Is it the engines, the wings or the Administrator that will keep the airlines flying?

Earlier this week the European Transport Commissioner relaxed strict rules banning state subsidies for airlines. This follows reports that the cancellation of approximately 100,000 flights earlier this month due to the volcano in Iceland was going to cost the industry in the region of £2 billion.

Inconvenient as the closedown of European airspace was for travellers, the interruption of cash flow could potentially be ruinous for a lot of airlines.  Sadly, this probably means that we could see some seeking administration orders, with a view to helping them trade through the short-term cash flow problems that they are encountering.

But, what exactly is an administrative order?

An administration order under the UK legislation is similar to US Chapter 11 protection, though different in certain key ways.

An administration order is generally sought by directors of a company, who can otherwise be at risk of personal liability if they keep trading without a realistic expectation of being able to pay the creditors.

An Administrator is appointed to oversee the company’s position and to take over management of the business.  As a result:

•    Creditors cannot commence a winding up of the company.

•    The powers of the directors to manage the business are transferred to the administrator.  At the end of the administration, the administrator has the option to reappoint the directors.

•    The directors must produce a statement of affairs for the administrator which will be the starting point for a revised business plan.

•    The administration order is publicised.

The effect is to give the company a chance to stabilise itself, save jobs, minimise losses to creditors and minimise disruption to stakeholders generally.  It’s a very useful device that has saved lots of companies from avoidable bankruptcy.  Hopefully though we won’t see too many administration orders in the coming months.