Comment: Does Stobart Air collapse trigger a new round of insolvencies?

Paul Zalkin, managing director at business advisory firm Quantuma, looks at the potential impact of the latest airline collapse

It was perhaps a case of when, not if, and it might have been one of a dozen companies.

The cessation of Stobart Air’s passenger operation came as no surprise given the torrid conditions in which UK airlines continue to operate.

Airlines are at the top of a vast commercial aviation supply chain, which includes aircraft and engine manufacturers, their supply chains, leasing and finance companies, the commercial and operational side of airports and all the ancillary businesses associated with getting to, from, through and beyond an airport.

Few businesses in the sector have escaped the financial consequences of the pandemic, but those that are better capitalised, nimble and run by directors with the wherewithal and experience to manage a crisis stand the best chance of survival.

A key requirement of management is acceptance that navigating the crisis without turnaround and restructuring expertise is a very tall order; the skills required to manage change, growth and planned events are fundamentally different to the skills required to manage black swan events.

Since the pandemic started, airline passenger numbers have dropped significantly and airlines have suffered a huge fall in sales. Yet the impact runs far deeper than a simple contraction in the top line.

When the revenue tap was turned off, funds for existing bookings also had to be returned – in cash or vouchers – creating an unforeseen working capital drain.

This was funded through costs savings, furlough, rights issues and borrowings. Notable by its absence in the UK was a sector-specific package of state support to help the airline and aviation sectors weather the storm.

Subsequent ambiguity over what it means for a country to be on the ‘green’ or ‘amber’ lists – a fatally flawed traffic light system – has achieved the opposite of what airlines and operators were praying for; it has confused the travelling public and probably hammered a final nail into the coffin of the 2021 overseas holiday summer season.

Weaker airlines with poorly capitalised balance sheets, and a limited scope to tap investors for further funds, have fleets on the ground and vultures circling overhead. Holiday companies hoping to capitalise on pent-up demand are facing another round of refunds and cancellations.

Playing it forward to the point when vouchers can legitimately be spent, how will the business model work? Funds banked for a cancelled 2020 booking will be long gone by the time an airline or holiday provider is required to settle costs associated with honouring vouchers.

True, a lot of variable cost associated with postponed arrangements will have been avoided – other businesses in the supply chain carry that can – but initial customer payments will have been used to meet fixed costs and trading losses accrued over the past 15 months.

In issuing vouchers, airlines and holiday companies have forced the (non)travelling public to provide them with a free working capital facility. If that capital cannot be replaced, through investment or borrowing, vouchers liabilities will have to be restructured, or the government will have to intervene.

And, if that does not happen, a new wave of formal insolvency events will surely ensue in which case bonding providers, insurance companies, credit card companies and possibly HM Treasury will be forced to meet the cost of ensuring customers are not left out of pocket or stranded. Trade and other creditors will not be so lucky.

As for Stobart Air, it primarily ran a franchise operation servicing Aer Lingus Regional routes, although it also offers wet leasing and charter services which may continue in a restructured form.

The company runs a fleet dominated by short-haul turboprop aircraft that was subject to a sale and leaseback in 2017 so the majority of those assets are likely to be dealt with by the lessor company, Propius, which is under the common ownership of Stobart Group.

It seems the passenger protection liability for cancelled flights is being met by Aer Lingus so, once appointed, Stobart Air’s liquidators will seek to establish whether any part of the operation can be rescued, failing which its assets will be sold off.

As for Stobart’s employees, their future will turn on whether any part of the business survives (some may transfer to a company which picks up routes previously operated by Stobart Air).

However, until the picture become clearer, those employees – and the industry in which they operate – face an uncertain future.

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