Thursday 20 October 2016
Update: Monarch Airlines survives speculation and emerges stronger
After weeks of speculation, Monarch Airlines, the UK’s oldest airline brand, announced it has secured a further £165 million ($203 million) capital injection from majority owner Greybull Capital, and a refinancing of 30 incoming Boeing aircraft. The news followed concern that the carrier was dangerously close to insolvency after the Civil Aviation Authority (CAA) granted a two-week extension to its ATOL Licence on the condition that it raised additional funds.
Monarch’s CEO, Andrew Swaffield, has repeatedly sought to assure observers that “we are not going to go bust,” but he faces an uphill battle to convince otherwise. The Ishka view is that new financing arrangements have helped resolve one immediate challenge and will allow the airline management to focus on other strategic issues. A small operating profit is expected in its second half results, however, the carrier will remain squeezed between low-cost competitors such as Ryanair and EasyJet, currency fluctuations and the partial and hopefully temporary closure of core markets such as Egypt and Turkey.
Greybull comes to the rescue (again)
An ATOL licence requires airlines to have sufficient reserves of cash to avoid leaving customers stranded in the event of a bankruptcy. However, when Monarch’s existing licence expired on the 30th September 2016, the UKs Civil Aviation Authority did not grant a reprieve until four hours before the deadline, adding to speculation on social media that the carrier was in financial difficulty. Its licence was temporarily extended until 12th October 2016.
This month, Greybull Capital, the majority owner of Monarch, provided a £165 million ($203 million) package to help recapitalise the carrier and its ATOL licence has now been renewed for another 12 months. Seabury Securities served as financial advisor on the recapitalisation. Swaffield called it “the largest investment in our 48-year history.” The private equity firm took a 90% stake in the business in October 2014 following consolidated group losses of $191.1 million, and successfully returned the group to profitability last year.
Boeing sale and leaseback deal shores up balance sheet
Boeing also stepped in with an offer to support the refinancing of 30 incoming 737 MAX aircraft “worth £1.54 billion ($2 billion)”. A firm order was placed in October 2014, with a further 15 aircraft on option as part of the airlines plan to migrate from an all-Airbus to an all-Boeing fleet. The sale-leaseback agreement is likely to boost the airline’s available cash and was key to securing the extra funding from Greybull and its full ATOL licence. The first delivery is expected in 2018.
Until the new IFRS accounting rules come into effect in early 2019, Monarch will be able to keep the sale and leaseback agreement ‘off balance sheet’. “The sale and lease back is the biggest part of our business plan,” said Swaffield. This will keep key economic indicators, like the airline’s debt to equity ratio lower than if the aircraft were reported on the balance sheet. With the new aircraft the airline is also banking on making significant savings on its annual £120 million ($148 million) fuel bill.
Was there reason to panic?
In late September 2016, the CAA started making contingency plans to charter aircraft from other UK operators who were then asked to begin shadowing Monarch’s routes. If Monarch’s ATOL licence was not renewed at the end of the month and the carrier had to stop operating, then the CAA would be able to arrange the smooth return of stranded holidaymakers. The plans had to remain secret since a panic can often be self-fulfilling as bookings dry up. Although the airline is expected to post a respectable operating profit when it files its most recent accounts, Monarch was clearly low on ready cash at that time.
Swaffield puts this down to a number of unexpected headwinds that are hampering the airline. According to Swaffield, Monarch’s difficulties began in 2015 when the British government suspended all flights to the Egyptian resort of Sharm el-Sheikh – a key market for the airline. The carrier has also been hit by low Turkish demand following the coup attempt earlier this year, a weak pound, and cut-throat competition with low cost carriers such as a Ryanair and easyJet.
So while the CAAs plans were prudent, sharp-eyed aviation enthusiasts noticed that other airlines were shadowing Monarch’s network. The rumours soon began spreading on social media to the alarm of customers. The company always denied being in real financial difficulty, though Swaffield did admit that bookings had dropped as the news of the ATOL negotiations spread.
The Ishka View
Monarch Airlines is stable following the refinancing of the order book and a recapitalisation from Greybull, and was not as close to insolvency as the ATOL debacle may have indicated. Its main weakness was a lack of ready cash, which has now been rectified, and the sale and leaseback agreement provides further comfort. Monarch management can now sharpen their focus on building out their strategy as a ‘post-charter’ airline. It will be hard to match Ryanair and easyJet on costs, and like other UK carriers, is suffering from currency fluctuations and lower localised tourist demand with the closure of key resorts in Turkey and Egypt.
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