Thomas Cook Regulatory News (TCG)

Alice Marsden

Group General Counsel and Company Secretary

020 7557 6400

Matthew Magee

Head of Corporate Communications

020 7294 7059

Principal risks

Mitigation

Strategic initiatives

We continue to implement our strategy for profitable growth, which involves significant changes to our businesses and operations, as well as our underlying processes and systems. Due to the complexity of these changes, there is a risk that we will not deliver the targeted benefits.*

· Weekly Executive Committee meetings attended by senior management during which progress and issues are discussed and addressed 

· Financial benefits and KPIs are incorporated in the business plan and delivery is tracked as part of the business review process

· Each project or programme has its own steering group which provides challenge to the project, monitors progress and ensures that decisions are made at the appropriate level

· We have made significant progress within all elements of our strategy including the 24-Hour Hotel Satisfaction Promise and partnerships with LMEY Investments and Expedia. Our strategic initiatives are key mitigation measures for our principal risks and are described in detail in the mitigation of each risk below

Customer satisfaction

Technological advances have had a significant impact on consumer behaviour by increasing price transparency and availability of travel products as well as a proliferation of online reviews about travel experiences. Consequently, competition for travel services is increasing and Thomas Cook must differentiate itself by providing a high-quality holiday experience. Inability to consistently meet customer expectations may have an adverse impact on Thomas Cook's market share.*

· Our implementation of the Customer Experience Roadmap is progressing well and is on track to be fully embedded into the business by 2020. This has strengthened our focus on customer excellence and is improving our ability to respond to shifts in consumer behaviours 

· We have refreshed our organisational values to ensure clear alignment with our Customer Promises of Quality, Service, and Reliability. All employees received training on our Customer Promises and the new organisational values, which helps foster a culture of customer excellence 

· The 24-Hour Hotel Satisfaction Promise has been extended to apply to most of our differentiated properties and continues to receive positive customer feedback

· We regularly review our customer journey map to identify innovative holiday features such as 'Choose Your Room'

· We have a robust hotel quality review process

· We proactively monitor our Net Promoter Score (NPS) to identify and address areas for improvement at each stage of the customer journey

Quality of our products and services

Our success and future growth depend upon the introduction and expansion of products and services that appeal to consumers. If we are unable to provide the right new products and services to rapidly changing customer demands and preferences, it may have an adverse effect on our business.*

· We are continuing to invest into our own-branded hotel portfolio, which contributes to higher customer satisfaction and margin. This summer we opened 11 own-branded hotels across Bulgaria, Croatia, Italy, Turkey, Spain, Greece, Cyprus, and the Maldives. In 2018 we are planning to launch a further 11 own-branded hotels 

· Our aim is to reduce the number of hotels within our differentiated portfolio. This allows us to focus our resources into developing a better experience for our customers 

· We have entered into a strategic partnership with LMEY Investments, a Swiss-based hotel property development company, to further develop and grow Thomas Cook's own-brand hotel portfolio

· We have signed a multi-year agreement with Expedia which will provide our customers with over 60,000 more hotels in global city and European domestic locations than currently on offer

· We have launched the 'Choose Your Room' service which allows customers to pick the hotel room of their choice. It is initially available at 50 hotels and will be available in 300 by summer 2018. The service raises the bar in terms of the quality and value we offer our customers. Personalised add-ons and ancillaries are real drivers of profitable growth

Digital strategy

Our distribution approach has to be aligned with customer demands and preferences and be able to adapt to rapid changes in technology. If we are not successful in adapting our approach it may have an adverse effect on our market share, profitability and future growth.*

· We continue to improve our websites, which is leading to strong growth in web bookings for our major markets 

o Our OneWeb platform is now fully operational in the UK, Belgium and The Netherlands

o The web platform used by our German market was recently ranked as one of Germany's best online portals 

o We are currently upgrading the technology utilised on our Northern European platform, which will make the website faster and more responsive 

· In an effort to attract more customers to our websites, we have developed rich and inspirational content. This year we have added 80,000 images and 130 hotel videos 

· Our Companion App is available for our customers to support them during their entire journey

Talent

Failure to recruit or to retain the right people at the right time will lead to a lack of capability or capacity to enable the delivery of our business strategy.

· Our annual engagement survey allows us to assess employee commitment and identify actions we need to enable talent retention. We will therefore introduce with effect from FY18, a new commitment index designed to focus leaders on those areas which will drive commitment to the organisation to deliver the business strategy

· Our high potential talent have been identified by using a matrix of performance and potential. Those identified have targeted development plans based on their career aspiration

· Graduate programmes were introduced in 2016 in the UK and Group Airline businesses to further strengthen succession and were further expanded in 2017

· Our Group Leadership Development programme for direct reports to Senior Leaders commenced in 2017, targeting those identified as having potential for senior leadership roles

· The recent appointment of the new CFO following the retirement of the current CFO was done through internal channels demonstrating effective succession planning

IT infrastructure

We are increasingly dependent on technology to reduce costs and to enhance customer service. If our IT architecture is unable to support the needs of the business, our business may be adversely affected.

· Our service delivery process ensures demands from the business are addressed in a timely manner

· We have a robust governance framework that enables IT to align with and meet the needs of the business

· We have commenced a major change programme which involves simplifying and harmonising our IT landscape and will lead to significant operational efficiencies

Cyber security

Information security and cyber threats are currently a priority across all industries and remain a key Government agenda item. We recognise that we have high risk exposure in this area.

Our review of this area indicates that the Group is particularly sensitive to criminal activity against our brand, reputation and revenue as well as ransomware/malware attacks. 

· We are currently implementing a robust Cyber Security Strategy based on five objectives: Protect, Detect, Deter, Respond, and Recover 

· The Strategy is aligned with internationally recognised standards of Cyber security from the ISO 27001 series and is designed to be quickly adaptable to the changing cyber threat landscape

· Our Cyber Security Steering Group, which meets monthly, monitors progress of the Cyber Security Strategy implementation and ensures appropriate mitigations are in place for all high risk areas. The Audit Committee also receives regular updates regarding progress on cyber risk mitigation 

· We are currently undertaking a project to achieve compliance with the General Data Protection Regulation by May 2018. As part of this project we are enhancing our information security measures to ensure the confidentiality, integrity, availability and resilience of our processing systems. This work complements our Cyber Security Strategy and serves as an additional mitigation of this risk 

Disruption to airline operations

The success of our Group Airline business depends on our ability to effectively manage our fleet by ensuring we maintain the right number and types of aircrafts and by operating those aircrafts to deliver a high-quality and cost-efficient service to our customers. 

Inability to operate the required number and types of aircraft in our fleet may lead to missed revenue or reduced margins. Inability to operate the fleet effectively may lead to customer dissatisfaction, cost increases and reduced profitability. 

This risk has always been monitored by the Group at an operational level. At the request of the Audit Committee this risk was added to the principal risks to ensure a more holistic disclosure of the Group's risk profile.

· We have commenced a programme that aims at achieving efficiencies in the maintenance, flight operations, ground operations, operation control and flight dispatch departments through the adoption of a more streamlined organisational structure, which will have a positive effect on our ability to manage and prevent operational disruptions

· The Red3 programme was implemented with the aim of reducing the number of three-hour delays through the adoption of mitigating measures such as the use of charters and aircrafts in reserves 

· The fleet Management Team continuously assesses the status of our fleet; forecasting potential needs and managing dismissal and intake of aircraft. Our fleet strategy also involves the structuring of our lease plans over a long period of time. This approach allows us to refinance the lease/purchase of aircrafts on a staggered schedule 

· The acquisition of new aircraft is subject to a number of qualitative criteria that guarantee consistency with our product offering

· We have recently entered into a seven-year agreement with Transat A.T. inc. for the exchange of aircraft on a seasonal basis, enabling us to manage and utilise our fleet more efficiently

Cash and working capital

Our ability, over the longer term, to generate sufficient cash flow to make scheduled payments on our debt will depend on our future operational performance, which will be affected by a range of economic, financial, regulatory, competitive and business factors; many of which are outside of our control.*

· We proactively monitor our short, medium and long-term cash requirements and liquidity headroom. Our new bank facility will further increase headroom

· Our cost-out and profit improvement initiatives are successfully contributing to cash availability 

· We continue to monitor all opportunities to manage liquidity requirements and maintain an adequate level of contingency as well as seeking to lower the average cost of debt over the medium-term

Health and safety

Due to the nature of our industry, the Group will always be exposed to the risk of a health and safety incident en route to a destination, in the accommodation or during an excursion. A health and safety incident could have a negative impact on our reputation.

· The markets in which we operate each have their own health and safety regulations. We are currently focused on enhancing our policies and procedures by finding best practice from each of the markets in order to define a common Group standard. The policies address all major risk areas including swimming pools, balconies, transport, excursions, fire and hygiene

· Our Health and Safety Audit Programme, which is delivered by reputable external specialists (SGS and Cristal), verifies compliance with Federation of Tour Operators and industry standards and includes a robust follow-up process. We continue to make improvements to our audit programme; most recently we engaged an external specialist to perform hygiene and security audits 

· The Group Health, Safety, and Security Team regularly reviews and updates its safety and security training programmes to ensure they continue to reflect best practice 

· All new hotels are inspected by the internal Quality Team and SGS before opening to ensure robust standards are in place

· We actively monitor the number of health and safety incidents and over the last few years we have seen a significant rise in fraudulent customer illness claims by UK tourists. We have put in place prevention and detection measures (e.g. fraud investigators) in an effort to address this issue 

Geopolitical uncertainties

A significant decline in customer demand due to the growing threat of terrorist attacks in our key tourist destinations, specifically Turkey, may lead to a decrease in revenue from our branded, selected and complementary hotels.*

· Our flexible business model allows us to align our committed capacity to fluctuating demand. We continue to rebalance our destination mix and add new destinations to our portfolio, thereby mitigating the impact of geopolitical events

· We have developed a Hotel Security Framework, which defines a set of minimum security standards that should be operational in our hotels. Implementation of the Framework will follow a risk-based approach, with risk destinations including Tunisia and Egypt as a priority 

· We proactively monitor the geopolitical landscape by partnering with the Risk Advisory Group, a leading independent global risk management consultancy that provides intelligence, investigations and security services 

· We continue to follow the guidance of the appropriate state departments relevant to our source market

· We have a robust crisis management framework which we activate in the event of an incident 

Brexit

Our risk assessment of the UK's exit from the EU identified the following areas that could have a major impact on the Group's strategy:

· Loss of access to the European Single Aviation Market could have a significant impact on the ability of our UK Airline to operate in the EU and the US

· Loss of access to EU employment markets, including the ability for businesses to place temporary workers in EU Member States without additional barriers may cause a skill shortage in the UK and in destination

· The Corporate Affairs Team has been proactively meeting with Government officials from both the UK and the EU to ensure our concerns are appropriately understood 

· The Brexit Working Group which includes representatives from Finance, Tax, HR, Communications, Legal, Risk, the Group Airline and the Tour Operating Segments was established in 2016 to ensure all risks and potential issues related to the UK's upcoming exit from the EU are being considered and addressed

· Management is putting in place contingency plans for every eventuality with a particular focus on ensuring that our customers' holiday experience is not impacted 

Compliance with regulatory and legislative requirements 

There is a risk that we do not comply with regulatory, legislative and corporate social responsibility requirements in the legal jurisdictions where Thomas Cook operates.

In particular, in February 2017, the European Union Competition Commission launched an investigation into the travel industry regarding hotel accommodation agreements with a focus on the availability of hotel bookings and pricing between member states.

· We have a dedicated legal team, which works to ensure that we comply fully with regulatory requirements and which monitors all current and emerging regulatory developments in our source markets. The team receives regular training to provide awareness of critical changes in relevant legislation or case law

· Our Code of Conduct is backed by a comprehensive training programme to ensure that it is fully embedded across the Group

· Our Legal Risk Database enables communication and timely analysis of all risks related to regulatory, legislative and corporate social responsibility requirements

· In regards to the EU Competition Commission investigation, Thomas Cook is committed to fair and open competition and will cooperate fully with the Commission through the process