On Thursday night XL Airways flight JN1121 pushed back from the terminal at
Sanford International, the Orlando airport that is the gateway to Florida
for thousands of British holidaymakers every year.
For the 266 passengers on board it was the end of a late summer break - two
weeks spent basking on the beach or squealing with delight on the rides at
Disneyland.
The thrills weren’t over just yet. As the aircraft prepared to taxi, two
police cars raced up, lights flashing. The plane stopped, then eased back to
its stand. The passengers were told to get off. “We went backwards about 150
feet, stopped and got a message from the captain that there had been a bit
of a problem,” one passenger told a local television news crew.
What the holidaymakers didn’t know was that XL Leisure Group, the airline’s
owner, had run out of money. As they kicked their heels in the terminal, a
High Court judge was, in the early hours of the morning UK time, approving
the appointment of an administrator for the company.
XL executives had tried to time the appointment so its planes would be
airborne and heading home before they were seized by creditors.
Unfortunately, according to sources at Gatwick, cabin crew on the Florida
flight got wind of the impending collapse and inadvertently mentioned it to
airport staff. When the whispers percolated up to airport managers they were
alarmed. XL owed them money for handling fees. Take-off was stopped and the
plane impounded.
The drama in Florida was replicated around the world. The collapse of XL,
Britain’s No 3 holiday group, is the biggest since the demise of
International Leisure Group (ILG) 17 years ago. It brings an end to a
corporate saga built on an unlikely alliance between the sharpest traders in
the murky world of British charter airlines and a group of Icelandic
billionaires.
While most of the XL fleet managed to make it back to Britain, that was little
comfort to the 85,000 passengers still on holiday and the estimated 240,000
more booked to travel in coming months. Only those who had booked a package
holiday rather than a standalone flight are likely to be protected from
financial loss.
On Friday morning, passengers turning up at Gatwick were stunned. “Absolutely
devastated,” said Jim Duwaine, from Portsmouth, who was meant to fly to
Menorca. “We are here just trying to get some other flights, but it’s not
looking good.” Not only holidaymakers suffered. About 1,400 of XL’s 1,700
staff lost their jobs.
As travellers begin the miserable job of forking out for new flights or
waiting for refunds, questions are beginning to be asked about whether the
regulatory oversight of the company was sufficient, and whether a change in
the law is needed.
“There is not a level playing field. [There needs to be clarity over] the ins
and outs of when you get your money back and when you don’t confuse the
public,” said Peter Long, chief executive of Tui Travel, the UK market
leader. HEADS of state rarely visit the Manor Royal Industrial Estate in
Crawley, West Sussex. Three years ago, however, Olafur Ragnar Grimsson,
president of Iceland, turned up to be met by Crawley’s leading citizen,
mayor Jim Smith, resplendent in his gold chain of office.
Grimsson made the trip to mark a substantial Icelandic investment in Britain.
It was an investment that set in train a complicated string of deals
involving two disparate groups of entrepreneurs that led to the creation of
XL Leisure.
Avion Group, an aviation business set up by Iceland’s Magnus Thorsteinsson,
had bought Excel Airways, one of the leading charter airlines at Gatwick.
Excel was the creation of Phil Wyatt and a group of aircraft brokers who had
plied their trade round Gatwick, home of the charter industry, since the
1980s. They had either created or brokered, and in some cases ditched, a
string of charter airlines – Ambassador, Peach Air, International Airways,
Sabre - and rubbed up competitors the wrong way with their sharp dealmaking.
In a rare interview given 11 years ago, Wyatt dismissed the jibes of his
rivals, including one who had accused him of “setting back the image of the
charter industry 10 years”.
Wyatt got to know the Icelandics when brokering for an Icelandic airline, Air
Atlanta.
Thorsteinsson was from a completely different background. He was one of the
so-called Samson trio – a group of Icelandic businessmen who made a killing
setting up a bottling plant in St Petersburg and selling it a decade later
to Heineken. The leader of the Samson group was Thor Bjorgolfsson, now
regarded as Iceland’s richest man. He is No 29 on the Sunday Times Rich
List, with a fortune of more than £2 billion and runs his investment empire
from chic offices in London’s Park Lane.
Wyatt and his colleagues floated Excel on the Alternative Investment Market in
2002, and sold out to Avion in 2005. While it was all smiles for the opening
of the new offices and Grimsson’s visit - which happened a month after
Avion took over - things did not go smoothly. A year later Wyatt and other
XL executives staged a management buyout.
To fund the deal, Landsbanki, an Icelandic bank, put up a loan of $280m
(£156m). Landsbanki’s chairman is Bjorgolfur Gudmundsson, Thor
Bjorgolfsson’s father and the third member of the Samson group.
The loan was in turn guaranteed by Eimskip, an Icelandic shipping group into
which Avion had been subsumed. Bjorgolfsson’s father is a leading
shareholder. The loan to XL was to have been repaid on March 5 this year,
but was rolled over as it became clear the British company could not pay.
Eimskip’s reason for providing the guarantee is not clear, but an industry
source said it had in effect assisted Wyatt and his fellow managers to take
the business off their hands. “It’s like me saying you can buy my house for
more than it’s worth, and I’ll help you pay the extra,” the source said.
XL grew quickly, buying up tour operators and bringing in new aircraft. Its
results, however, were poor – it lost £24m in 2007 – and Peter Owen, who
made his name at British Airways and later led the demutu-alisation of
healthcare giant PPP, was brought in as chief executive. Wyatt was relegated
to the role of deputy chairman.
Owen revamped the business, laying off staff and moving into new areas. Behind
the scenes, industry sources say, he began looking for investors to fund a
new management buyout. The takeover, however, would have valued the business
at much less than Wyatt and his colleagues had paid for it, and would have
wiped out their stake. Owen, who was also chairman of the failed
business-only airline Silverjet, left the company in June, and Wyatt took
executive control again.
By this time, the high oil price had increased XL’s losses, and a fuel-hedging
deal with Barclays Capital had gone wrong. When Barclays found the firm
couldn’t meet a hedging contract call for £10m, it converted the money into
a loan. A series of demands for payment were made, with Barclays eventually
reaching a standstill deal on the unpaid amount a few weeks ago. Landsbanki
and another Icelandic instituion, Straumur, were also owed money.
Worried that it might face a call on its $280m guarantee, Eimskip recruited
Kroll, the corporate-advisory firm, to work out the best way ahead.
Meanwhile, Wyatt was trying to find new investors, holding talks with a
consortium led by Elias Elia, the UK chief executive of E-Clear, a
credit-card payment group. “There was meant to be money coming from the
Qatar Investment Authority, or from a Swedish investment scheme, but it came
to nothing,” said one of the sources.
A fortnight ago The Sunday Times revealed Kroll’s involvement and the
desperate search for new funding. The crisis came last Thursday. Facing a
fuel bill the next day that the company could not pay, the directors decided
the game was up. Kroll was appointed administrator at 1am on Friday.
“In the end, they ran out of money,” said Alastair Bev-eridge at Kroll. IN
Iceland, Eimskip was spared the full force of the XL’s failure. A group
of its leading shareholders - led by Bjorgolfsson and his father - said they
would take on the loan guarantee.
Wyatt was in tears on Friday. “I am devastated. We could not find a way to
refinance it,” he said. He blamed the company’s sudden demise on high oil
prices and the decision of Eimskip to announce midweek that it had done a
deal with Bjorgolfsson to pass on the guarantee.
Travel industry experts, however, said the company had been hamstrung by its
lack of a sizeable tour operation and sales arm. “Ideally, integrated tour
operators in the UK have three things - a smallish airline, a medium-sized
tour operation and big distribution arm to sell their products. XL had a big
airline, a smallish tour arm and not much distribution,” said an executive
at one rival.
The company was also financially weak. Company Watch, the financial analysis
group, has had XL on its watch list for two years. It said: “The funding of
the acquisitions seriously weakened the balance sheet and the business,
which never had a huge capital base.”
Tui and Thomas Cook will use the chaos created by XL’s collapse to push for
regulatory reform. They want airlines to have to pay for consumer
protection, as package holiday operators are forced to by law. The
government rejected their demands 18 months ago after heavy lobbying from
airlines including Easyjet, Ryanair and British Airways.
Tui’s Long said: “It is ridiculous that people sitting beside each other on
the same flight have different levels of protection just because of the way
they bought their products.”
For XL passengers stranded at airports around the world or waiting for
refunds, that debate has come too late.
