On 16th February, well-known regional airline flybmi filed for administration, cancelling all its flights, citing several reasons for its inability to return to profit.
Operated by British Midland Regional Limited, the company maintained a fleet of 17 aircraft, and flew to 25 cities across Europe. The company saw a significant expansion in the number of passengers it carried between 2016 and 2017, increasing by 26% compared to the previous year.
In 2018, flybmi carried 522,000 passengers across 29,000 flights. It may sound like a lot, but Ryanair hits these figures in a day and a half. Air travel is an industry with a notoriously small margin, with some estimates showing that just 1% of each flight (Source: The Economist) is translating to profit, meaning that scaling is necessary if airlines are to survive.
Tell-tale signs that the industry, particularly at the low-cost end, is in trouble emerged when some of the largest carriers started to warn about profitability, with industry stalwarts such as Ryanair and Norwegian, either consolidating or warning on the difficult headwinds the industry faced.
As for flybmi, there was a clear pattern developing in their payment behaviour – a key indicator of a business’ health. As time went on, you can see in the table below that the promptness of payment decreased, and the days beyond terms rose, peaking in late summer at 95 days beyond terms (September 2018)!
When we compare this against the industry, we start to see the position that flybmi was in over the last six months,, even compared to a sector that was generally struggling, it was nearly twice as many days beyond terms than the industry average:
Additionally, we can see that some suppliers were forced to pursue flybmi via County Court Judgements (CCJs) - which as you can see below, worsened as time went on - with a higher monthly average over the last 6 months compared to the preceding 36 months. The total unsettled amount in the average month more than doubled during this period…
This is a key indicator of financial distress.
The perfect storm of falling passenger numbers, increasing cost of fuel, uncertainty over Brexit and environmental taxes means that it is a volatile time to be a small airline, and naturally, the smaller the company, the bigger the exposure to risks.
As was also the case with the collapse of Monarch airlines, the fallout often stretches beyond the immediate carrier and into the sector more widely. When Monarch Airlines went under, it eventually took down its engineering support arm, Monarch Aircraft Engineering, which had contracts with several other airlines.
Analysts are already predicting that more will follow, particularly within the European market: Air Berlin already went bust, along with several others: VLM from Belgium, SkyWork from Switzerland, and the Nordic airline Primera; while Alitalia was bailed out by the Italian government. A similar situation occurred at Franco-Dutch airline Air France KLM, who received a boost from the Dutch government, just 9 months after industrial disputes and poor financial performance led to the resignation of Air France’s CEO.
Additionally, there is a seasonal aspect to this, with winter being traditionally the worst time for airlines, which, if they can make it through, will reap the rewards as we enter the key season for package holidays.
The low-cost airline sector is under pressure from several angles, so it’s vital to monitor those in the sector who are feeling the pressure most. Keeping an eye on payment trends as an indicator of cash flow, particularly in such a seasonal industry, is a must.
As harsh economic headwinds bite, and even the jumbo jets of the sector are having a bumpy ride, it’s the smaller, more exposed firms that could be in need for an emergency landing.
The lesson we can take from this new example is that all industries should keep an eye on their customers’ and suppliers’ financial health. How about you? Do you monitor any of the businesses in your ledger?