By Bjorn Fehrm
October 11, 2016, ©. Leeham Co: Alitalia, Air Berlin and now Monarch have all filed for insolvency since the start of 2017. These are all airlines with an emphasis on low cost flying, with an important leisure part. Alitalia and Air Berlin had histories as network carriers, which hasn’t helped.
What happened in summary; When the European low-cost market got rough, their cost levels weren’t tough enough.
The Monarch fall was abrupt. Where Alitalia and Air Berlin still flies (Air Berlin until 28 October), the British Civil Aviation Authority (CAA) decided 1 October to not renew Monarch’s Air Travel Organisers’ License (ATOL).
Though the ATOL is only an insurance scheme for leisure trips (CAA gets you home if the airline folds), CAA deciding that Monarch was in bad shape, would hurt traveler confidence.
So despite the ATOL flights being only a small part of the Monarch operation, the discontinuing of ATOL protected flights, meant the company was done. The company had been in trouble for some time and the public would be sensitive to any signals that things had turned worse.
On morning the 2 October, the company’s owner since 2014-10, Greybull Capital, called quits on injecting more capital (last it injected £165m in 2016-10) and PWC was called in as administrators. The company stopped all operations on the day.
CAA then began organizing how 110,000 travelers protected under ATOL could be brought home from Monarch destinations. The administrators are working on what to do with the 300,000 that have booked tickets or charter trips with Monarch as carrier.
What’s the background to Monarch’s fall?
Monarch operated as a charter and low cost scheduled flights operator to 40 leisure destinations from the UK, mainly to destinations around the Mediterranean.
Since 2015, terrorism in Egypt, Tunisia and Turkey has forced leisure flight operators to bunch together in the West Mediterranean. To classical destinations; Spain, the Spanish islands and Portugal.
This increased competition with the likes of Ryanair, easyJet and Norwegian hurt Monarch. It didn’t have any wealth of destinations outside the competitive area.
On top, Monarch earned its revenue in Pound Sterling, while it had its costs (fuel, aircraft rentals) in Dollar and other costs in Euro. Since the UK Brexit decision June 2016, the Pound Sterling has fallen 20% versus the Dollar and Euro, effectively increasing cost for fuel and aircraft rentals for Monarch.
After bailing out the airline at last year’s ATOL renewal, the owners decided to not inject more cash this time. The stop of operations came within one day.
The companies 25 A321 and nine A320 (+ one 737-800) is standing still since last Monday.
With the folding of Alitalia, Air Berlin and Monarch, the question is does it stop there?
Of the large LCC players, Norwegian Air Shuttle (Norwegian) is the weakest. Its balance sheet (the cushion for rough times) is the weakest, with only 8% own capital. And this after having sold some of its assets in June.
The dominant Ryanair has its homemade problems, but its balance sheet is ultrasolid. Number two, easyJet is also in good shape. The operations works and the balance sheet is in good health with 45% own capital.
It will be interesting to follow Norwegian. It had a substantial operational loss in 2Q2017, after a bad May.
Yields (revenue for sold seats) have continued to decline for the third quarter months, July to September, compared with the same months 2016.
And costs are up compared with the same months last year. It’s all in Norwegian’s monthly traffic statistics.
The 3Q2017 report is due in two weeks, 26th of October.
The company has further reserves it can sell, especially the Norwegian Bank shares. But how valuable are these if the Airline it supports is on the ropes?
Ryanair’s CEO, the outspoken Michael O’Leary, said a month ago, he expected Monarch and Norwegian to not last the winter. For Monarch we know he was right.
For Norwegian, how much was it Norwegian stealing O’Leary’s pilots? And how much was sound business analysis?
Apparently it was Boeing that poured in some £100M last year into Monarch, probably trying to keep its MAX sales alive. Looks like it didn’t work out as planned.
The smart play in this situation is for BA to buy Monarch’s MRO! Remember, they’re “hot and heavy” on trying to grow services.
That 100 mill they put into Monarch may well be secured by the MRO assets
ATOL is not an insurance scheme for ‘leisure trips’ (which could be anything from a package holiday to a self assembled bundle to simply flying to stay with friends or relatives) but rather it is an insurance scheme specifically for ‘flight-inclusive holidays’. That was Monarch’s background and it still offered these. ATOL is a legal requirement for UK operators selling such ‘flight-inclusive holidays’ and so removal of the ATOL certificate de-legalised such operations. I don’t know whether it was organisationally/legally possible for Monarch to have operated the scheduled flights part of the business separately or, if it was, whether they had actually set themselves up to do so.
Despite its problems I suspect Norwegian will survive more or less intact. The model needs modification and the balance sheet needs assistance (so maybe there will be an ownership change or maybe Norwegian will seek to reorganise and recapitalise through legal methods, if such exists) but fundamentally and unlike this year’s casualties they have momentum, a strong growth market with very large potential and, as yet, are avoiding full on direct head to heads with competitors.
Wouldn’t be bad for Norge’s sovereign wealth fund to invest a couple of hundred million in Norwegian. If nothing else, it would protect the reputational name “Norwegian”! (What else are they going to invest their funds in in Norge? Hydro? Canned sardines?
Would be nice. Wonder whether it would get past the powers that be with regard to ‘state aid’ though.
https://www.nbim.no/en/the-fund/about-the-fund/
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See all the investments:
https://www.nbim.no/en/the-fund/holdings/?fullsize=true
https://www.youtube.com/watch?v=XvsrHlF2M2g
ATOL is a very good thing. Surprisingly we have nothing similar in Germany.
If your flight is delayed, then you are overprotected by EU regulation 261/2004. If you’re a family of 4 and you arrive 3 hours too late in Johannesburg or New York, then you get 2400 EUR from the airline by EU 261/2004.
If you book a holiday package by a tour operator, then you are fully insured by the “Reisesicherungsschein” against airline insolvency and much more.
But if you’re an individual traveller and you book your flight ticket, your rental car, your hotels, your activities yourself without a tour operator, then there is zero protection. And that’s now the case for some hundred thousand Air Berlin customers. They lost their flights with Air Berlin. They get zero compensation for the lost fligt not even their money back. And they have often already fully paid rental cars, hotels and much more at the destination. Or they are at the destination now and need to book an expensive alternative flight back to Germany now.
Here in the UK there are additional protections for consumers who have used their credit card to buy the tickets, book the hire car, etc. Section 75 of the Consumer Credit Act means that if the airline operator has gone bust and aren’t paying out, then it becomes the credit card company’s problem.
This is true of literally anything costing between £100 and £30,000. Quite a wide range. You can’t claim if the service or goods are just, well, rubbish, but if they’re not provided or delivered at all or lost in the post then you can.
Of course, it doesn’t help if the airline has gone bust but the hire car company has not. You’ll get your airline ticket money back, but not the missed hire car booking. So you’d have to re book the flights, or rearrange your trip, or whatever. But at least you’d be doing that knowing that you’ll get your money back. Provided the flight cost more than £100 in the first place. That less likely to be the case with a low cost carrier.
Essentially it’s up to the credit card companies to perform some sort of due diligence on the vendors on your behalf; they are not allowed to let you get into debt (which is what’s happening when you use a credit card) by using their card to buy something that is never actually delivered or provided. In practice it’s the other way round – they cancel the debt (give you your money back) if their is a problem with the vendor.
Beyond the act some credit cards come with additional insurance services that can be used too. Rowan Atkinson ad:
https://www.youtube.com/watch?v=g-oCckHaGdM
That kind of thing might help if one is left stranded abroad. It depends on exactly how comprehensive the insurance cover is, if it is provided at all.
If you look at Woody’s comment above, he says the scheme insures “flight-inclusive holidays” which would make it pretty similar to the German scheme, no? Plus, if I remember correctly, the definition of what is protected as a package holiday has recently been broadened in the frame of EU harmonizations.
That still leaves people who booked a flight w/o anything else pretty much unprotected, which makes it very interesting what Matthew writes about the UK’s rules about protection when paying by credit card.
And just to contradict myself… as of course it is often much preferable to buy assets rather than companies, any potential new Norwegian investor/owner may simply prefer to see the current set up ‘fail’ before stepping in.
Greybull are a bunch of asset stripping rogues, there was never any possibility that they invested £165 million last year. I also find it hard to believe that Boeing has lost £100 million on the deal. However this all pans out, it will be on the bleeding edge of what’s legal, and Greybulls losses will be minimal.
UK packaged holidays must be ATOL protected but not scheduled flights. So Monarch stopped paying for the insurance on scheduled flights last year,with predictable results. The British government picked up the tab of £60 million for the 95% of passengers who were not covered ,although they might be able to get some of it back from various insurance and credit card companies. Why will anyone pay extra for an ATOL protected flight from now on?
EU airline compensation regulations are ridiculously generous and way more than expected from any other form of transport.
Can’t NAS just defer some of those deliveries?
MO’Leary is usually right.
>EU airline compensation regulations are ridiculously
>generous and way more than expected from any
>other form of transport.
Except that when the regulations were formulated air transport was primarily for travel abroad, unlike almost all other forms of transport. The regulations have forced the airlines to provide a service that the consumers can have some confidence in.
This is of benefit to both the airlines and the passengers. It gives the passengers confidence to use the service.
For a start it’s the only thing preventing Ryanair dumping their current industrial relations problem completely into the hands of their paying customers.
Look at the dire state of air travel in the US. If you’re unfortunate to be seated and buckled up on an overbooked flight, you get beaten up and dragged off the aircraft. The lack of regulation regarding delays, overbooking, etc. means that the airlines have to play as dirty as the dirtiest airline in the business to stay competitive. That’s a vicious circle and it does nobody any good.
Good regulations are good. They level the playing field and promote growth to the benefit of all.
Oh yeah it’s just bloodshed and mayhem over here with innocent people getting dragged off by and “beaten up” by jackbooted thugs by the dozens every day.
“Why will anyone pay extra for an ATOL protected flight from now on?”. Because it works. As far as I know, anyone who bought a package holiday from Monarch is covered and will be paid out. Just as it says on the tin.
As for Greybull being ‘asset stripping rogues’ I think that is harsh. They exist only because there are businesses out there that are financially on their knees and so cannot find funding from other sources. Yes Greybull can make very high returns through what they do and this may seem or may be unpalatable (really comes down to more risk requires higher rewards and whether their rewards are ‘justified’ by the risk they take), but in return those businesses have the funds required to operate for longer, keeping people in employment and providing at the very least breathing space for employees to look for alternatives.
The vast majority of monarch passengers were rescued by the UK government not ATOL, having chosen an airline that didn’t offer protection on scheduled flights.
Greybull dump all the risk on someone else, usually including massive liabilities for the taxpayer and pensioners. Greybull didn’t provide the funding.
Correct, but you stated “Why will anyone pay extra for an ATOL protected flight from now on?”. Anyone whose booking was under ATOL protection will receive that protection, as far as I’m aware. It works and so there is no reason for anyone to not ‘pay extra’ if they want ATOL cover in the future.
For anyone booking non ATOL there is travel insurance. OK, maybe all governments should require airlines in their own jurisdiction to include compulsory failure insurance in every ticket they sell. But they don’t. So customers simply need to choose their travel insurance policy to include cover for airline failure and have terms that suit them and buy it. It isn’t complicated.
I was under the impression that Greybull and Boeing jointly provided the finance. But if you’ve read more about this or have direct knowledge then I stand corrected.
I think you are also 100% correct about the unacceptability of government liability backstops (specifically pension I guess here) being used by any business to shirk responsibility and risk. Which is back to the issue of the risk/reward relationship. Maybe it will come out otherwise in the wash but “Greybull dump all the risk on someone else” is, I believe, simply untrue.
Again though, Monarch existed as long as they did only because the likes of Greybull were able and willing to come in.
It’s not that complicated, Monarch used to provide ATOL cover on scheduled flights,when they stopped their flights became less expensive. If the government are going to rescue you anyway, why choose an ATOL covered airline, which will be more expensive?
Greybull specialises in distressed companies with lots of assets. They don’t put money in.Think BHS or comet. I believe Monarch came with a significant dowry.
Anyone purchasing a flight without either institutional insurance (eg ATOL) or their own suitable personal travel insurance is letting the government assume all the risk. You have a go at Greybull for this sort of practice. So do you think it is different and OK for passengers to do this?
Clearly any business like Greybull is going to be interested only in failing businesses with assets that are both sufficiently large and sufficiently durable. Otherwise there would be no point. This doesn’t make them bad.
As for “they don’t put money in”, I simply don’t believe that. A quick Google shows an FT article in which they are reported to have claimed to have put in £290mn, with the FT arguing instead it was £85mn. The amount they put in and the reward they receive from this is an entirely reasonable and should be debated and maybe laws changed, but I don’t believe your statement that “they don’t put money in” and neither it would seem would the FT.
@woody, study Comet electrical stores (also Greybull) to understand how this works,or BHS.
It was well reported about the cash injections from Greybull and Boeing into Monarch
https://www.reuters.com/article/us-monarch-airlines-boeing-bailout/boeing-helped-finance-bailout-of-monarch-airlines-in-2016-ft-idUSKBN1CD0XS
https://www.flightglobal.com/news/articles/greybull-puts-another-165m-into-monarch-airlines-430283/
Sure they may have security over assets so may not ‘lose it all’
The Meyohas brothers are well known for this sort of thing in the UK, plenty of form and no shame. Boeing must have known that this was going to happen when they secretly lent the money last year and most certainly 2 months ago when Monarch took up the options on more 737max. The stench is doing nothing to improve my opinion of Boeing. Taxpayer and pensioners will end up paying,Greybull will come out with a profit.
Looks like AirBerlin is going to Lufthansa.
Could this move Norwegian and easyJet closer together? Add a leisure company to the mix and you could have a very strong LCC.
http://c.newsnow.co.uk/A/905984066?-303:3665:0
Or Norwegian and IAG?
Or Norwegian and RyanAir — in an Irish-Norwegian alliance — that I alluded to in my link above. 🙂
https://en.wikipedia.org/wiki/Secret_Garden_(duo)
Well Ryanair and Norwegian are already sorting out a sort of (Norwegian) hub and (Ryanair) feeder spokes arrangement aren’t they.
Think this also has relevance to the US, where Chapter 11 protection has prevented a number of US carriers from going to the wall. All the carriers mentioned have been lingering at deaths door for a while and about time they let go (unfortunately).