Chris Bristow, insolvency advisor at Real Business Rescue, a division of Begbies Traynor, discusses the red flags that indicate a company is in financial trouble  

When an airline or aviation company enters into formal insolvency proceedings, there are a huge number of factors which need to be considered.

As with all insolvency situations, stakeholders such as customers, creditors, and employees need to be considered.

However, with huge assets which could be located in multiple jurisdictions, potential repatriation missions to be undertaken, plus regulatory issues to be adhered to at all times, aviation insolvency is an extremely complex affair.

If formal insolvency proceedings can be avoided, therefore, this is often the most favoured outcome for all involved.

The key to this, is for those within the aviation industry to be aware of the warning signs of impending insolvency, meaning swift action can be taken at an early stage to stem the financial and/or operational challenges via a robust yet flexible restructuring plan which can help stabilise the company and get it back on a solid financial footing.

In an industry where it is typical for customers to pay weeks, months, and even years ahead of their flight date, insolvency within the aviation industry can be notoriously difficult to spot immediately.

This is because airlines are able to keep flying using funds from future customers to pay its current liabilities for a considerable length of time.

Despite this, there are some signs that all may not be well with the financial and/or operational health of an aviation business, long before formal insolvency is declared.

Here are some of the major warning signs to be on the lookout for:

• Compromised cash flow – Cash flow is at the heart of any successful business. For those within the aviation industry, where advance bookings and payments are the norm, being able to confidently monitor and forecast your cash flow position is crucial.

This may be easier for some operations than others. For those that have hedged their fuel price risk, for example, predicting their ongoing costs may be more reliable than those at the mercy of fluctuating fuel prices.

Steps should be taken to constantly stabilise and improve a company’s cash flow position by reducing unnecessary costs, increasing efficiency, and ensuring cash reserves are kept at adequate levels.

When cash flow becomes squeezed, the situation can escalate at an alarmingly quick rate. Once creditors become aware a debtor may be in a financially precarious position, they will often ramp up their efforts to recover money owed with this pressure only serving to make the situation worse for the indebted business. Left alone, a squeezed cash flow position can make continued trading untenable.

• Falling behind in tax obligations – As a creditors with huge resources at its disposal, HMRC and other tax bodies, are tenacious in recovering the money owed to them, particularly from companies they believe have significant assets.

In the UK, HMRC issues more winding up petitions than any other creditor, therefore failure to keep up with liabilities owed to HMRC comes with significant risks.

Once an aviation business finds itself in significant levels of tax debt, steps should be taken to resolve the situation whether by informal negotiations with HMRC or by entering into a formal insolvency proceedings to restructure its liabilities.

• Unable to satisfy the CAA – In order for an airline to retain a valid operating licence they need to assure regulators, like the CAA in the UK, that they are in a position to satisfy their financial obligations over the coming 12 month period.

If financial difficulties have become so great that there are question marks over whether the CAA will grant the licence, immediate action needs to be taken to stabilise the company in the immediate period and a plan put in place to guarantee long-term security.

• Uncontrollable operating costs – The operating costs of a company within the aviation business can be eyewatering.

Add to this ever-changing consumer demand, high maintenance costs to assets, elevated fuel prices, cutthroat competition, and regulatory matters to consider at all times, it is easy to see how costs can quickly spiral out of control.

In order to guarantee sustainability of the company, these costs need to be carefully monitored, controlled, and reduced where possible.

If costs are continuing to rise, and you are failing to improve your turnover, operational efficiency, or renegotiate contracts in your favour, the financial position of the company can deteriorate surprisingly quickly.

• Falling behind with lessors and creditors – As with all companies, ensuring debt is carefully managed and the liquidity position is healthy, are crucial factors for airlines to continue to trade effectively.

This means choosing the most appropriate channels of funding and ensuring all debt covenants and obligations are kept up with as agreed.

As aviation businesses are often highly leveraged, with most aircraft operators leasing rather than buying outright their aircrafts, falling behind in these payments to lessors can have a catastrophic effect.

Defaulting with lessors should be taken as a huge warning sign that all is not well with the financial health of the business, and exploring debt refinancing or restructuring to meet both short-term and long-term liabilities may be required as a matter of urgency.

About the author: Chris Bristow is a business debt expert at Real Business Rescue, company rescue, restructuring and liquidation specialists with a wealth of experience in supporting company directors in financial difficulty.