INSIGHT: Route opportunities and fleet developments… what does the collapse of Monarch Airlines mean from a network perspective?

Despite serving more than 120 routes from the UK, Monarch Airlines held a monopoly on just 13 of them, with Birmingham Airport having the largest exposure in terms of lost markets to the airline’s collapse at the start of this week, The Blue Swan Daily analysis shows. In terms of destinations the Croatian capital Zagreb has now lost connectivity on two routes to the UK, while Gibraltar has lost its largest airline customer. A study of the leisure airline’s summer 2017 schedule also highlights how intense the competition has been in some of the airline’s busiest markets, including one route from Manchester which is served by eight other airlines.

Monarch formally entered administration in the early hours of 02-Oct-2017 but its demise had been long anticipated after failing to find the right market for its activities against increasing competition from new entrants and resurgent operators in the busy UK – Mediterranean leisure market. Administrator KPMG says Monarch’s collapse is a result of “depressed prices” in the short haul travel market, alongside increased fuel costs and handling charges as a result of a weak pound. The terror attacks in Turkey and Egypt also deprived the airline of a large chunk of its annual revenues, and forced it to compete on heavily congested traditional routes to Spain and Greece.

The loss of some 3.7 million seats from the UK market will be a gap and most likely lead to “some increase in yields for airlines; at least in the short-term as the market rebalances,” says aviation analyst, John Grant. “However, more than anything perhaps the passing of a Monarch is more reflective of the difficulties of being a ‘mid-market’ carrier in a world of low-cost travel,” he adds.

CHART – In the UK, Birmingham Airport faces the largest exposure to Monarch Airlines’ collapse with it holding a 13.8% share of its summer departure capacitySource: The Blue Swan Daily and OAG

At its largest departure point, London Gatwick, where Monarch served 30 destinations with 830,000 departure seats it was the airport’s fifth largest operator with a 4.9% share of capacity during the full summer schedule. However, there was just a single market where it held a monopoly position, to Zagreb in Croatia. Its increased focus on the Iberian Peninsula is clearly evident with its five largest markets from Gatwick -Alicante, Faro, Malaga, Palma and Tenerife – accounting for more than half of its total capacity. Its collapse now leaves easyJet as the exclusive provider on routes to Gibraltar and Lyon.

Birmingham Airport appears to suffer the largest exposure to Monarch’s collapse with a network of 35 markets this summer of which it was the sole operator on just over a quarter. These nine markets comprised Gibraltar, Lisbon, Nice, Preveza/Lefkada, Split, Stockholm, Valencia, Venice and a short operation it offered to Salzburg. Together these account for 115,000 seats from the UK of a summer network that encompassed almost 760,000 seats from Birmingham – approximately 15.1% of its activities there. In terms of Birmingham’s total network capacity Monarch provided a 13.8% share this summer, with the exclusive routes accounting for just 2.1% of Birmingham’s total departure capacity.

At Manchester the Monarch network encompassed a notable 30 destinations this summer, offering more than 740,000 departure seats, but it was only the seventh largest operator and like at Gatwick, Zagreb was the only market which it served exclusively. Highlighting the intense competition it was facing in the Spanish market prior to its collapse, its biggest route by capacity from Manchester this summer to Alicante is still served by eight other operators – British Airways, easyJet, Jet2.com, Norwegian Air, Ryanair, Thomas Cook Airlines, Thomson Airways, and Vueling. The loss of Monarch will now however deliver monopoly positions to easyJet to Gibraltar, Porto, and Tel Aviv.

While London Luton has remained the airline’s spiritual home and the location of its headquarters, Monarch’s activity there had reduced through the years to just 16 destinations in the summer 2017 schedule offering 335,000 departure seats. Among these were two short haul routes where it was the sole operator: Gibraltar and Dalaman.

At Leeds Bradford, the smallest of Monarch’s current UK operations with 146,000 seasonal departure seats, the airline served ten destinations through the summer 2017 schedule. All of these had direct competition from at least one airline and in the case of Faro, Palma and Tenerife three operators – Jet2.com, Ryanair and Thomson Airways. However, it was the third largest operator from the Yorkshire airport and its share of departure capacity at 8.1% is the second highest among its home departure points.

The summer schedule analysis shows that Zagreb is the overseas market that has lost the most from Monarch’s collapse and direct connectivity to both London Gatwick and Manchester. However, Gibraltar’s positioning has also been noticeably impacted, losing links to Birmingham and London Luton and leaving easyJet as the sole operator to both London Gatwick and Manchester. Monarch was the largest airline there with a 39.1% capacity share this summer offering over 95,000 seats each way to and from the British Overseas Territory and headland on Spain’s south coast.

CHART – Monarch Airlines was the largest operator from Gibraltar Airport accounting for more than a third of its summer capacity; a larger share during its last week of operationSource: CAPA – Centre for Aviation and OAG

Airlines will now be working to backfill capacity into already served markets to meet demand, while looking at opportunities for growth following the removal of a competitor in potential new markets. Other destinations – both in the UK and abroad – could also lose potential new routes as airlines redeploy capacity in the wake of Monarch’s collapse.

We are already seeing clear signs that Monarch’s staff will be captured by expanding airlines, especially its pilots with easyJet, Ryanair and Virgin Atlantic among the airlines offering recruitment roadshows, but what about its aircraft? Well, its entire fleet is what is described in financial terms as ‘fully leveraged’ meaning that all in-service aircraft are leased, allowing the airline to shed aircraft if necessary to slim down its costs but also leaving no opportunity to borrow against its aircraft in times of financial crisis.

According to the CAPA – Centre for Aviation Fleet Database, Monarch’s 35-strong fleet consists almost entirely of Airbus A320 family aircraft (25 A321s and nine A320s), with only one Boeing 737-800 (received in May-2017, on lease from Pegasus Airlines to prepare for its switch to the 737MAX-8 from 2018). It has a total Market Value of approximately USD617 million, according to estimates by valuations experts Oriel.

With an average fleet age of 12.6 years as at 11-Sep-2017 – older than the fleets of many of Monarch’s LCC competitors, but not old by comparison with the 13.9 years average for all airlines in Europe – the outlook for the aircraft is not overly positive. Oriel suggests that much of the older examples will likely be parted out for the use of the engines.

“Most of the aircraft in Monarch’s fleet can be described as ‘mature’,” it says. “On the minus side, over 75% of the fleet is 12+ years old. On the plus side, the A321 aircraft, comprising some 70% of the fleet are more desired V2500-powered examples. Some of the younger aircraft will probably find homes although deployment might have to wait until the Northern Hemisphere Summer.”

The CAPA Fleet Database shows the Monarch fleet is leased from 16 different lessors, one airline and one unidentified source. Oriel estimates the loss of lease revenue, at today’ Market Lease Rates, to be at approximately USD7 million per month, allow no one lessor is over-exposed to the airline’s collapse.  Administrator KPMG says it is already “commencing the process of returning the Group’s leased aircraft fleet to its owners”.

AerCap has the largest number of aircraft with Monarch – six, which is commensurate with the size of the lessor, followed by Aviation Capital and Avolon (four each), Apollo Aviation Group (three), Archway Aviation and Aircraft Lease Securitisation (two each), according to the CAPA Fleet Database. Aergen, Air Lease Corporation, Aircastle, Bayerische Immobilien Leasing, BOC Aviation, DCAL 4 Leasing, GECAS, JSA International Aircraft 3575, Pacific AirFinance, SMBC Aviation Capital and Pegasus Airlines are each the owner of one aircraft in the Monarch fleet.

With the future of Alitalia and airberlin still not fully clear, the fleet of aircraft for remarketing is building up and Oriel warns this “is bound to have an effect on the market and lease rates”. The slow A320neo deliveries and low fuel prices have supported demand for older aircraft in the last 12 months, but airberlin and Alitalia’s woes and the collapse of Vim Airlines in Russia and now Monarch could tip the scales.

We must not also forget the matter of the USD4.9 billion (at list prices) 45-strong Boeing 737MAX-8 order placed by Monarch initially in 2014 and added to in Jun-2017 with the conversion of 15 options. These were due to start arriving from early next year. Some of these initial aircraft will already be in production with specifications selected, but other delivery slots may be picked up by other customers, albeit with the likes of Garuda Indonesia and NokAir are already delaying MAX deliveries, Boeing will hope demand and a small level of overbooking will enable it to balance its production schedules with only a small reshuffling of deliveries. Monarch had yet to confirm its proposed configuration for the aircraft, but these were likely to be in a dense arrangement to support its mainly leisure demands.