“We gotta get out of this place”; some observations on the Monarch Airlines

“We gotta get out of this place”; some observations on the Monarch Airlines

October 17, 2017

So pop pickers I thought the old Animals song was quite appropriate for the Monarch collapse and that it would make a change from all the pun-tastic headlines in the news – so as the last flights bring the final passengers home you’ll find no reference to crash landings, falling to earth, loss of lift or wings clipped here!

As with most of the major insolvency stories of the last few years this was a story a long time coming. Just like Woolworths and BHS in the retail sector Monarch remained a moribund business and failed to adapt quickly enough to survive.

Of course the story grabs lots of news time because it has some classic elements:

  • The stranded customers
  • The huge work force facing redundancies
  • • And the residual glamour associated with air travel.

But beneath the headlines there are some useful points to note and I want to focus on two areas in particular; the short haul airline industry and the consumer protection afford by the ATOL scheme and how they related to Monarch.


The short haul airline industry

a) Competition

It’s a tough market that is arguably over-saturated, but mid-level carriers have always had to compete against the scale of the budget airlines like Ryanair and easy Jet. Monarch had operated in the long haul market as well but once it was acquired by venture capitalists in 2014 it concentrated on the short haul routes. Monarch offered package holidays so was protected for a while but consumers became increasingly savvy and more and more bought their holiday accommodation and flights separately. This left Monarch vulnerable to migration of customers to cheaper airlines and dwindling package holiday sales. Monarch’s revenues were £100m down last year and apparently kept on falling in 2017.

b) Fuel Prices and costs

Aviation fuel and handling/airport charges are traditionally denominated in dollars therefore leaving two of the biggest costs of any UK based airline vulnerable to exchange rate fluctuations. The pound has fallen circa 10% against the dollar since the Brexit referendum in June 2016 thereby increasing Monarch’s underlying costs particularly as it is the nature of package holidays that they are priced and bought in advance. Price rises just erode margins further. In addition, and compounding the problems has been the volatility of aviation fuel prices; they recently fell but for most of 2017 they have been at least 15% higher than in 2016.

c) Terrorism

Monarch’s traditional heartland was Spain and Portugal but with the terrorist attacks in Egypt and Turkey other travel firms and airlines sought to fly to the Iberian peninsula as well and over supply forced Monarch to lower prices; a third “whammy” to Monarch’s already precarious finances.

d) Conclusions

Whilst you could say the impact of terrorism could not have been predicted, rising costs have been squeezing margins in the airline industry for years. Monarch was too small to obtain the economies of scale of Ryanair and easy Jet and failed to move with the times; if you want to survive in today’s airline industry you need to be a Triple A organisation – Adroit Agile and Adaptable. It remains to be seen if the remaining players justify that rating themselves.


The Consumers

So the cameras showed crowded airports, families in distress (or angry and ranting), shocked employees, apologetic management. Headlines flagging that the repatriation of 110,000 holiday makers was the largest peacetime repatriation of passengers since WWII masked a 2 important points – firstly the effectiveness of the ATOL scheme and secondly that the government’s decision to bring ALL effected passengers home at no additional cost to the consumers even if they didn’t have ATOL protection may ultimately destroy that effectiveness. The repatriation by the CAA has gone well and on 16 October a flight from Tel Aviv landed in Luton with the last passengers.

The ATOL scheme is administered by the Civil Aviation Authority and it is the requirement by law, that every UK travel company which sells air holidays and flights is required to hold an ATOL, which stands for Air Travel Organiser’s Licence. The travel company pays a £2.50 levy for each passenger it books and the levy provides the fund to repatriate holiday makers and ensure they enjoy there holidays if abroad.

Started in 1973, the scheme originally covered charter flights and package holidays but as noted above, as the holiday market fragmented with flights and accommodation being arranged separately, the scheme has been extended to cover all holidays were flights and accommodation are booked together.

Although Monarch had its own package holiday firm Monarch Holidays, which held an ATOL, Monarch Airlines was not ATOL protected so many of its passengers were flight only and therefore did not have protection.

The CAA estimate that 50% of the 110,000 passengers repatriated were not covered by ATOL but they’ve all been brought home free of charge and with a minimum amount of fuss. It’s cost the Government £60m and Chris Grayling the Transport secretary is apparently in looking to the tour operators to meet some of the costs of flying back non ATOL covered passengers.

The Travel industry is not very impressed.

They were not consulted in the decision to repatriate all passengers free of charge. ATOL was there to protect consumers and it demonstrably works, they say, but by repatriating non ATOL consumers and asking the industry to fund some of the costs the Government has created a real distortion of the market. A precedent has been set, they argue, so now all consumers will expect to be flown home free of charge in the future if a travel company fails irrespective of ATOL protection.

Interestingly Monarch collasped on the day the Conservative party conference started. Would it be a tad cynical to suggest that a party with a slender majority and an unloved leader, would decide to take an avowedly populist course of action and think about the consequences later?

Just asking.

“The View From The Skies”