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171002084104-european-airlines-2-540x304If 2016 has been labelled as the annus horribilis for the maritime industry (due to the failure – among others – of Hanjiin Corp.), the year 2017 will probably be remembered as one of the worst for the airline sector.

AlitaliaFirst, the rejection by the workers on April 24 of the umpteenth rescue plan forced the beleaguered Italian national air-carrier Alitalia to seek protection from creditors. On May 2nd, the company was granted admission by the government to a special insolvency procedure reserved to large commercial enterprises called ‘amministrazione straordinaria’.

Air berlinThen Air Berlin, Germany’s second largest and Europe’s 10th biggest airline declared bankruptcy on August 15 following years of losses and the decision of its largest shareholder, Etihad, to cease bankrolling it. Finally, on October 2nd Monarch ceased trading and filed for administration in the U.K. The airline’s Air Travel Organiser’s Licence expired at one minute to midnight on 30 September. Despite a 24-hour extension, the licence was not renewed.

Are these cases problematic from an insolvency law perspective?

Despite the huge number of workers involved in these procedures[1], it might be argued that insolvency proceedings had a limited impact on travellers and travels, while redundancies have insofar been limited. Alitalia is still operating, albeit under the supervision of 3 government-appointed officials. Air Berlin will cease its operations at the end of October 2017, but a relevant portion of its planes and crews will continue flying under new owners (Lufthansa and Easyjet). It might even be argued that these failures have left behind a leaner industry: in the long run, a reduced competition might result in higher margins for remaining operators.

However, such picture is arguably inaccurate.

MonarchTo prove this point, it appears appropriate to look in deeper details to the Monarch’s case. This collapse separates itself from the other failures mentioned above for a variety of reasons, including the fact that Monarch’s core business consisted of selling holiday packages rather than flight tickets.

Unlike the above mentioned companies, Monarch effectively ceased operating all its flights the day it petitioned for administration. However, the Civil Aviation Authority organised repatriation transports for all 110,000 British holidaymakers who had been affected by the collapse of the company, thus reducing its impact on customers (even if future bookings have been forfeited and sometimes clients were asked to pay twice for their holiday packages).

Additionally, while the failures of Alitalia and Air Berlin can be ascribed to bad management and an increased competition in the European skies[2], Monarch raises new problems. It evidences some of the current regulatory shortcomings in the airline industry.  For instance, the cost of the repatriation flights for all British holidaymakers – roughly £60m according to the most recent estimates – is likely to determine an increase in fares for all flights. On top of that, some are also considering extending the Air Travel Organisers’ Licence (Atol) to all flights[3]. It is expected that such a decision would push up fares on budget companies such as EasyJet and Ryanair with a £2.50 levy, even though the chance of either airline going bust in the next year is tiny.

Furthermore, in Monarch the administration procedure has to deal with the problem of underfunded pension liabilities. This issue is increasingly common in Anglo-Saxon companies facing hard times: see BHS, among others. However, Monarch has raised the bar of pension-related concerns.

On the one hand, Monarch was allowed to pass into the Pension Protection Fund (PPF)[4] safety net in 2014, to let the then new owners Greybull Capital to restructure the business. Agreements of this kind are increasingly frequent[5], but they have sparked a controversial debate in the public opinion and in the Parliament[6], as they protect the profits and interests of investors to the detriment of the employees and the public purse. In the 2014 Monarch deal, employees were forced to accept caps on their retirement benefits, with some pilots losing up to 60 per cent of their accrued entitlements.

On the other hand, a much higher cap was imposed on BHS workers, as the PPF protection was not considered at the time of the 2015 sale for £1 to a former bankrupt with no experience of retail (the company collapsed under its debt in April 2016). Incidentally, £1 is the same price that Greybull Capital paid in 2014 to buy Monarch.

In the wake of the collapse of Monarch airlines proposals have been made to reform the PPF system. These include extending its ability to intervene at earlier stages or increasing the levy that funds the PPF, thus allowing the government-backed body to lift the cap for all employees[7]. Transport secretary Chris Grayling has also indicated that the British government is considering reforms to the rules governing insolvent airlines[8]. The government is however looking at introducing regulatory measures for airlines to be able to wind down in an orderly manner and look after their customers themselves, without the need for government to step in.

An acute observer would not miss the fact that these issues are incredibly similar to those faced in the restructuring of the U.S. automotive industry. Back in 2009, to offload pension and medical liabilities for retired and current UAW employees, as well as to ensure the long-term viability of Chrysler and GM, ‘employees’ were granted a share in the companies which emerged from bankruptcy through the Voluntary Employee Beneficiary Association (VEBA trust).

Unfortunately, little has been done – in terms of regulatory reforms – to address these matters on both sides of the pond. As a result, should a new crisis in the automotive/transport industry occur, similar ‘creative’ solutions would have to be devised.

The need for regulatory measures is urgent as – despite the apparent health – the transport industry is about to face hard times. This is the case in particular for the automotive industry, clashed among the need to invest huge sums to meet regulatory demands to reduce CO2 emissions and use alternative fuels such as electricity and natural gas, the increasing competition from new products and competitors (e.g. Google, Dyson, Tesla, etc.), the higher cost of R&D activities and new trends in the technology (e.g. automation) and the use of vehicles (e.g. car-sharing and leasing).

Despite the apparent strength of the market, competition is fierce, and automakers are raising incentives and slackening the standards for credit applications to sustain sales. In the U.S., commentators agree that the market of new vehicles has plateaued, while automakers are preparing for the worse. For instance, GM has announced that it may remain profitable even if the U.S. market for new vehicles dropped to 13 million cars and trucks[9].

car-inventory-pricingInventory levels are dangerously high both in the U.S. and in Europe. UHY Hacker Young said that the value of inventory held by UK car dealerships has now reached a record £27.3 billion – up from £23.6 billion last year – with unsold stock now equalling 17.7% of the turnover of the sector, up from 16.9% last year[10].

To conclude, all these figures suggest that a new credit crunch and commodities’ crisis may be around the corner. Despite the 2008 financial crisis, governments have taken insufficient steps to address the problems highlighted above. This has determined inequalities in the treatment of creditors and employees, and it will probably force the adoption of emergency measures when the crisis will hit once again the whole transport (and commodity) industry.

[1] Alitalia alone counts 12,500 employees, while figures for Air Berlin and Monarch are lower, some 8,000 for the first and 1.858 for the latter (according to KPMG figures, available at: https://home.kpmg.com/uk/en/home/media/press-releases/2017/10/monarch-administration-employee-update.html [last viewed: 11 October 2017]).

[2] Airports Council International Europe has warned on October 10, 2017 that the easing in passenger traffic growth observed in the summer months is likely to continue for the near future. This will increase the risks of other failures in the industry, or the adoption of drastic measures such as Ryanair’s cancellation of more than 700,000 bookings for the winter calendar period. Doug Newhouse, ‘ACI Europe reports record August pax growth of +8.7%’ (TR Business, 11 October 2017). Available at: <https://www.trbusiness.com/regional-news/europe/aci-reports-record-august-passenger-traffic-growth-8-7/128859> [last viewed: 12 October 2017].

[3] Nowadays the obligation falls only on every UK travel company which sells air holidays and flights.

[4] The PPF was established to pay compensation to members of eligible defined benefit pension schemes, when there is a qualifying insolvency event in relation to the employer and where there are insufficient assets in the pension scheme to cover Pension Protection Fund levels of compensation.

[5] A similar deal was recently agreed to ditch British Steel’s £15bn pension scheme. Interestingly, the agreement between Tata Steel, the scheme’s trustees and the employees was reached one year after the sale of the long products division of Tata Steel to Greybull Capital for £1. It also paved the way for the establishment of a new joint venture between the remaining part of the British business and the German-based ThyssenKrupp Corporation.

[6] Work and Pensions Select Committee chair, Frank Field criticised the deal for burdening ordinary people with restructuring costs, while allowing “mega-rich individuals [to] walk away from a collapsed company with a bumper profit” (Oliver Gill, Monarch’s £1 deal to ditch pension fund’ (CITY A.M., 12 October 2017).

[7] Currently, the PPF can make deals with distressed employers with underwater pension schemes only if insolvency is likely to occur in the next 12 months, and there is a plan to cut levies by 10% in 2018. In other words, these proposals aim at reversing current policies in the area.

[8] Gwyn Topham, ‘Ministers plan reforms to prevent repeat of Monarch collapse’ (The Guardian, 9 October 2017). Available at: <https://www.theguardian.com/business/2017/oct/09/monarch-collapse-chris-grayling-investigation-airline> [last viewed: 12 October 2017].

[9] To contextualise the statement, suffices to say that currently the latest available figure of the Seasonally Adjusted Annual Rate (SAAR) for light vehicles in the U.S. is 18.47 million. See https://www.bloomberg.com/quote/SAARTOTL:IND [last checked: 11 October 2017].

[10] Tom Sharpe, ‘Value of car dealers’ unsold stock increases 16% in a year’ (AM online, 2 October 2017). Available at: <https://www.am-online.com/news/market-insight/2017/10/02/value-of-car-dealers-unsold-stock-increases-16-in-a-year> [last viewed: 12 October 2017].