What Monarch Air’s Bankruptcy Means for European Aviation

Airlines don’t usually go bankrupt suddenly. Warning signs flash up often enough — be they internal or external — and when a collapse happens there are plenty of reasons.

That was true of Alitalia, Air Berlin and the same applies to Monarch. Anyone shocked at the 50-year old company’s demise just hadn’t been paying close enough attention.

None of this makes it any easier for the hundreds of thousands of passengers who have had their holidays curtailed or ruined, and also for the 1,858 employees who have lost their jobs. Just like the other European airlines that have bitten the dust this year, Monarch was the victim of both its own mistakes and broader industry-wide problems.

A Long Struggle

Falling into the red wasn’t unusual at Monarch. The company made multi-million dollar losses in five out of the last 10 years, including an eye-watering pre-tax loss of $395 million (£297.9 million) in its most recent set of accounts to the year ending October 31, 2016.

This was not a company in great health. Tired of bailing the company out, the Swiss-Italian Mantegazza family, which had launched the business, decided to sell, with secretive investment firm Greybull Capital emerging as the new owners in October 2014.

They agreed on a $166 million (£125 million) investment, plans to reduce and remake the fleet with a new Boeing 737 Max 8 order, an end to long-haul and charter flying, and a 30 percent cut in staff wages.

All this was supposed to put the company on firmer footing but just two years later the airline needed another $219 million (£165 million) from its major shareholder. Again this was not enough, and the end came when a flight from Tel Aviv to Manchester touched down early Monday morning.

What caused the collapse?

In a leaked email to staff, chief executive Andrew Swaffield was keen to point the finger at terrorism in key destinations.

The company, which operated as a low-cost airline and tour operator, had exposure in Sharm-El- Sheikh, Egypt; Turkey, and Tunisia, all of which have suffered from falling demand after terrorist incidents.

Monarch was then forced to put more of its capacity into Spain and Portugal, where it faced more competition from better-funded airlines. The result was more passengers but a revenue decline of $132 million (£100 million).

Last year’s Brexit vote is also likely to have played a part. Unlike Thomas Cook and TUI, which cover multiple European markets, Monarch is heavily exposed to the UK. Customers pay in pounds but Monarch pays for jet fuel and plane leases in dollars. Since the referendum, the pound has fallen against the dollar, and although Monarch is likely to have hedged to cope with some fluctuations, the airline was facing a substantially higher bill.

According to aviation consultant John Grant, the situation the company faced was unique.

“They were protected in their operations to Egypt and Turkey, where the smaller independent tour operators provided them with a lot of support, and the sector lengths that time were just a bit too far for the low-cost carriers such as Ryanair and EasyJet to show but a passing interest,” he said.

“When those markets collapsed, Monarch had to move some 330,000 seats from those two markets and essentially switch focus to Spain and Portugal,” Grant said. “They inevitably came head to head with the real low-cost carriers and cost bases that Monarch just could not match.

“Combined with the weakness of the pound and the fact that Monarch were predominantly a UK area-of-sale business, [with] much higher independent traveler levels in those markets etc. it was always going to be hard.”

Terrorism and the Brexit vote might have made things harder for Monarch, but unlike airline rivals such as EasyJet and Ryanair, Monarch was unable to ride out the storm.

Part of the blame must also go to the owners, senior executives and consultants who devised the company’s strategy.

In his exit e-mail, Swaffield said that Monarch was in the process of trying to pivot to long-haul flying by essentially selling off the short-haul business. This decision came only two years after the company had decided to end its previous long-haul operations.

Then there was the order for a fleet of 737 Max 8s. Although Monarch likely wouldn’t have been paying anything near the list price of $3.2 billion (and eventually switched to sale and leaseback), it still was still a huge change for an airline that flew mostly Airbus jets, especially given its precarious financial situation.

“Monarch had a long history and was sub-scale relative to both pan-European low-cost airlines and tour operators. Its unit costs were uncompetitive relative to peers, despite vigorous efforts at restructuring and material labor concessions due to legacy structures. Its small network and limited brand penetration weakened unit revenues,” said HSBC transport analyst Andrew Lobbenberg in a note to investors.

More European Airline Bankruptcies?

Many people still think Europe has too many airlines. Plenty can trace back their history to a time when individual European nations signed their own aviation deals with other countries. These flag carriers built up dominant positions in their home markets, but when the EU created the Single Aviation Market in the 1990s, national borders in effect ceased to exist and the EU became a lot like the U.S., only with way more airlines.

Numbers have dwindled over the years but with Aliatalia, Air Berlin and Monarch all going bust in a relatively short period, the industry looks to be going through a period of flux.

Analysts, though, are keen to point out that all three of these airlines shared similar traits.

“The common theme is that these are airlines that have been in financial difficulty for many years, under pressure from more-efficient competitors. Surprisingly, the collapses have been driven by a reluctance of their financial backers to continue injecting new capital, rather than the more predictable triggers (recession, high fuel prices, geopolitical shocks),” said Gerald Khoo a transport analyst at broker Liberum.

Despite these challenges, the market remains fairly benign at the moment with fuel prices still at a relatively low level.

Should this change or the economy worsen, any airline hoping to avoid doing a Monarch will have to make sure it has deep enough pockets to ride out the storm.