 ONS (16/10/11)
Harmonised unemployment levels and rates for OECD countries (annual, quarterly and monthly) OECD StatExtracts
Economic Data freely available online Economics Network
Questions
- What are the causes of the UK’s rise in unemployment in quarter 3 of 2011?
- Why is unemployment particularly high for the 16 to 24 year old age group?
- Find out the unemployment rates for the 16 to 24 age group for other European countries for both females and males. How does the UK rate compare with the rest of Europe?
- What are meant by a ‘lagging indicator’ and a ‘leading indicator’? Why is unemployment a lagging indicator?
- Identify some other lagging indicators and some leading indicators and explain why they lag or lead the level of economic activity.
- What solutions are there to high unemployment of young people (a) in the short run; (b) in the long run?
A weekly expense for most families is filling up their car(s) with petrol, but this activity is becoming increasingly expensive and is putting added pressure on lower and middle income families in particular. For those families on lower incomes, a tank of petrol represents a much larger percentage of their income than it does for a higher income household. Assuming that petrol for a month costs you £70 and your monthly income is £500, as a percentage of your income, a tank of petrol costs you 14%. Whereas, if your income is £900, the percentage falls to 7.7% and with a monthly take-home pay of £2000, the cost of a month’s petrol as a percentage of your income is just 3.5%. This is a stark indication of why those on lower incomes feel the burden of higher petrol prices (and indeed, higher prices for any essential items) more than other families.
The price of petrol will today be debated by MPs, following an e-petition signed by more than 100,000 people and having the support of more than 100 MPs. When in power, the Labour government proposed automatic fuel-tax increases, but these were scrapped by the Coalition. However, in January, the government plans to increase fuel duty by 3p a litre and further increases in prices are expected in August in line with inflation. This could mean that the price of unleaded petrol rises to over 1.40p per litre.
And it’s not just households that are feeling the squeeze. The situation described in the first paragraph is just as relevant to firms. The smaller firms, with lower turnover and profits are feeling the squeeze of higher petrol prices more than their larger counterparts. Any businesses that have to transport goods, whether to customers or from wholesalers to retailers etc, are seeing their costs rise, as a tank of petrol is requiring more and more money. To maintain profit margins, firms must pass these cost increases on to their customers in the form of higher prices. Alternatively, they keep prices as they were and take a hit on profitability. If prices rise, they lose customers and if prices are maintained, profitability suffers, which for some companies, already struggling due to the recession, may not be an option.
Mr. Halfon, the Tory MP whose motion launched the e-petition said that fuel prices were causing ‘immense difficulties’ and the Shadow Treasury Minister Owen Smith has said:
‘With our economic recovery choked off well before the recent eurozone crisis, we need action.’
With inflation at 5.2% (I’m writing an hour or so before new inflation data is released on 15/11/11), higher prices for many goods is putting pressure on households. This is possibly contributing towards sluggish growth, as households have less and less disposable income to spend on other goods, after they have purchased their essential items, such as groceries and petrol. A criticism leveled at oil companies is that they quickly pass on price rises, as the world price of oil increases, but do not pass on cuts in oil prices. The issues raised in the debate and how George Osborne and David Cameron respond, together with inflation data for the coming months, may play a crucial role in determining just how much a tank of petrol will cost in the new year.
MPs to debate motion calling for half in petrol prices BBC News (15/11/11)
Petrol price rise: David Cameron faces Commons revolt after No10 e-petition Guardian, Cherry Wilson (15/11/11)
David Cameron faces backbench rebellion over fuel price hike Telegraph, Rowena Mason (14/11/11)
Petrol prices may be slashed by Rs 2 per litre on November 16 The Economic Times (15/11/11)
Paying the price as fuel costs rise BBC News (15/11/10)
Oil barons the big winners from soaring pump prices, ONS figures reveal Daily Mirror, Graham Hiscott (15/11/11)
Scrap rise in petrol duty: 100 MPs demand Osborne abandon planned 3p increase Mail Online, Ray Massey and Tim Shipman (15/11/11)
Questions
- As the price of petrol rises, why do people continue to buy it? What does it suggest about the elasticity of this product?
- Why do higher prices affect lower income families more than higher income families?
- What are the arguments (a) for and (b) against George Osborne’s planned 3p rise in petrol duty?
- Do you think that higher prices are contributing towards sluggish growth? Why?
- What type of tax is imposed on petrol? Is it equitable? Is it efficient?
- Why can the oil companies pass price rises on to petrol stations, but delay passing on any price reductions? Is there a need for better regulation and more pressure on oil companies to change their behaviour?
In the UK, we have a dominant public healthcare sector and a small private sector. In the blog Is an education monopoly efficient? we looked at the idea of an education monopoly and why that may create inefficiencies in the system in comparison with competitive private markets. Does the same argument hold for the market for healthcare? The NHS is largely a state monopoly, although market forces are used in certain areas, which does bring some benefits of competition. However, was the NHS to be privatized, would we see further efficiency gains? As we stated in the previously mentioned blog: ‘the more competition there is, the more of an incentive firms have to provide consumers with the best deal, in terms of quality, efficiency and hence price.’
Privatisation of the NHS has always been regarded with skepticism – of all the British welfare state institutions, the NHS is the most symbolic. However, we have recently seen a takeover of a NHS hospital by a private firm. It’s not privatisation, but it is a step towards a more privately run healthcare system.
Hinchingbrooke hospital in Cambridge is only small, but has a history of large debts – £40m and yet only a turnover of about £105m. This new strategy will still see the NHS owning the hospitals, but the private firm becoming liable for the hospital’s debts and essentially taking over the running of it. However, Circle aims to repay all the debts within 10 years and make a profit. There are many skeptics of this bold new approach, suggesting that Circle’s numbers don’t add up, especially with the flat NHS spending we’re going to see. However, the firm does have a positive track record in terms of making efficiency savings and whilst success will undoubtedly be a good thing – it may bring up some pertinent questions for the way in which the NHS is and should be run.
Hinchingbrooke hospital deal shakes up NHS Financial Times, Nicholas Timmins (10/11/11)
Failing NHS hospital is taken over by private firm for the first time in history Mail Online, Jenny Hope (11/11/11)
Andrew Lansley’s NHS is all about private sector hype Guardian, John Lister (11/11/11)
Circle clinches hospital management deal Reuters, Tim Castle (11/11/11)
Will profits come before patients in a hospital run by a private company? Independent, Oliver Wright (11/11/11)
Hospital group’s liabilities capped at £7m Financial Times, Sarah Neville and Gill Plimmer (10/11/11)
First privately run NHS hospital ‘is accident waiting to happen’ Guardian, Randeep Ramesh (10/11/11)
Government rejects hospital privatisation claims BBC News, Democracy Live (10/11/11)
Questions
- What are the benefits of competition?
- What are the market failures within the healthcare market? To what extent do you think that public sector provision (in the form of the NHS) is the most effective type of intervention?
- Is this just the first step towards privatisation of healthcare?
- Do you think private ownership of hospitals with significant debts is a good strategy?
- Why do you think Unison have argued that Circle’s takeover is ‘an accident waiting to happen’?
- Does privatisation mean that profits will be more important than patient care?
The UK and US governments face a conundrum. To achieve economic recovery, aggregate demand needs to expand. This means that one or more of consumption, government expenditure, exports and investment must rise. But the government is trying to reduce government expenditure in order to reduce the size of the public-sector deficit and debt; exports are being held back by the slow recovery, or even return to recession, in the eurozone and the USA; and investment is being dampened by business pessimism. This leaves consumer expenditure. For recovery, High Street spending needs to rise.
But herein lies the dilemma. For consumer spending to rise, people need to save less and/or borrow more. But UK and US saving rates are already much lower than in many other countries. You can see this by examining Table 23 in OECD Economic Outlook. Also, household debt is much higher in the UK and USA. This has been largely the result of the ready availability of credit through credit cards and other means. The government is keen to encourage people to save more and to reduce their reliance on debt – in other words, to start paying off their credit-card and other debt. That way, the government hopes, the economy will become ‘rebalanced’. But this rebalancing, in the short run at least, will dampen aggregate demand. And that will hardly help recovery!
In the following podcast, Sheldon Garon discusses his new book Beyond Our Means. He describes the decline of saving in the USA and UK and examines why other countries have had much higher saving rates.
‘He also seeks to explain why high interest rates didn’t encourage saving in the boom years and why current levels of relatively high inflation haven’t stopped savings rates shooting up again in Britain.’
Living beyond our means Guardian: the Business Podcast, Sheldon Garon talks to Tom Clark (2/11/11)
Questions
- Why have saving rates in the UK and USA been much lower than those in many other countries? How significant has been the availability of credit in determining savings rates?
- Why have saving rates increased in the UK and USA since 2008/9 despite negative real interest rates in many months?
- Explain what is meant by the “paradox of thrift”. What are the implications of this paradox for government policy at the present time?
- Why may it be difficult to have a consumer-led recovery in the UK and US economies?
- What is the life-cycle theory of consumption and saving? How well does it explain saving rates?
- Can people be given a “nudge” to spend more or to save more? If so, what nudges might be appropriate in the current situation?
- Why do countries with a more equal distribution of income have higher saving rates?
- What is the relationship between the saving rate and (a) the rate of inflation and (b) the real rate of interest? Why is this the case?
