Analysis: Monarch keeps its crown

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Analysis: Monarch keeps its crown

29 December 2014  EUROMONEY

Earlier this year Monarch, the 46-year-old UK carrier, was close to insolvency but changed ownership at the 11th hour and agreed a broad restructuring. Jack Dutton reports on one of the quickest turnarounds in aviation history.

Monarch, the UK’s longest-running airline, changed owners at 9.52pm on October 24 2014 at  law firm Freshfields Bruckhaus Deringer’s London  offices.

“I’ll never forget the moment that deal was  signed,” reflects Andrew Swaffield, the carrier’s  chief executive officer (CEO). “Without the investment,  Monarch would have become insolvent. It  could not secure ownership without restructuring,  so it was very clear we had a choice. We had to  restructure, or go out of business.”

Monarch’s license with the Civil Aviation  Authority (CAA) was due to expire at midnight  the same evening.  The airline’s former owners, the  Mantegazza family, who had been stakeholders  since Monarch’s inception in 1968, had injected  £120 million ($189 million) in cash to bail out the  airline over the past five years. Despite the bailouts,  Monarch’s 2014 losses exceeded £60 million and  its pension fund built up a £158 million deficit.

The airline had to restructure if it wanted to carry on. Having only three months to restructure,  Monarch Airlines, Seabury Capital and Greybull  Capital were responsible for one of the fastest  turnarounds in aviation history.

Road to investment

“Most of the growth was loss-making,” says Swaffield. “We ended up with too many planes,  chasing too few passengers. It’s a common story in  aviation that you can have too much capacity and  you grow too fast, and the revenue doesn’t keep up  with it.”

Monarch needed a restructure and new investors. When Swaffield became CEO at the end  of July he approached Seabury Capital Group, a  US-based advisory firm, to help restructure the  airline. Seabury found Greybull Capital, a private  equity fund based in Knightsbridge, west London,  as potential investors. The company had previously  taken over electrical retailers Comet before it  folded in 2012.

Greybull would only buy a stake in Monarch if it moved its pension scheme into the Pension  Protection Fund to get rid of its deficit, reduced  its fleet size and removed long-haul and charter  flying. Monarch needed to renegotiate leases, build  a business plan and address the labour costs. Most  importantly, the CAA had to renew Monarch’s  Atol license if the carrier was to be allowed to  operate.

Meeting these conditions would not prove  an easy task. John Luth, chairman and chief  executive officer of Seabury, explains how the deal  nearly did not materialize in the limited timeframe.

“This was an incredible turnaround – it took  12 weeks from start to finish. It was an impossible  task. If we hadn’t pulled some rabbits out of the  hat, we were four to five days beyond the sunset  date.” Monarch was on borrowed time, and  needed to work assiduously with Seabury if it was  to make the turnaround.

Closure of the deal

Most airline turnarounds take at least 12 to 18  months to carry out successfully, but this one took  only three months. “The reality was there that we  just didn’t have any more time,” admits Luth. “All  the groups had to come to the table to make concessions  – they came in record numbers – both in  the number of people showing up to vote and in  record percentages voting in favour. These are very  difficult concessions but, in this case, they were the  hallmark of the turnaround.”

Private equity fund Greybull Capital took a 90% stake in the whole company, which included  Monarch Airlines, its maintenance, repair and  overhaul business and its tour operator Cosmos  Holidays. The deal raised Monarch £125 million  of permanent capital, anchored by a £50 million  capital commitment. The remaining 10% stake  was transferred to the statutory Pension Protection  Fund, a UK government fund designed to protect  existing pension holders.

The outgoing shareholders, the Mantegazza  family, made financial contributions to remove  Monarch’s liabilities and debts. Freshfields Bruckhaus Deringer and Bird & Bird were the law  firms which advised Monarch. Forsters advised  Greybull, and Macfarlanes advised the Mantegazza  family. Stephenson Harwood advised on  the Pension Protection Fund on the restructuring  of Monarch’s pension deficit.

Monarch’s workforce bore the brunt of the losses: 700 of its 3,380 staff were made redundant,  while the remaining employees took a 30% pay  cut. Two-thirds of the redundancies were voluntary.  A ballot decided the pay cuts; about 90% of  the employees voted in electronic ballots set up by  the unions Unite (which represented Monarch’s  engineers and cabin crew) and Balpa (which  represented Monarch’s pilots). Some 91% of the  turnout voted in favour of the pay cuts that were  needed to keep the airline buoyant.

It is unusual to have such strong consensus  between senior staff at an airline and its union, but  if Monarch wanted to stay afloat, it did not have  much choice.

“The trade unions played a very important role. I would encourage management, particularly  in aviation, to engage with trade unions positively  and not to regard them as a blocker. They are not  a blocker. They are there to represent their members  and we have to engage truthfully with them,”  says Swaffield.

Monarch’s future

Monarch will be stopping long-haul and charter flights from April, and focusing on scheduled  European leisure flying. Although the airline will  be smaller, it should be more profitable.

“We’ve taken around £200 million out of the  annual cost base permanently,” says Swaffield.

“We have three years now before our new fleet begins to arrive from April 2018. We have an opportunity  to return to profitability within one year  and build a sustainable business ready to renew the  fleet from April 2018 onwards.”

The airline has cut out its unprofitable routes  and will be closing its East Midlands base in May.

This closure will result in the removal of Monarch’s Malta route.  Monarch has 38 jets in its fleet: two A330s,  nine A320s and 27 A321s. By April the carrier will  be stripping back to an all-Airbus fleet of 32, with  two additional standby aircraft. Monarch is returning  10 of its aircraft to lessors early: two A330s,  three A320s and two A321s will be returned by  April. Two new A320-family aircraft will arrive  earlier in the spring.

“It was difficult to negotiate with the lessors, but these were obligations for the airline. Telling  someone that you’ve ran out of money and  you can’t pay is a horrible way to approach any  financier, but we were gratified that an overwhelming  majority of the lessors came to the table,” says  Luth.

Monarch is going through a long-term transition  from an all-Airbus fleet to an all-Boeing fleet.  By 2020 Monarch will have 30 new Boeing 737  Max 8 aircraft, with the first one is being delivered  in April 2018. The deal is estimated to be worth  $3.2 billion, based on present list prices. But how  does Swaffield intend to compete in a market  dominated by airlines that offer low-cost fares?

“We believe that with the right cost base, with our brand and our level of personal service and  attention, that we can be very successful in the European  leisure schedule market. We are not a highfrequency,  short-hop airline flying high-frequency  city pairs in mainland Europe, for example. We’re  not competing in the business travel market, and  we don’t compete in the very short regional fly  market.

We generally have longer flight lengths  than easyJet – about twice as long (2,000km). We  specialize in the Mediterranean sunny belt.”

Monarch still has a lot to do. At the moment the average age of Monarch’s fleet is 11.5 years.  By the end 2020 its average age will be one year,  making it the youngest fleet in Europe.

“It’s one thing to write it down on paper and another to deliver it. We have to hit our numbers  in terms of trading. So far, so good. We beat  our target in November, which is a good start,”  observes Swaffield.

“What we’ve done is prune the tree back, to get back to our profitable core – and that’s pretty  much where we were three years ago. That will be  a good base from which we can establish a sustainable  set of financial results and then look to grow  in the future.”

SOURCE: Airfinance Journal
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Seabury Advisory Group is part of Seabury Capital, a leading global advisory and professional services firm that delivers diversified and responsive business solutions to clients in Aviation, Aerospace & Defense, Transportation, Financial Services, Insurance and related industries. Since 1995, Seabury has partnered with more than 300 clients on 1,000+ engagements to solve their most complex challenges through an integrated approach to consulting, investment banking, asset management and information technology. Our professionals worldwide are top-tier bankers, consultants, technology experts and former executives who share a passion for delivering innovative and intuitive solutions geared toward our clients’ diverse and emerging needs. Headquartered in New York, Seabury and its subsidiaries are based in 14 countries on five continents.