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Why did Monarch collapse, and who is next?


“Don’t go to the airport. There will be no more Monarch flights.” So said Monarch’s Twitter feed today as the market digested the largest ever demise in the UK airline sector.

But why did Monarch collapse?

Richard Branson put it succinctly, directly blaming Brexit for the failure of the airline.

This site and many others have suggested that Brexit is going to be bad news for the low cost, short haul sector.

The market spent much of last week focused on Ryan Air, however, with the Irish discount airline fending off possible legal action for mis-leading passengers. At the time of writing Ryan Air was trading at €16.27 in Dublin, down from a 52 week high of €19.28.

The big question for many investors is not going to be why Monarch collapsed, but who is next?

The UK’s short haul airline boom was driven by EU membership, a strong Pound, and access to a wide variety of European destinations under the EU’s open skies policy. With that, and many other issues, on the negotiating table in Brussels, analysts are wondering how discount airlines will continue to survive in a much tougher environment.

“Airlines were always seen as a notoriously tricky business and with good reason,” says Russ Mould, investment director at stock broker AJ Bell. “Demand can be very cyclical, varying according to how well consumers feel they and the economy are doing, and customers show very little brand loyalty, preferring to focus on cost and value for money.”

The price of oil can also have an impact, but discount airlines were able to operate when oil was well north of $100/bbl. What has changed?

There are potential benefits for Monarch’s competitors.

Ryan Air, for example, said it would be looking to recruit some of Monarch’s pilots, while there could also be new slots and routes available for the likes of easyJet and Wizz.

“All of these players are 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,” says Mould.

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.

Profit margins remained thin, however, and analysts are speculating that a deterioration in operating performance plus leasing payments eating away at its buffer, amid difficult trading conditions, have combined to bring Monarch down.

Analysts are generally positive about the outcome of Monarch’s fall for its competitors.

Short term, there are likely to be bonuses for short haul airlines; long term, however, investors need to keep an eye on the outcome of negotiations with the EU, and the impact of cheaper sterling on the holiday sector.

Low cost carriers will suffer if holiday makers find going abroad starts to get too expensive. Also, rising UK interest rates will impact the UK consumer, and it will be the luxuries, like foreign travel, which will be impacted.

We have to ask ourselves the question – how easy will it be for UK airlines to operate freely in a post-Brexit scenario?

Certainly airlines like Norwegian seem to be able to get along, but the political situation is fluid.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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