Flybe: navigating administration and pandemic

30 September 2021

Ned Swifte and Linh Nguyen explore the story of the first rescue of an airline out of administration and the lessons that can be learned from the success. 

At 2.30am on 5 March 2020, Flybe's directors appointed Simon Edel, Alan Hudson, Joanne Robinson and Lucy Winterborne from EY-Parthenon as administrators. Fifteen months later, despite the unparalleled impact and challenges of the Covid-19 pandemic, the administrators had achieved the first rescue of an airline out of administration in the UK.

This article looks at the key events in the Flybe administration, the unique challenges faced by the team, and the critical steps they took to preserve value and enable the rescue of the airline as a going concern.

Pre-pandemic stresses

At its peak, Flybe was one of the UK's largest regional airlines, employing 2,200 staff and operating 38% of all UK domestic flights and transporting eight million passengers per year. The airline connected key regional hubs throughout the UK and selected destinations across western Europe, as well as being a valuable contributor to the Exeter economy and many regional airports.

Flybe had been navigating solvency and restructuring concerns for several years, even before the pandemic. Despite a recapitalisation in early 2019, solvency concerns re-emerged in January 2020, due to a material build-up of unpaid air passenger duty, customs excise duty payments and soft credit pressures - in particular from increased credit card collateralisation - something we are seeing increasingly across the travel sector as the impact of Covid-19 continues. In February 2020, the government and Flybe's shareholders put an 11th-hour deal in place to support the airline, but then Covid-19 struck. Bookings fell dramatically and, by early March 2020, with critical funding no longer available, the directors took the decision to appoint administrators.  

Rapid deployment, stabilisation - and a critical step

Answering the call at around 4.30 pm on 4 March 2020, the administrators deployed a team to Flybe's Exeter head office to urgently prepare and plan the necessary steps to effect and communicate an administration early the next day.

Setting up a process to immediately cascade key communications to Flybe's 2,200-person workforce, 20,000+ passengers, UK and European slot coordinators, regulators, suppliers and other stakeholders was paramount. The immediate objective was to notify employees, communicate the safe grounding of the fleet and reach out to all affected customers to ensure that they did not travel to airports. Working through the night with the Civil Aviation Authority (CAA) and management, administrators were able to send teams to all 26 of Flybe's airport locations to intercept and support those customers who didn't receive the news.

The CAA received Flybe's strategic request to voluntarily suspend its air operator certificate (AOC) and maintenance licences once they had safely grounded the fleet during the evening of 4 March 2020. As we'll see, this step was ultimately one of the main reasons why it was possible to complete a business sale, some 15 months later, thus preserving a vital component of UK regional connectivity.

Making remote administration a reality

An airline administration was never going to be an easy prospect amid a global pandemic that has arguably hit the aviation industry hardest of any sector. Passenger air traffic all but stopped in March 2020 and volumes fell 60% below their pre-Covid-19 peak across the year, barely recovering in 2021.

The impact of the pandemic not only hastened Flybe's failure, it also significantly complicated the challenge of selling the business and its assets. Airlines, funds and other potential buyers had their own capital constraints and were far more focused on sorting out their own issues than looking to strategically acquire another business in a distressed situation. Falling aviation asset values also limited bidder appetite.

Moreover, the team almost immediately faced the prospect of performing a remote administration from home. We were on-site for less than two weeks before the full UK lockdown, which required the Flybe and administration teams to adapt working practices to ensure necessary support on the ground for critical maintenance, security, access to systems and records, and conducting multiple sales processes. We preserved and secured the business and assets dispersed across Europe and North America, while navigating stakeholders through an accelerated sales programme and planning an operational restructure to make Flybe a viable and attractive business proposition.

Despite these challenges, the initial worldwide M&A process still resulted in interest from over 200 parties, including over 20 non-binding offers.

In addition to the going concern sale itself, some of the ancillary assets offered as part of the M&A process held key strategic relevance to certain regional communities. This included the share sale of a solvent subsidiary called Flybe Aviation Services in June 2020, a subsidiary which held the strategically important maintenance contract for RAF Brize Norton, and also the sale of the airline's training academy in Exeter, which will now be a hub for tertiary-level skills training run by Exeter College.

Licence to sell

Much of the ability to present a compelling proposition rested on the carefully considered pre-administration step to preserve critical licences and certifications. Without Flybe requesting the voluntary suspension of its AOC and maintenance licences, prior to the appointment of administrators, the airline's insolvency would likely have triggered a revocation of both.

In addition, we also ensured that the necessary Flybe post-holder employees, linked to the licences and certifications, were retained once the administration appointment happened.

An automatic revocation of the AOC would mean that the operating licence (OL) would have also been forfeited (you can't have an OL without an AOC) and consequential loss of Flybe's valuable airport slots, which were a crucial element of the going concern sale strategy.

Restoring the maintenance licences would have been especially challenging after appointment. But our proactive action meant that the CAA restored Flybe's maintenance licences on 10 March 2020, just five days after the appointment - rather than a period of months, which we've seen in other cases.

Separately, the CAA commenced steps to revoke Flybe's OL, but an appeal of this decision was made by the administrators on the basis that the M&A process provided for a realistic prospect of the survival of Flybe as a going concern. The OL appeal process(es) by the administrators, supported by specialist and experienced aviation and insolvency legal advisers, came to an end only after we completed the going concern sale.

Why were these licences so critical?

• The maintenance licence allowed us to operate Flybe's maintenance and repair profitably, and overhaul operations division (MRO), which was crucial to maintain Flybe's 65-strong fleet of leased and financed aircraft and engines. This preserved value and generated liquidity for the estate through trading income, creating another source of recovery for the senior secured creditors and extending the period available to conduct the sales process.
• Flybe retained its airport landing slots in the UK and Europe and these were necessary in order to support the future airline business plan (for any going concern sale) and any prospective recovery for the administration. The ability to retain and then transfer airport slots with the business was reliant on Flybe holding a valid AOC and OL. The suspension but not revocation of Flybe's AOC and OL (note: the OL was not suspended, but operations were subject to an undertaking) - and the administrators' appeal against any OL revocation during the administration meant that Flybe ultimately retained its airport landing slots and transferred them to the purchaser as part of a going concern. This ability to transfer the slots was also aided by successfully being granted grandfathering rights to certain airport slots by the European Commission in August 2020.

In the absence of the liquidity generated by the administrators' actions (and other non-core asset sales), it is very likely that Flybe would have shut down, leading to the redundancy of the remaining workforce and the cessation of the going concern sale. In fact, retaining these licences enabled us to extend the M&A process, without eroding creditor value. It also gave us additional time to vet offers and find the right buyer and structure for the business.

During this extended period, the administrators and Flybe management were able to reshape the business plan for the post-pandemic market, focusing on the most profitable routes and streamlining the key operational, commercial, regulatory and financial requirements. This demonstrated that a relaunch of Flybe under a different operating model made commercial and financial sense.

Finally, when determining how to structure the going concern sale, we needed to be conscious of the ultimate transaction structure. Broadly speaking, we considered either:

1. A sale of the shares of a reconstituted Flybe limited company which held the AOC and OL via an in-court procedure (such as a restructuring plan or scheme); or
2. A sale of the business and assets (and airport slots) via a going concern business and asset sale by the administrators to a third party who also held a valid AOC and OL.

The latter structure above was ultimately agreed alongside the purchaser and, also, in consultation with European and UK slot coordinators who needed to satisfy themselves that the proposed transaction structure was permissible under their own slot coordination regulations.

Flybe 2.0

By summer 2020 an organisation affiliated with one of the shareholders had emerged as the successful purchaser. The purchaser successfully applied for its own AOC and OL and acquired Flybe's business and assets (including the airport slots) as part of a going concern sale.  

The transaction completed in April 2021 and the new owners plan to launch a new Flybe later this year.

The airline sector's recovery from the pandemic is likely to be a non-linear path, slower to arrive than hoped and the shape of the industry will change significantly as the economy adapts to reduced business travel, the continued rise in importance of technology, the transition to sustainable aviation fuel and the road to net zero. All of these points will see a continued squeeze on capital so further distress is likely.

There are important lessons we can take from the Flybe administration, where key decisions at the right time preserved significant value and allowed the sale of the business as a going concern against the odds.

Key takeaways

Safe entry on administration filing: planning done alongside legal advisers and Flybe management limited operational risk by grounding flights and preserving CAA licences.

Robust initial communications plan: delivering a comprehensive communications cascade within the first 24 hours of appointment in cooperation with Flybe management and the CAA - over 20,000 customers and 2,200 employees addressed.

Protect licences and slots to enable a sale as a going concern and provide optionality: proactive steps taken pre- and post-appointment enabled us to successfully protect Flybe's licences, business and landing slots. It also provided us with the opportunity to generate liquidity/income (profitably) via the MRO business.

Focus on the exit - develop a business plan for a new Flybe: this ensured that any interested parties had a head start in understanding what a reshaped Flybe could look like, kept management and retained staff focused and engaged, and therefore avoided staff departures.

Building the right team: a well-rounded mix of legal and restructuring professionals bringing sector, regulatory, legal, and strong insolvency experience was essential.

Multidisciplinary approach: drawing on the expertise within the team which included specialisations such as insolvency, M&A, modelling, operational capability teams, aviation specialists, government and tax expertise.

This article first appeared in the Autumn 2021 edition of RECOVERY magazine. See the full edition on R3's website.

 

Ned Swifte is an assistant director at EY-Parthenon.

Linh Nguyen is an assistant director at EY-Parthenon.