I’ve been watching as some weaker European airlines have fallen like dominoes over the last few months, and it’s striking to me how different their insolvencies have been handled thanks to varying bankruptcy laws. Americans are used to seeing nothing change when an airline files for bankruptcy protection. Everything operates as usual while restructuring occurs behind the scenes. In Europe, that’s not the case, and in the UK it’s particularly brutal. For Monarch, it was incredibly dramatic whereas for airberlin it involved more subtle and frustrating changes.
Let’s start with airberlin, the airline that failed to learn proper capitalization rules. It should have shut down years ago, but thanks to Captain Moneybags over at Etihad, airberlin continued to get cash infusion after cash infusion to keep it going despite having no real prospects for success. When Etihad finally gave up, airberlin went into bankruptcy in August to find a way forward. Most people understood that “the way forward” meant selling pieces off to Lufthansa, though easyJet does have an outside shot.
What we’ve seen since August is a systematic dismantling of the network. Airberlin gave little notice as it started to whack away at routes. As lessors started circling like vultures to reclaim their A330s, airberlin had to cut its long-haul destinations with the final ones winding up now. Many short-haul flights continue to operate, but it’s really just a matter of time until the company is wound up and its ashes are fully claimed. (Lufthansa has already announced it will fly from Berlin to New York and on some former Caribbean routes airberlin used to operate.)
So what exactly is different about this company’s insolvency? Well, if you bought your ticket before the airline filed for bankruptcy on August 15, you better hope your credit card company will help you. I’ll let airberlin explain.
All airberlin tickets issued… before August 15th 2017 are no longer refundable due to insolvency regulations.
Your flight canceled but your ticket was purchased before bankruptcy? Sucks for you. Good luck.
Not only that, but any compensation owed to passengers for delays or cancellations under European law from before bankruptcy won’t be paid out. To make matters worse, the airline’s frequent flier program filed for bankruptcy as well, and now you can’t use or earn miles at all in the program. Everything just gets frozen as is while they work things out.
That sounds terrible, but then there’s Monarch, which is far worse.
The nearly 50-year-old English airline failed last week after a long illness. It wasn’t a secret that Monarch was in trouble, but the sudden nature of the shutdown took people off-guard. One evening people were checking in for their flights, the next morning the airline was just gone.
Monarch had been losing money for awhile and it was floundering. It was a package operator that was tiny in comparison to the huge guys like Thomson or Thomas Cook. Yet it also wanted to be a low-cost carrier that could never compete with the likes of Ryanair and easyJet. After years of searching for the right way forward, it ran out of money and time.
The airline was placed into administration, and that was it. It shut down immediately and all that was left was to divvy up the remains. That meant 750,000 people instantly had bookings rendered useless. There were more than 100,000 people in the middle of trips abroad that had to find their way home. Fortunately, the British government was prepared for that.
It put together a tremendous and expensive repatriation effort where aircraft were chartered to run similar schedules to what Monarch was going to run. If that seems like an incredibly pricey endeavor for the British to take on, it is. But some will be reimbursed. There is a scheme in the UK where tour operators pay into an insurance plan that pays out if one fails. Those who were on package holidays are covered, but I believe those who purchased only flights aren’t. Credit card companies will also pay some of the expense back.
Is this really better than allowing a company to reorganize as we do in the US? An airline like Monarch may have struggled to find financing under US law, even if it were allowed to keep operating. It was relatively small (on an airline-industry scale) and it was rudderless and losing money. The end result might actually have been the same in the US even though the law would have allowed otherwise.
In the end, people are being hugely impacted by these bankruptcies in Europe. But this kind of shake-out has been expected for some time. The money that was propping up weak airlines in Europe has been disappearing as of late. That means weaker airlines are going to continue to struggle and fail if nobody else steps up. (I didn’t even mention Alitalia in this entire post…) For travelers, the vagaries of bankruptcy laws in each country are going to continue to lead to confusion and anger.
I have some trouble with the narrative that says there was no longer a market for package holidays, forcing Monarch to retreat from that and confront Ryanair head on, simply because of the success of Jet2. In less than a decade they’ve gone from obscurity to being larger than Monarch and owning that package market, without enjoying the benefits of Gatwick slots or brand loyalty that Monarch did.
Besides AlItalia any others – handy to know when looking for flights!
Ronald de Neef Managing Director Starline Entertainment
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Ronald – Those are the big ones right now.
What is going on at Virgin Atlantic??
Ronald de Neef
CLICK HERE FOR OUR MIPCOM LINE-UP mipcom
Ronald- I’m not sure what you mean. It’s doing just fine as Delta Jr.
The collapse of Monarch is becoming more interesting by the day. As you rightly comment the UK require those that sell package holidays pay a fee, currently £2.50 pp, into a fund to repatriate and refund customers affected by the closure of an operator. Airlines have always refused to get involved and only around 10% of Monarch customers should have been protected, the rest being left to find their own way home or claim against their credit cards.
The failure occurred at the start of the Conservative party conference, and it is alleged the Minister of Transport ordered that all customers be protected to avoid scenes of customers stranded across Europe overtaking the news from the Conference and thus around £60 million was spent hiring aircraft from around the world including the US and Doha to keep the story as quiet as possible.
Over the weekend the London Sunday Times has alleged that the owners of Monarch, who promised to invest £165 million exactly a year ago, failed to do so, but that Boeing, in return for an order of 737MAX aircraft from Monarch did so through a secret company based off shore. This really throws into question the right of Boeing to argue that Bombardier received hidden subsidies, when they seem to be in the habit of doing exactly the same to gain orders. This story looks as though it may run and run……
I read the piece in the London Sunday Times. As a Canadian, I have watched the hypocritical Boeing go to war with Bombardier and the Canadian and British governments and I’m thrilled to see them get their fingers badly burned!
Guess I should have taken a few pictures of the AirBerlin planes I saw taxiing at JFK Saturday.
Because like the concor and Pan Am they only exist in your memory now
The prime difference of course is that European bankruptcy laws view their primary concern as protecting the creditors to the maximum extent possible. Where as in the US the primary goal is to protect the company and find a way to keep it a viable concern. The creditors basically end up out of luck. Not to mention the employees who get hammered regardless of whether or not it’s needed or justified.
Not true. Chapter 11 is a creditor managed process by which the creditors have the option to reorganize the company if they believe doing so will result in a higher return on their claim (the creditors typically receive shares in the new company in proportion to the size of their claim). If no viable reorganization plan is put forward, the creditors have the option to shut the company down and take what they can get from an asset sale.
“(I didn’t even mention Alitalia in this entire post…)”
Until you did…
It’s good to see that Europe practices the capitalism that the U.S. preaches but then does not practice (witness the huge subsidies that U.S. airlines have received in the past and still are — for example, my tax dollars are currently paying for airline pensioners).
We need more capitalism in the U.S.!
Also not true. The Pension Benefit Guarantee Corporation is funded by premiums paid by companies with pension plans:
“The PBGC receives no funds from general tax revenues.”
The UK approach also crystallises a decision which is much more drawn out under the US process, though not obviously for better effect. When a company goes into administration, the quickest and best way out for the administrators is to find a buyer for the assets and, to the greatest extent possible, to do so as a going concern. The fact that this hasn’t happened is a pretty strong indicator that there was no real alternative to putting Monarch out of its misery. Had it been allowed to continue, it would have needed cash from somewhere and perhaps more importantly in thinking about bankruptcy law more generally, would have continued to compete with rivals which are actually solvent – in effect an unfair and market-distorting subsidy
A subsidy from whom? The creditors owed money are now the firm’s owners, and like the owner of any enterprise they can choose to reorganize operations in the hope of a better return versus shutting down and selling assets.
As for “unfair” – administration or reorganization is an option available to all firms – the textbook definition of fair.
“All airberlin tickets issued… before August 15th 2017 are no longer refundable due to insolvency regulations”
Dumb question, does this mean if one is bought now it is refundable? If so this is ridiculous and confusing..
Nathaniel – Yes, if it was bought after going into bankruptcy then it can be refunded per fare rules.
Sadly, the current round of failures of European airlines (which isn’t finished yet) are due precisely to a lack of US-style bankruptcy which makes it very unlikely that many other airlines will be interested in buying the company. As much as some people don’t like the process, chapter 11 bankruptcy in the US allowed the legacy airlines to restructure their debts and cut costs which led to a series of mergers which could not happen if each airline involved in the merger process had not been allowed to “clean itself up.”
It is also important to remember that European legacy airlines control a far higher percentage of slots at the largest airports than low cost or ultra-low cost carriers when compared to the US. Monarch and Air Berlin both have valued slot portfolios that will allow some semblance of bidding process to take place for the company – but it is really the slots that buyers are after, and in many cases, their slots will end up with airlines that are already quite large in those markets.
I hope you follow-up on this story, CF, and other global airline shutdowns because, at this point, where the assets end up is perhaps a more compelling story going forward.
The selling of slots so that Monarch’s creditors can get something is a lot more complicated that it seems. (https://www.ft.com/content/18c96d94-a9ed-11e7-93c5-648314d2c72c)
of course it’s complicated but it doesn’t change that the most money will only come from companies that have the greatest ability to consolidate the industry. Again, CF needs to follow-up on the story but I will be very surprised if the outcome of either airline’s asset sales is a complete inability of the legacy carriers to consolidate their market position even after thousands of employees are laid off.
That is as close to buying the company for its slots as is possible.
Speaking of Alitalia, seems its days may be numbered too (as you implied); apparently its fate will be decided by the end of the month, and it seems likely that parts will be sold off, and either the airline will disappear altogether, or “the name will be retained in a symbolic way” (whatever that means, quoting from a news source). In any case, it seems Alitalia as we know it may not be around for much longer.
Also, apart from Alitalia, what are the other European carriers that are currently in trouble? You’ve mentioned Norwegian but they still seem to be doing alright so I guess they’ll be fine at least in the short-term. I’ve read a rumor about Jet2 but I’m not very familiar with the airline so I’m not sure about their situation. Any others?
People look at this from their own local perspective, so I am going to be no different. But all contain a certain logic.
1. US. The business is failing but the management wants to survive, so Chapter 11 where the people who own the debt of the company basically gets screwed but the business itself continues.
2. EU. Where the business is failing but social policies and political pressure enable an unsustainable business to continue until a deal is done, Germany manages its problem to the benefit of its national flag carrier, whereas the deal is yet to be done for Alitalia.
3, UK. Somewhat Darwinian across all industries. The business has failed, there is a market, someone else will fill it.
Which one is right?
to be accurate, you have to say that, in the US model, debt is exchanged for equity. Debtholders may be forced to enter into a different type of participation in a company but they do not necessarily lose what they had. You also have to look at the years after to determine which system provided the best outcome.
IN fact, if you look at the restructuring of the US airlines in Chapter 11, post 9/11 no US legacy airlines failed; a number were acquired after emerging from bankruptcy – usually by several years or more. Stock in the legacy carriers since the US legacy C11 process has done very well; many (but certainly not all) debtholders have likely received as much or more value as they would have if they held debt. The US airline industry is now very successful; that is not true in other parts of the world.
While you (collectively) might want to answer the question from a moral standpoint, the real answer has to be from a business survival, jobs retained, profitability standpoint.
And, to be fair, the story is not in the same point in time in the US, the UK and the EU; 9/11 forced a restructuring in the US airline industry that has not fully taken place elsewhere but the US airline industry is now far healthier.
You present a very strong argument and I would argue the whole Anglo-Saxon economic model is a determination of ownership flow, i.e. people owed money, over people who have invested.
The anglo-sphere works fundamentlally differently to the Euro model.
The Euro model does not do that, it gerrymanders interests at a socially engineered level (Alitalia, Air France, Lufthansa) whereas the US model protects management to the posstible exclusion of others.
There are always losers in a bust. It is how it is managed that determines who loses the most and the EU and US have decided whom it wants to protect most.