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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.  You can read it here (PDF).  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.

If you’ve got a bit of free time today, there is a lot more in the report including a history of how the company came to be in the state it was.  You can read it here.

Comments (67)

  • Graeme says:

    If the shareholders can escape with £34m whilst leaving a £100m pension deficit (see the sixth-from-last page of the report) then something has gone badly wrong either in the way the pension scheme has been set up or in the way our administration procedures work.

    • callum says:

      Isn’t there something wrong with pension schemes in general? I have no idea how it works, but I’m constantly seeing companies running enormous pension deficits yet choosing to pay out dividends etc. instead.

      There could be a reason to allow this practice that I don’t understand?

      • AJA says:

        Callum Pension deficits are a problem with defined benefit schemes which is why more and more of them are closed or are closed to new entrants and most employees are now joining defined contribution schemes. A pension deficit is an actuarial valuation at a particular point in time comparing future expected pension payouts (liabilities) versus the value of the underlying pension scheme (assets). There is no obligation to make up the deficit rather than pay out dividends even though that could probably resolve the problem for many schemes. The deficits occur because of low interest rates, poorly performing equities markets and increasing life expectancy of the scheme members. Changes in any of these factors can reduce deficits or conversely increase them substantially so even if a company funded a scheme by not paying out any dividends in a particular year it does not mean that a deficit would not happen in future.

        • Callum says:

          Thanks. Obviously it doesn’t stop deficits appearing again in the future, but if they plugged the current deficit then it would resolve the immediate issues and greatly reduce the severity of any future issues.

          So there really isn’t a reason I’m missing that would prevent regulations fixing this? I always doubt my loophole fixing ideas etc as there are so many unintended consequences in this area!

      • Lady London says:

        I’ve been looking into this quite recently in some depth. Essentially its a scandal and needs better regulation. However like most things that protect employees in the UK, its very hard to achieve.

        I would like to know how German, Dutch, French, Belgian and Scandinavian employees pensiobs are protected when companies fail or are sold into private equity after becoming insolvent. UK employees certainly arent. Time and time again cimpanies like British Home Stores are sold for very littke (even £1) to privatw thst strips the assets and leaves pension promises unmet for employees that paid in for years.

        Did you know that the Pensions Regulator has said they will not pursue companies that fail to make required Deficit Recovery Payments since late March? 3 months allowed, but likely to be extended. Not every company is unable to pay, that will use thus breathing space to stop paying.

        Pension funds are advised to try to negotiate so that if the pension fund does not receive due payments then neither should dividrnds be paid and to try to ensure other creditors also dont get paid if the pension isnt.
        Hard to enforce because employees jobs are held at ransom by companies.

        Within 4 or 5 years almost all oension fund deficits in the UK will disappear. The reason is that inflation will uncrease and COVID will allow overall longevity, and therefore oension liabilities, to be vastly recalculated downwards removing the deficit. A great many companies will be able to use this to finally get rid of their pension liabilities as the valuation will look giod enough to pass the liability to an insurance company. Some comoanies have been working towards this for over 10 years.

        British Airways got rid of substantial pension liabilities in this way 1-2 years ago.

        • Bob says:

          In France:

          1- “pensions” are universal: no employee can avoid to have one and it is eventually “outsourced” from any company every month, so no risk of bankupcy. (macron wants to destroy that)

          2- a guarantee of wages paid exists for all employees(so also universal) in case the company get bankrupted and did not have sent the cash to paid the wages until the official unemployment date (this is what happened to the employees of aigle azur for instance : then the “guarantee of wages paid” will go to the justice to get some money back and I believe there are a preferantial creditor according to the law.

          • Mike says:

            The reason is Gordon Brown, until his raid on pensions most were in surplus. He needed tax money and didn’t want to be seen as increasing taxes, so stealth taxes were the main weapon.

            One of the reasons that the tax bill is currently the highest since the 70s is that mass immigration needs to be paid for as it doesn’t cover is own costs. Politicians keep saying that migrants will pay your pensions but that is not the case as many reports have made clear.

            Unfortunately, once a tax is in place then it’s very hard to get rid of, even harder once you have a population dependent on tax payer funds.

  • BJ says:

    I’m a bit baffled, obviously doesn’t take much to interest you city-types 🙂

    • Chris L says:

      I find it I interesting. I’m not a ‘city-type’. It would certainly be of considerable interest for those with outstanding EU216 claims – probably many.

      • BJ says:

        I disagree, I doubt even 1% of people with EU261 claims will show any interest in the administrators report. My point is that there is nothing in the report as described here that would seem out of the ordinary, to me at least. Therefore I don’t know what’s supposed to be ‘very interesting’ unless those with a background in financial and corporate sector see sondthing in the numbers or arrangements that were unexpected or unusual. If Rob did, it wasn’t clear to me from thd article what these very interesting things were. Thus, I just assummed it was over my head and I was missing something because I don’t have the correct knowledge or expertise.

        • Mikeact says:

          I guess it’s the perceived unfairness of the share holders likely to receive the lions share of their money back. Interesting how they set it up to to minimize any financial damage.

          • BJ says:

            But surely this is just par for the course? It’s hardly rocket science to provide a secured loan as opposed to an unsecured loan.

        • Mikeact says:

          Good to have an experts opinion..very illuminating for a amateur observer and good to see it picked apart and with unanswered questions. Thanks.

    • Lady London says:

      its another case of how the British worker gets repeatedly ripped off by those who call themselves “private equity” @BJ. So of interest to a chunk of Rob’s audience in finance industry. and of interest to me as I’ve been on both sides!

      • BJ says:

        What I mean, over my head 🙂

        • mr_jetlag says:

          Also interesting to me, not just as someone in the industry but as a demnstration of the effects of finance on the “real world” ie jobs and government policy.

          You may or may not agree, but it’s undeniable (as LL says) that the practices of the M&A industry are somewhat responsible for the current mess some of these corps are in today (not just aviation, but retail and banks too)

          • Lady London says:

            if you look at a case in progress of happening, IMO The Automobile Association (the AA) which has been taken over by private equity and now weighted down with large hard-to-see-why-except-to-pay-private-equity debt, could be on a similar path. It appears after a “consultation” their former ok pension scheme has just got replaced with a worse one by their owners.

            Perhaps its just a case of promises being changed for the future only which is fair enough, but IMO you can be sure if the AA ever goes bust, private equity will have taken out their profits first.

          • Rob says:

            It’s all driven by the banks, not the private equity companies. If a bank will lend you 10 x company profits on an unsecured loan (except against the assets of the business, which are always very low) then you take it. If you can buy the company for 11 x profits then you put in very little of your own money and you are getting 100% of the gain if it goes well.

  • Kip says:

    If the Government feels the need to create a bespoke aviation financial package to compensate for the proposed quarantine then I assume EY would be very interested. There could even be an opportunity to create a slimmed-down successful regional air infrastructure. What will probably happen is that tens of thousands of airport/airline staff will be laid off while HMG mutters about being ‘led by the science’.

  • Simon says:

    In the Monarch insolvency, a Court was persuaded that a failed airline could still hold slots (as the slot allocation body should not be in the business of examining slot holders’ viability). Had Monarch retained its operating licence? If not, flybe shouldn’t automatically lose the slots, unless there’s something different here?

    • Adam says:

      Yes, there are a couple of differences.

      First, Monarch still had an operating licence (it was only suspended, not fully cancelled) at the time in question. They monetised their slots by trading them before the OL was cancelled.

      Second, the Monarch situation related to allocation of future slots for the next season. They happened to be applying for those at the time they were insolvent, and the slot coordinating body said no as they were failed. That decision was overturned – they still had an operating licence, albeit one that was susPended, so it still qualified within the regs as someone to whom slots could be allocated. But this is a different situation from operating licence cancelled – at this point, the slots return to the pool for allocation to everyone else.

      Frankly, this makes some sense. Airlines don’t pay a capital sum for slots so it’s not clear why they should be able to monetise them in an insolvency.

      • Charlieface says:

        Often they do pay cash for slots

        • Adam says:

          They may pay cash to trade slots when airline A swaps a more favourable slot pair with a less favourable pair held by airline B. But those that they receive from Airport Coordination Limited, the slot allocating body, are not “paid for” as far as I’m aware.

  • Pat the Postie says:

    If saved then I hope the new owners actually sort the profitable services out instead of it coming back around in a few years to go bankrupt.

  • Lisa de leeuw says:

    “Very interesting” , you need to get our more, what do you do for fun? listen to William Hague reading the Yellow Pages.

  • FloriGuy says:

    £85 million for 63 aircraft?

    £1.35 million each? Anyone wanting to start a HFP private aircraft syndicate?

    • Rob says:

      It is only the ‘owned’ fleet – the leased ones have gone back. Or did they own 63?

    • memesweeper says:

      Have you been on a Dash-8? Slow, noisy, uncomfortable and cold was my last experience. If they were trying to compete with National Rail using regional jets they’d have stood a slightly better chance.

      • Rob says:

        Flybe tried that, and the Embraer order was what really sent them over the edge. Flybe only worked on ‘thin’ routes. Any route big enough for an Embraer was big enough for easyJet to come in. The Embraer was also far more expensive to run.

        • Dubious says:

          It became increasingly hard to find an EMB route. I eventually got one from Jersey to Doncaster DSA a few years back! That really was a thin route!

          People complain about Dash-8s but as far as turbo-props go those with designated with a Q have onbaord noise supression and are amongst the quietest, plus they can land on and take off from short runways which provides some new options.

          Ever compared the ear peircing cabin noise inside an Antonov-140 or older Antonov-24..or a Let410…probably not, but how about an ATR-72 or ATR-42 or a Saab 2000 or a Fokker 50 ? They are all pretty noisey on the inside in comparison.

  • Novice says:

    Tbh, Uk is not a huge country. If we had an awesome rail network with fast modern trains with reasonable prices then we wouldn’t need domestic flights which are bad for environment.

    I see this as an opportunity for Uk to become more green but having a buffoon in charge that won’t happen. But I hope ppl demand it.

    Viva la revolucion! 😂

    • Josh says:

      ….

      • The Original David says:

        The primary obstacle to a fast and efficient rail network throughout the regions is the people who live in the regions whingeing that they don’t want railway lines running through the countryside in their particular region. China has the right idea here – run some bulldozers through, send the cement mixers in and start running the first trains while the UK is still arguing a judicial review of the planning documents…

      • Aston100 says:

        It’s OK, he is young.

        • Novice says:

          I could be a he/she/it/they.

          Seems to be a lot I can be 😂

          One thing y’all know is I’m young 😂 😂

          • Dayle Ward says:

            You mean you could be he or she? Don’t see how anyone can be an ‘it’ bit harsh calling yourself an ‘it’!!!

        • mutley says:

          Novice has made a good point , I am based 20 miles from LHR/ Central London. When visiting clients, if they are within 50 miles I drive, up to 250 miles then I take the train, after that jump on a plane, as EDI and GLA take too long by train, NCL is the cut off.

        • Josh says:

          I’m in my early 30s – he’s making me feel old 😂 Can’t agree with much of his/her/its posts haha Although sounds like a bloke 😏

    • memesweeper says:

      “Tbh, Uk is not a huge country. If we had an awesome rail network with fast modern trains with reasonable prices then we wouldn’t need domestic flights which are bad for environment.”

      What, like Japan? They still have plenty of domestic fights. And the UK, like Japan, is not a contiguous land mass.

      UK railways do a great job if you are in a big town and want to go to London, or vice versa. Other point-to-point journeys are often abysmally served by public transport.

    • the_real_a says:

      To be honest, we in the regions have cars. Its 4x quicker to drive than take a train. Investment would be much better made to the road network to remove the bottlenecks. Electric cars are just around the corner if you are a vegan. This is the problem with transport policy made in London. It makes no sense “up here”.

      Its also pointless me taking a train to an airport, as i have to allow about 3 hours contingency – i might as well drive. The cost of the train is more than the parking.

      • Cal says:

        What do electric cars have to do with being a vegan?

        • Charlieface says:

          It was perceived by him as vegans and people worried about climate change having a strong correlation, which may possibly be true.

          • Novice says:

            I care about climate and I’m not a vegan. Why should a person in their right mind not care about climate emergency?

            By now I have made myself clear that I’m young so obviously this is a worry if you know you aren’t going to kick the bucket any time soon.

          • Josh says:

            @Novice

            You’re not Shoestring’s son by any chance? 😂

      • Novice says:

        I did say a fast and modern network. And I do realise all the issues but I am not an expert. My point was basically that being a small island nation, we should have a fast network going through everywhere so everywhere is linked then a person would not need to drive as much.

        Having said that it might be better to stick with cars for foreseeable future.

        And when I said I could be an it, I might not be human 😂 It was early in morning for me.

        Also, Japan is a nation of a few islands so obviously they need domestic travel too. I have never been Japan so I’m wrong you are welcome to correct me.

      • Lady London says:

        +1

    • Alan says:

      Ermm not sure that works for NI or the Scottish Islands… Also pretty uneconomical to run high speed rail to the less populated areas of the country vs running flights if HS2 costs are anything to go by…

      • Novice says:

        I meant on the mainland eg. MAN-LHR etc.

        • TGLoyalty says:

          Well that’s the problem with having a national hub airport not linked to any proper railways.

    • Charlieface says:

      Problem is everyone has their own ideas what green means. City types (liberal globalists) want big fast trains, country types (right wing rich NIMBYs) don’t want their countryside ripped up, Greenpeace want everyone to ride their bikes to Scotland. The reality is going to be somewhere in the middle.

    • Dubious says:

      It was the ‘baffoon’ that wanted the multi-billon GBP £ airport built in the Thames Estuary…and when he didn’t get it he tried to block other airport developments like was the case with London City Airport’s planning permission on their passenger terminal extension…
      https://www.pbctoday.co.uk/news/planning-construction-news/london-city-airport-expansion-blocked-mayor/15719/

      …Glad the money didn’t get wasted in the Thames though,.