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What brought down Monarch, the UK’s biggest ever airline collapse

Monarch is no
more.
Reuters/Darren
Staples

Monarch collapsed on Monday after years of financial
difficulty;

Terrorism, the fall in the pound, and Brexit
uncertainty all blamed for problems;

Efforts to compete with low-cost rivals also failed,
pushing Monarch into difficulty.

LONDON — When
Monarch Airlines collapsed on Monday, the company became the
biggest airline failure in the history of British aviation and
left approximately 110,000 travellers stranded abroad.

What went wrong?

Speculation that the 50-year-old company was close to collapse
first
surfaced in September last year but the airline strongly
denied it was in trouble at the time. Monarch received a funding
injection from private equity business Greybull Capital shortly
after. It later emerged that Monarch lost £291 million in the
year to October 2016.

Speaking to the Daily Telegraph on Tuesday, Greybull
Capital’s founder Marc Meyohas said a “bloody hurricane” of
problems led to the airline’s eventual collapse, adding that the
European short-haul flight market is a “bloodbath.”

Terror and Brexit hit the industry

Marc Meyohas told the Telegraph that the combination of a weak
pound since the Brexit referendum, the increase in terrorist
attacks in the Middle East and Europe, and ongoing Brexit
uncertainty proved to be “pretty large headwinds” that Monarch
couldn’t cope with because of its relatively small size.

Airport
staff speak by empty Monarch Airlines check-in desks after the
airline ceased trading at Birmingham Airport, Britain October 2,
2017.

REUTERS/Darren
Staples

Weaker sterling has been an issue for all British airlines since
the Brexit vote —
the slump in the pound has cost easyJet £90 million — and
Monarch was no different. The weak pound both lowered the number
of people able to afford a holiday and increased the airline’s
fuel costs.

Terrorism and the rise of ISIS have also been an issue for the
industry. Tim Symes, a leading insolvency lawyer with DMH
Stallard, said on Monday: “A higher terrorism threat has proved
to be difficult for trading conditions; Egypt and Turkey provided
a key chunk of revenue for [Monarch] and subsequent terror
attacks left the airline deprived from the resulting weaker
demand.”

But terrorism and the fall in the pound affected the entire
aviation industry — why has Monarch suffered more than others?

‘Lost its way’

“Monarch had somewhat lost its way in recent years, trying to
reinvent itself as a low-cost carrier but in a market already
well supplied by dominant players like Ryanair and easyJet,” John
Strickland, an aviation consultant,
told the FT on Monday.

Symes said: “The airline adopted the low-cost model in 2004 to
keep pace with rivals EasyJet, but this was the beginning of its
demise. Flights at some destinations were dropped due to low
demand and leased planes were quickly returned.”

The airline was the fifth largest in the UK, behind British
Airways, easyJet, FlyBe, and Jet2, and Monarch struggled to
compete with its bigger competitors in a cut-throat business.

Neil Wilson, a senior analyst at ETX Capital, said on Tuesday:
“Monarch carried 14% more passengers last year but for £100
million less revenue.

“Airlines continue to cut fares to grow market share and this is
coming at the expense of profit margins. The problem of
over-capacity and overly-aggressive pricing is not going away
until we see more consolidation.”

A
Monarch Airlines passenger aircraft prepares for take off from
Gatwick Airport in southern England, Britain, October 9,
2016.

REUTERS/Toby Melville

Gerald Khoo, an analyst with investment bank Liberum, said
Monarch was “widely considered to be financially doomed” for many
years,
according to the Financial Times.

Symes said: “The Brexit vote seemingly provided the final nail in
the coffin, as the weak pound impacted on handling charges.”

“Monarch was basically in the wrong place at the wrong time. It
was sub-scale and failed to adapt to changes in a tough market,”
Khoo concluded.

Russ Mould, investment director at AJ Bell, said in an email to
BI: “Airlines were always seen as a notoriously tricky business
and with good reason.

“Demand can be very cyclical, varying according to how well
consumers feel they and the economy are doing and customers show
little brand loyalty, preferring to focus on cost and value for
money. At the same time, the price of oil can move around a lot,
even allowing for any short-term hedging that an airline can do
to cope with sudden cost increases.”

Monarch’s collapse has kicked off
the biggest repatriation of British citizens since the Second
World War and
sent shares in other British airlines higher as investors saw
opportunities for growth.

It is believed that the airline owes Greybull Capital as much as
£150 million, with the firm set to lose a total of £250 million,
which it considers to be “close to a total write-off.”

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