Monarch’s demise shows how only the financially strong can rule the airline market

After three bail-outs in the last three years, budget airline Monarch has finally been grounded, weighed down by operational losses and leasing payments on its aircraft fleet at a time when competition between carriers remains as fierce as ever.

The decline of the pound (increasing fuel costs and potentially crimping consumer spending via inflation) and the impact of terrorism attacks in key Mediterranean resorts were additional complications for a company whose accounts to October 2016 revealed a £75 million net cash pile but also annual operating losses of £290 million and £470 million in non-cancellable operating lease payments.

“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,” says AJ Bell Investment Director Russ Mould.

“As a result, airlines can find themselves with little control over their sales (number of passengers multiplied by the price per seat they pay) or their costs (fuel), which can be a volatile combination – and even a deadly one if the carrier has a lot of debt for good measure, as the lenders will want their interest to be paid on time.

“In this case, Monarch made a £13 million profit before over £300 million of exceptional costs and had a £92 million net cash balance as of last October, after last autumn’s cash injection from 90%-shareholder Greybull. But profit margins were thin and it is possible that a deterioration in operating performance and the leasing payments have eaten away that buffer amid difficult trading conditions – and note how Monarch’s cash pile was tiny compared to that of its major UK-quoted rivals.

* Sales and profits drawn from last full-year's accounts
** Cash, debt and other balance sheet figures drawn from most recent interim or quarterly results
*** Ryanair leases shown next three years' obligations only

“The collapse of a rival is to the potential benefit of publicly-quoted rivals such as International Consolidated Airlines (the parent of BA, Aer Lingus and Iberia), easyJet, Wizz and Ryanair, as it could take capacity out of the market, or at least present them with a chance to acquire airport slots, routes and staff from a distressed seller.

“All of these players are currently in the black and look financially sound, to reflect how in some ways the airline industry has become a lot more efficient and better at managing its resources since the time Warren Buffett lost a packet on a shareholding in US Air, prompting the legendary investors to declare the sector ‘a death trap for investors’ and joke that next time he would think of investing in the industry he would call ‘Airlines Anonymous’ first.

“Buffett even owns stock in three US airlines, Delta, Southwest and United Continental to show how the Sage of Omaha thinks the industry has changed, even if Monarch shows the dangers of backing a weak player in a still-fiercely competitive industry.”

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