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 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
Article Link: http://www.airfinancejournal.com/Article/3412563/Analysis-Monarch-keeps-its-crown.html
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