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Why did Flybe go into receivership?

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Why did Flybe go into receivership?  Accountancy firm EY was appointed as administrator to regional airline Flybe when it collapsed on 5th March.  Flybe, as regular readers will know, had been rescued a year earlier by a consortium comprising Virgin Atlantic, Stobart Aviation and US private equity fund Cyrus.

EY has just published its initial report for creditors of Flybe.  It is very interesting.

I should add at this point that I never had much experience of insolvencies in my previous banking life and my interpretation of what is written is simply that – an interpretation.

Flybe administrators report

Let’s start with the money

EY is currently estimating that, assuming the airline is broken up, the assets will fetch £139 million (see page 24).  After £3 million of unpaid salaries are settled, this leaves £136 million.

However ….

There are secured creditors who are owed £240 million.  This represents, ignoring a second small £3m item:

£127 million owed to companies who financed mortgages on the Flybe fleet

£110 million owed to Virgin Atlantic, Stobart Aviation and Cyrus

Cunningly, the three shareholders had secured their entire investment on the assets of the company.

Unsecured creditors – ie everyone else owed money by Flybe, including passengers who did not fly – are owed a total of £317 million.  None of these people are likely to see anything except a nominal sum.

If we assume that the mortgages are only secured against aircraft and engines, and not any other assets of the business, then – at best – the mortgage companies will get back £102 million of the £127 million they are due.  (£102 million is the expected value from the sale of the owned aircraft and engines.)

This leaves (£136 million – £102 million) £34 million to be shared by Virgin Atlantic, Stobart Aviation and Cyrus.  It seems that the three shareholders will get back roughly 30% of the money they invested.

Nobody else will get anything except a nominal sum.  The only assets which were not pledged to Virgin / Stobart / Cyrus were the airport slots used by Flybe.  If these have any value – and it won’t be much – it will go to the remaining £317 million of creditors.  Ticket holders are excluded from this, however, as they are assumed to have been refunded via their credit or debit card company.

The valuation of the Flybe fleet is exceptionally low

Flybe was predominantly using small 78 seat Dash-8 aircraft.  There are not many airlines flying this type of aircraft, and Flybe is now releasing a considerable number onto the market at once – and during a pandemic too.

The aircraft were valued in Flybe’s last set of accounts at £166 million.  They are only expected to fetch £85 million when sold.

If it had been possible to sell the aircraft for their book value of £166 million, Virgin Atlantic, Stobart Aviation and Cyrus would have got virtually all of their investment back.  The other £317 million of creditors would still have received virtually nothing.

Will Flybe fly again?

Strangely, it is possible that Flybe is not totally dead.

There ARE three groups who are interested in buying the business and assets of the company.  However, the Civil Aviation Authority was due, on 30th April, to cancel Flybe’s operating licence.  Without a licence, the airport slots used by Flybe are automatically lost which would make it too difficult to reopen the business.

EY has appealed to the Government to override this decision, which it has the authority to do.  EY is still waiting to hear whether they will do this.  A substantial number of jobs will be saved if the business can be sold.

Comments (67)

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  • AJA says:

    I dont think it was cunning the three shareholders secured their entire investment on the assets of the company. That was good business sense. They’ve still lost roughly 70% of their investment. That said I don’t have any sympathy for them, I feel sorry for the staff who lost their jobs and the remaining unsecured creditors who are likely to be paid pennies in the pound.

  • pedro says:

    An interesting, if somewhat niche (!), read. I’m sure I’m not the only Restructuring professional to have a lunchtime glance though, and thanks for pointing it out!

    I think, as you acknowledge, your interpretation is a little simplistic – but to be fair, the EY report has been very carefully crafted to say as little as they can get away with. Additionally, EY are absolutely not estimating any value for the assets – they are very clear that it is the director’s statement of affairs. Those values must be considered to be highly uncertain – particularly in today’s market.

    In terms of points of “interest”, what stood out for me was:
    -the curious movements in the Connect facility (£121.8m ‘ultimately’ advanced (pg 2); £110.0m ‘principal outstanding’ at 5 March (pg 10); claimed o/s balance £135.6m). Impossible to compute the interest rate – but must be huge. And by definition they must’ve taken cash out at some point – I wonder when…
    -that the business was essentially bust on 9 January
    -the reluctance to name which one of the Connect shareholders wasn’t prepared to pony up in early January 2020 (pg 3)
    -whether any new money actually went in post January 2020 (pg 3) following government discussions – the report is impressively opaque in this regard. This, allied to the first point, presumably means not, notwithstanding the restatement of the facility agreement…
    -just how effective Amex and Paypal have been in terms of closing out their merchant exposure, relative to the other banks – Paypal particularly surprised me;
    -the absence of any reference to EY costs.

    It is impossible to compute the Connect return from this document – it’ll be dependent upon whether any aircraft / engines aren’t specifically secured to non-connect funders and are therefore captured by the Connect security (either fixed or ultimately caught by their floating charge). The security mix is key and this document – presumably deliberately – doesn’t detail it. The elephant in the room, though, in terms of recoveries for the marginal creditor is process costs. The director’s statement of affairs doesn’t include these (it is not meant to), but I could easily imagine these being of the order of £10m. The Monarch administrator is already way over £8m.

    On the slots, don’t know where you’ve picked up that the slots are not pledged. Ultimately they are an asset and will therefore be captured by Connect’s floating charge. That said, do they really have any value? This isn’t Monarch – who had early morning slots at a (then) capacity constrained Gatwick.

    The one thing you can accurately determine from the report is what the unsecured creditors will get. The answer is nothing. Technically it should be £600,000 (the prescribed part – shared amongst creditors estimated at £317 million), but buried on page 11 is EY’s intent to apply to court not to have to distribute it.

    • Lady London says:

      Well done Pedro. I really appreciated this in depth look you gave at things that make all our worst suspicions clearly accurate!

    • Rob says:

      Thanks Pedro. I was also surprised that the January cash inflow didn’t seem to have appeared despite media comment to the contrary but didn’t wank to risk libel by saying so!

      Good spot re the interest rate on the funds advanced which I hadn’t spotted.

      I had assumed that all the aircraft were pledged – there was a line in the report somewhere which seems to imply it. If not then, yes, the shareholders will get back a lot more and the mortgage holders a lot less.

      • pedro says:

        On aircraft, I see the line you mean (pg 6), but there is wording elsewhere (pg 10) which gives wriggle room in terms of how proceeds might flow. There are multiple outcome scenarios stemming from this and the SOA is of no help is it aggregates all fixed charge creditors, rather than showing granular detail. It’ll come out eventually though…

        Meanwhile the EY fee estimate is also available (more niche reading!). £12.5m estimated for them alone – of which they’ve already incurred £7m. Trebles all round at More London (well, maybe not just now!). Plus they reckon another £11m of additional costs (albeit hopefully some of those would be recoverable – i.e. the maintenance and overhaul costs per the pg 6 chat).

        • mr_jetlag says:

          A&M (which I read one of the other airlines have retained) will be at least 30% more in fees. Now there’s an industry that’s literally recession proof!

  • Riccatti says:

    Well why don’t they finally make capitalisation of landing slots official.

    Make them tradable assets, and make more transparent market.

    Pay consideration to the slot-allocating body or a form of tax. Not the under-handed deals with Airport Coordination Limited.

    • Dubious says:

      For Slot Coordinated Airports, there is actually a process that ACL follows and it involves all the users of the airport taking part (one slot pair in one part of the world might not be useful if the airline can’t get a slot pair in the other airport they are based at), as well as the airport operator.

      No money goes to ACL to trade a slot – they are legally responsible to perform the role as facilitors. Trading slots on the open market would distort the efficiency of the slot timings reducing the capacity of that airport. Not very helpful to the wider economy.

  • Stephen says:

    I booked £500 worth of flights on the evening before the company collapse how about my money back you bunch of thieves?

    • Rob says:

      Your credit card company will pay up, not an issue. As will your debit card company and PayPal under their voluntary schemes, even though not legally obliged to. Unless you posted Flybe a cheque you should be fine!

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