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How Monarch’s cash flow became critical

Yesterday Britain's fifth largest airline went into administration after several bumpy years that have seen cash injections that haven't been able to keep huge industry pressures at bay.

What went wrong?

The airline was founded in 1968 and until 2014 was co-owned by the Swiss Mantegazza family, when the majority was sold to private equity firm Greybull Capital (which owned 90 per cent). Industry developments put the airline under huge pressure, from the rise of the budget airlines in the 1990s to the emergence of geopolitical tensions and terror attacks in Turkey, Tunisia and Egypt, depriving Monarch of some of its most lucrative winter destinations, such as Sharm el Sheikh.

In some quarters, the folding of Monarch was foreseen. A year ago, in late September 2016, the UK's Civil Aviation Authority (CAA) was so concerned about the airline’s financial condition that it set up a shadow airline in case Monarch folded. The company was saved in October 2016 by its majority owner, Greybull Capital, injecting £165m to keep the airline operating. But fast-forward a year and this time there was nothing to be done to save the company, with estimated losses for 2018 surpassing £100 million.

Currency concerns

The value of sterling has plunged by 10 per cent against the dollar since the Brexit vote in June 2016, also taking a similar tumble against the euro. This has meant higher costs but lower revenues, damaging the company's financial position. Andrew Swaffield, Monarch's chief executive, told The Independent: “We take nearly all of our revenue in pounds and a lot of our costs go out in dollars and euros. We pay for aircraft leases and fuel in dollars and things like navigation and ground handling in euros. So we get no revenue benefit from a decline in the pound but we get a big cost increase.” The BBC reports that the increased cost of fuel and aircraft leases (priced in dollars) added £50m a year to Monarch's costs. Monarch – with its fleet of 35 compared to the likes of Ryanair and Easyjet with far bigger fleets roughly 10 times the size – was not big enough to absorb such additional costs.

A victim of Brexit?

The airline industry has been under huge pressure for years due to global factors that extend far beyond Brexit – from the uncertainty in the form of conflict in Syria and terror attacks in and on the borders of Europe, causing disruption to routes and tourism, as well as volatility in fuel prices and aggressive competition from low-budget carriers pushing ticket prices down.

However, the pound's fall following the referendum in 2016 seems to be an important factor in Monarch's financial problems. The BBC's business editor Simon Jack reported that Monarch's management was in talks with several interested parties to agree “tie-ups” to shore up the airline's viability. He writes: “Company sources tell me that those talks were derailed by uncertainty surrounding the future regulation of the UK aviation industry thrown up by the Brexit vote.” If this is the case, then Monarch could indeed be one of the first large companies to fall victim to Brexit. The BBC's Jack concludes: “Brexit didn't kill Monarch on its own but it added cost and helped shut off some of its potential escape routes.”

This item appears in the following sections:
Cash & Liquidity Management
Cash & Liquidity Management in Europe
Liquidity Risk Management
FX Management & Crypto
Buying & Selling FX
Risk Management
FX Hedging & Risk Management
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