T28B

Thanks for the heads up about the (frankly troubling) Financial Times piece...if anyone finds themselves blocked by the ft's paywall try googling

"Greybull eyes profit from Monarch collapse"

Similar report in Chicago Tribune (not paywalled) yesterday with mention of the Monarch 737 deal at below cost. "Boeing said "it doesn't publicly comment on the financial arrangements of its customers" British pols unload on Boeing, 'king of corporate welfare,' in Bombardier tariff spat - Chicago Tribune

The 80% use-it-or-lose-it rules are still in effect. Their cessation coming at the end of the summer season likely means that most, or all, of their summer slot usage will achieve the 80%. However anyone buying the winter slots has to get aeroplanes on them very quickly to meet the rules.

'Ownership' is a relative term, they can quickly become someone else's.

The 17/18 winter season is from 2017-10-29 to 2018-04-24

A follow up to the FT article wrtten by the author of the article:

OK I think the way to look at it is this.

Boeing sells a plane to Monarch in 2014 for delivery in 2018. The list price is 100 but Boeing - maybe because it wants to clock up some orders for its new model 737 - offers it for say 60 (these are purely illustrative numbers).

At some point Monarch is going to have to start making payments on these orders, because Boeing isn't going to start building a plane & ask for the cheque afterwards.

Monarch is at some point always going to go to an aircraft lessor and S&L the planes. Its advantage is that because the price its been offered for the planes is low, its lease payments (which are linked to the capital cost) will be low too.

But Monarch has a problem. It's got no cash to start making any payments to get the orders rolling.

The new 737 meanwhile has done well and the market price is quite close to list - so lets say its 90. There is a lot of pent up demand. As things stand Boeing has to sell its planes to Monarch for 60. It would like to sell them for a higher price.

There is a rational reason for Boeing and Monarch to do a trade. The substance of the trade is this: -

Boeing gets to "take back" the order at 60 and retender it at market which is 90. It does so and sells the order to a leasing company which wants to get hold of the planes. So Boeing gets an extra 30 for building the planes which is more profit for them.

In return for Monarch facilitating this - Boeing splits some of its gains with Monarch. That's the £165m. Its presumably a discounted value of future payments B expects to receive as it builds the aircraft.

Monarch remains the potential user of the aircraft. It signs up with the lessor to lease the planes when they are built. So what it has done is take some cash up front from Boeing. But because the capital cost of the aircraft has now risen, its lease payments in future will be higher than they would otherwise have been.

That is the economic effect I think, although others with more detailed knowledge will probably correct me."

And another poster commented
"This is financial engineering of the highest order. Who needs bridges, power stations, more efficient aircraft or supercomputers, when you can construct an edifice of ownership that defies gravity?"

Monarch cancelled their orders for 787's -
did they offset that down payment towards the Max's ?

I would very much imagine that is what they did.I cannot imagine the former owners wanting to lose their deposit

Some of you might find this interesting.

BBC Radio 4 - The Bottom Line, Shake-up in the skies

Shake-up in the skies
The Bottom Line

What's behind the recent collapse of airlines such as Monarch, Alitalia and Air Berlin? Is it a case of supply outstripping demand or is there a larger crisis
looming? Will Ryanair's cancellation of thousands of flights do the company permanent damage?

What's really happening to Europe's airline industry?
Evan Davis and guests discuss.

GUESTS

John Strickland, Aviation consultant

Peter Duffy, Chief Commercial Officer, EasyJet

And

Roger Flynn, Chairman, Loveholidays.com.

Max order
 

It's not the first time it's happened between MON and Boeing.

Remember the B763 order that was moved on to Alitalia just before delivery?

I understand the first new aircraft were not going to start delivery until Spring 2018. At normal build rates Boeing will surely not have even started building the fuselages at Wichita yet. Reservation deposits, OK, but financiers will not make progress payments without seeing the progress. I would have thought though that the imminent need to start this soon contributed to Monarch's situation.

The costs of sending the Airbus fleet back to their owners at the end of their leases was projected to be huge. and would have added a large negative factor into the accounts ,even with the provisions made on the last declared accounts

Given that Boeing provided this substantial funding a while back, part of the process would surely have been to do their Due Diligence on the business, going through month-by-month the forward projections for cash flow for all the costs and revenues, and seeing there was an adequate margin to ensure the deal. For all that we take the mickey out of beancounters in the industry, this is where they earn their corn. If Boeing, of all people, are not able to do this properly then the industry is in a sorry state. That would include the handback costs for the Airbus aircraft, which will vary by lease and by individual aircraft (let's call this 'dilapidation costs') as well as everything else. It is most definitely not a 'back of a fag packet' calculation.

The existing lessors probably had their own provisions for this, and of course they were stuck with the leases. For Boeing however it was all a commercial go/no go situation. If there is a formal enquiry into the failure it would be good to ask Chicago some penetrating questions.

This deal would have taken place with the previous owners of Monarch, an entity which had a very close and long relationship with Boeing. The original B787 order would have required Boeing to pay a lot of penalties to the airline due to the many problems the programme suffered in its early days, so a cheap deal on some B737s and the kudos of turming an Airbus operator back into a Boeing one must have been very appealing.

I see the last repatriation flight landed at Luton in the early hours of Monday morning with 122 passengers from Tel Aviv. I suppose a fitting end after all the trials and tribulations over the past few weeks.

Tubby,
I am just catching up with this thread, and was interested to read your simplified description of the deal with Boeing, which seems to me like a highly feasible explanation of what may have transpired.
At the end of your post, you reproduce a comment attributed to another suggesting that this was financial engineering of the highest order, and implying criticism thereof.
Can you help me to understand what exactly would be wrong with the actions of any of the parties in the scenario you describe?
I guess it would be possible to argue over how the profit should have been split between Monarch and Boeing, but 50/50 doesnt seem like a terribly unfair place to start.
In even simpler terms than you used, the High order financial engineering seems to amount to no more than a customer giving up its advantageous position on an order list for a cash payment, and then undertaking to lease aircraft from a leasing company at the going rate.
Hardly rocket science, and in the circumstances beneficial to Monarchs various creditors. The benefit of Monarchs position on the order list and their order pricing would only have been of value to them if they had been able to continue trading long enough for the aircraft to be built, which seems highly unlikely they could have done. As things stand, as a result of the financial engineering, there is £165m more in the pot than there otherwise would have been.
Boeing for their part could have stood back and let gravity take its toll, with the order slots being vacated on Monarchs demise, and a queue of potential customers happy to snap them up.
I am struggling to see a basis to criticise the motives or behaviours of any of the parties involved in the scenario you describe, or to see who has been disadvantaged.
Finally, it is worth noting that people have been selling slots on order books for donkeys years.

The Monarch employees, passengers, subcontractors, airport services and airports may wish to enlighten you.

It kinda looks like a futures contract - except for the profit sharing part.
That's the bit which legally speaking would worry me, if I were in their shoes.

Very interesting, thank you Tubby.

More like a sale-and-leaseback - but selling the order book slots and effectively leasing back via the difference in payments on the eventual leaseback of the aircraft.

There is no "profit sharing" as such, they (maybe) got less than the full value of the slots (value to Boeing), and may have ended up paying back more in extra payments on the lease than they got in cash - but that is common in leaseback deals, particularly if the seller really needs the money (and they apparently did).

The only legal worry I can think of would be the are laws about "undervalue" transactions before an insolvency, but the "asset" here isn't easy to value at all. This isn't like selling off (and leasing back) the company premises to your mate and only getting half the market value, so half the value has been put out of reach of the creditors. I am not sure the order book slots would have _any_ value at all in the event of insolvency, therefore the creditors would appear (as others have already commented) to have more money than they would have had if the slots hadn't been sold.

It seems the Monarch Fallout is being felt particuarly hard with the Travel agents who were tied in with them. A1 travel, a fairly decent sized ATOL holder has ceased trading.

http://www.travelweekly.co.uk/articl...ceases-trading

This would appear to be the case, as the ATOL renewals in September would have picked out if the company was struggling and refused it's License. Will be interesting to see in the coming months how many more struggle and go under

G-OZBG is still sat at MAN, only one left.