Monarch falls to the budget kings

Monarch falls to the budget kings 14 October 2017

Last week Monarch Airlines, a stalwart of the British aviation industry, went into administration after almost 50 years of service. The largest ever failure by a British airline was a hard landing. In contrast to Germany and Italy, where insolvent carriers Air Berlin and Alitalia have been able to maintain operations[1], under British aviation law Monarch’s Air Operator’s Certificate was suspended and its fleet grounded immediately upon its 4am bankruptcy filing, leaving 110,000 holidaymakers in need of repatriation, a further 300,000 bookings cancelled and its 2,100 employees out of work.

In this article we attempt to uncover the scale of Monarch’s troubles and try to understand why the end came now, in October, at what should be the end of the most profitable trading period of the year for an airline primarily focussed on Summer Sun markets.

Falling revenues, rising costs

Monarch’s immediate problems can be summed up very succinctly: falling revenues and rising costs. Not only has the price of jet fuel risen 11% in the last year[2], but the pound has fallen about 13% against the dollar and 16% against the euro since the Brexit vote, meaning that UK airlines are paying more for fuel, airport and handling fees denominated in these currencies. Unlike its international competitors EasyJet and Ryanair, Monarch’s operations were based solely in and out of the UK and therefore its earnings were almost entirely in pounds.

At the same time, Monarch’s revenues have fallen due to increased competition in the low cost market. Terror attacks in Tunisia, Egypt and Tukey have seen travel firms and airlines concentrating on Monarch’s traditional strongholds of Spain and Portugal, further increasing capacity and depressing prices on these routes. In fact, Monarch carried 14% more passengers in 2017, but earned £100 million less revenue, largely due to this aggressive price competition.

Monarch passenger numbers

In a low fare environment, costs reign supreme

The analysis in the rest of this article focuses on markets from the UK to Spain, Italy, Greece and Turkey, which form the rump of Summer Sun destinations and compares the performance of Monarch with EasyJet and Ryanair, neither of which require any introduction as the dominant players in the UK market.

At this stage we should add that our analysis of Monarch’s performance carries a larger than usual margin of error and should be viewed as an indication of performance rather than an absolute statement. This is because the company has not recently published detailed annual accounts and gaining a fully accurate picture of seat costs is therefore difficult.

Aviation Analytics’ Network Grandstand platform provides estimates of seat profitability, based on our accurate accounts-derived airline seat costs and average fares from our in-house Low Cost Fares Database.

Integral to Network Grandstand’s benchmarking capability is the AAIndex – a measure of route performance using an A to E index as follows:

Here we compare the performance of Monarch, Ryanair and EasyJet’s UK – Summer Sun routes in the period June through August 2017:

AAIndex performance split: Ryanair vs. EasyJet vs. Monarch UK – Summer Sun routes

The results offer a striking insight into Monarch’s problems. Almost 100% of Ryanair’s UK – Summer Sun routes fall into the top category, making them highly profitable. This is despite Ryanair being the chief antagonist in the summer fares war, offering headline grabbing deals such as Leeds/Bradford to Ibiza for £40 return, and reflects the carrier’s ultra-low cost base.

EasyJet’s performance is slightly more mixed, with 74% of routes profit making or marginal. Nevertheless, this is still significantly ahead of Monarch, of whose routes just 47% were profitable, with a further 15% marginal. 38% of Monarch’s routes were loss making or highly loss making, compared to 25% for EasyJet.

Next we used Network Grandstand to provide a network average of each carrier’s performance across the above routes, looking at average fares, revenue per passenger and seat profitability. This provided the following comparison:

Average fare Revenue per passenger Profit per seat
Ryanair[3]  £58  £75  £17
EasyJet  £70  £84  £10
Monarch  £66  £78 -£7

This chart further illustrates how Ryanair’s strong ancillary revenues and low operating costs translate into making it the most profitable of the three carriers, whilst having the lowest headline fares. By contrast, Monarch would have needed revenues of £85 per passenger simply in order to break even, which would have meant a headline fare in excess of £73 – a price point at which it would clearly have struggled to attract passengers in this ultra-competitive market.

No room for manoeuvre

For the reasons described above, it is difficult to calculate Monarch’s seat costs with a high degree of accuracy. Our best-case estimates would be in the 20-30% range in terms of a premium on those of EasyJet. However, there are many factors which could increase these, such as less favourable lease rates and fuel hedging positions. The loss position for Monarch could easily therefore have been in excess of £10 per seat. This at a time when an airline of this nature should be firmly in profit to counteract the weaker winter period.

So, when the Board of Directors reviewed the summer and used the actuals to extrapolate a forecast for the winter and then onwards for the next financial year, it would have become clear that there was no viable road map towards anything approaching profitable trading. At that point, the Directors would have had no option save for the grim one that they took.

Indeed, the company’s CEO Andrew Swaffield was very prompt in issuing a statement forecasting a loss of £100 million for the next financial year. Based on our analysis of the summer market and knowledge of seasonality, this would certainly not be an outlandishly pessimistic forecast.

The demise of Monarch was a sad day for British aviation and our thoughts go out to the airline’s employees, who number a great many well-regarded and loyal professionals. Whilst it may have been, accepting recent history, inevitable, the abrupt end of a carrier that has been a fixture throughout all of our professional lives is a reminder of the challenges of the airline business. Monarch was one of the last of a long line of carriers that struggled to adjust to low fares revolution. Unable to match the radically lower cost bases of today’s market giants, it becomes the latest addition to a list of almost 200 UK airlines to have vanished from the skies in the modern era[4].

Postscript: Repercussions

Since the collapse of Monarch, there have been many headlines proclaiming an “air fares surge”. Given Monarch’s relatively small share of the UK market, we believe that its exit is unlikely to have a long term or widespread impact on fares. However, it is fairly safe to say that the response of Monarch’s competitors will vary across markets. Where the collapse of Monarch has left large gaps – for example Gibraltar, where it accounted for nearly 40% of the airport’s weekly capacity and fares have spiked as a result – it seems highly unlikely that other carriers wouldn’t move quickly to adopt these routes. However, routes where there is already competition from more than one operator will be less attractive to new entrants, and in these cases we are more likely to see consolidation and fares bottoming out, at least for the forthcoming winter season. At Aviation Analytics we will be keeping a close eye on fares in the coming weeks – stay tuned for updates.

[1] Air Berlin filed for insolvency on 15 August 2017. After the airline failed to find a buyer it was announced on 11 October that Air Berlin would cease operations by 28 October. See our previous article Air Berlin, a basket case?

[2] The International Air Transport Association (IATA) Jet Fuel Price Monitor

[3] Ryanair data converted on an exchange rate of €1.1:£1

[4] Wikipedia ‘List of defunct airlines of the United Kingdom’

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