Monarch Files for Insolvency in Biggest U.K. Airline Failure

(Bloomberg) -- U.K. leisure carrier Monarch filed for insolvency in Britain’s biggest-ever airline collapse, leaving the government to arrange the return of 110,000 tourists and marking the third failure of a major European operator in five months.

The airline and Monarch Travel Group were placed in administration, leading to the suspension of the Luton, England-based company’s operating license, according to a statement Monday. Future flights and holidays have been canceled and won’t be rescheduled, affecting a further 300,000 people.

The collapse of Monarch, which served more than 40 destinations from five U.K. bases, follows insolvency filings at Alitalia SpA and Air Berlin Plc as a glut in capacity prompted by the low oil price compels carriers to slash fares in a battle for market share. At the same time, the low-cost operator has seen margins squeezed by higher dollar-denominated fuel costs following the pound’s decline in the wake of last year’s Brexit vote.

Monarch Chief Executive Officer Andrew Swaffield said the carrier had fallen victim to “outside influences,” especially a flood of seating into its core west Mediterranean markets after a spate of terrorist attacks prompted holiday companies to reduce their exposure to Egypt, Tunisia and Turkey. Attempts to sell the short-haul business prior to the insolvency filing failed, he added.

The crisis at Monarch, which employed around 3,000 people and was Britain’s fifth-biggest scheduled airline by passenger numbers, follows on the heels of pilot scheduling issues at low-cost rival Ryanair Holdings Plc that prompted 20,000 flight cancellations, disrupting travel for around 700,000 customers.

Greybull Takeover

Monarch, which was founded in 1968, has come close to collapse before, with the airline rescued by a 165 million-pound ($220 million) capital injection from Greybull Capital LLP last December, just hours before it faced grounding by the U.K. Civil Aviation Authority due to a lack of funds.

Greybull had bought 90 percent of Monarch in 2014 via a 125 million-pound recapitalization that funded the final elements of a transformation from charter specialist to discount carrier. The private-equity firm said in a statement Monday it was “very sorry” that the three-year turnaround bid failed.

Some 1,858 people have been made redundant, administrator KPMG said, about 1,760 at Monarch Airlines Ltd. and the rest at the holiday division, leaving about 250 to assist in the repatriation of clients and the windup. Repair arm Monarch Aircraft Engineering Ltd. isn’t in administration and is still functioning.

Monarch operated 35 Airbus SE A320-series planes, almost all of them leased, with AerCap Holdings NV most exposed to aircraft being returned, according to Wells Fargo analyst Gary Liebowitz. He added that the jets represent only 0.5 percent of the firm’s fleet value.

The U.K. airline also has a contract for 45 Boeing Co. 737 Max 8 jetliners worth about $5 billion at current list prices, the last 15 of which were ordered only in June. Boeing said in an email that it is “aware of the situation” regarding the carrier -- which was due to get the first planes next year -- but doesn’t comment on discussions with customers.

EasyJet, IAG Interest

The insolvency opens up opportunities for rival operators to expand into former Monarch routes or snap up the carrier’s assets. Cantor Fitzgerald analyst Rob Byde said in a note that the failure is “another step in the consolidation of the European short-haul market,” and that he views EasyJet Plc, Britain’s biggest discount carrier and also based at Luton, as a likely bidder, though a wholesale takeover is unlikely.

EasyJet declined to comment, beyond saying that it has encouraged Monarch employees to apply for jobs. Virgin Atlantic Airways Ltd. also said it has launched a program to recruit pilots from the failed carrier.

British Airways owner International Consolidated Airlines Group SA has expressed interest in Monarch’s takeoff and landing slots, fleet and crew, Sky News reported over the weekend, without saying how it got the information. IAG has a growing discount arm of its own in Barcelona-based Vueling.

Share Gains

EasyJet advanced as much as 5.3 percent following news of the insolvency filing, while IAG traded 2.4 percent higher. Gains were paced by Dart Group Plc, owner of Monarch rival Jet2.com, which surged 8.3 percent, while U.K. regional carrier Flybe Group Plc jumped 4.1 percent and Ryanair was up 3.6 percent.

Swaffield said a study by consultants had shown that Monarch, which attracted about 5.4 million passengers in 2016, would continue to struggle in the European market, prompting plans to “pivot” into long-haul flights in spring next year. That strategy came unstuck when buyers for the existing operation weren’t forthcoming.

One of the KPMG administrators, Blair Nimmo, said on BBC Radio 5 Live that “the prospect of selling the business as a whole has pretty much gone.”

Monarch joins Air Berlin and Alitalia in presenting healthier carriers with scope for opportunistic acquisitions. EasyJet has been chosen as preferred bidder to buy parts of the German company, along with Deutsche Lufthansa AG, it was revealed last month, with talks set to continue until Oct. 12.

In Italy, Alitalia’s administrators have set a date of Oct. 16 for binding offers following a bankruptcy filing on May 2. Ryanair said last week that it had withdrawn from the bidding in order to focus on dealing with the fallout from its pilot shortage.

Under established plans for an airline collapse, the U.K. government has responded to the Monarch insolvency by asking the CAA to establish a temporary carrier with around 30 charter aircraft in order to bring people back from vacation when their holiday is over. Among that fleet will be planes from Qatar Airways, a Department for Transport spokesman said.

While Transport Secretary Chris Grayling said the situation was “hugely distressing” for people on vacation, disruption should be minimal according to the CAA, which advised: “There is no need to cut short your stay.”

The DfT said it will look into measures to prevent a similar situation occurring, including possible legislation, though Grayling said Monarch has ultimately been “a victim of the success of other airlines, like Easyjet and Jet 2.”

To contact the reporter on this story: Thomas Seal in London at tseal@bloomberg.net.

To contact the editors responsible for this story: Chris Reiter at creiter2@bloomberg.net, Christopher Jasper, Lena Lee