The aviation industry is a network business, relying upon strict regulation, rigorous safety standards and operations planned to minute detail. Unexpected financial or operating changes, particularly to `ground handling' services (the aggregation of services that manage customer check-in through to loading and unloading the aircraft) can have an impact on the lives of thousands of employees and hundreds of thousands of air travellers. When Aviator UK, the company that supplied ground handling services to four major UK airports, ran into immediate financial trouble it was clear that action would be needed and fast.
The Aviator Group is a large European ground handling operator, headquartered in Sweden. The Group operates in Europe with a focus on the Nordic region and, until recently, included UK operations (acquired from Servisair in 2015). The UK business provided ground handling services to most major airlines at Gatwick, Birmingham, Newcastle and Manchester airports, and employed approximately 1,700 people in the UK. In mid-2016, while the group was in the process of negotiating refinancing of its debt facilities, its lender group advised that it was no longer supportive of the Group's UK operations.
Following the unexpected (and immediate) loss of financial support for UK operations, and incurring a 3m+ wage bill, the directors of Aviator UK faced the risk that the business was cash-flow insolvent, with potentially no other option but to cease operations immediately.
The directors were cognisant that the potential disruption resulting from ceasing UK operations would have been reminiscent of other major aviation incidents, such as the Icelandic ash cloud in 2010, which cost the economy over 1bn. As a result, FTI Consulting and DLA Piper were engaged to advise the board and management of Aviator UK on alternative options to avoid the need to immediately cease operations.
Over the 48 hours following the insolvency, a plan was developed to avoid the need for an immediate shutdown of operations. The plan involved securing sufficient cash-flow support from key stakeholders (primarily airports and airline customers) to manage the transition of customer contracts and employees to alternative ground handling suppliers in a controlled manner over a 12-week period.
This article focuses on the specific legal and operational issues involved in managing this situation. Below are the key considerations that needed to be accounted for:
Given the immediate and medium-term funding need of the UK business, a working group was established (comprised of the board, management and legal advisors) to plan an orderly wind down of the business.
This required the business to obtain committed finance within 24 to 48 hours to enable the company to meet immediate supplier payments and payroll obligations.
Over 24 hours, advisers worked with the finance team and senior management to build a cash-flow forecast for the transition period, as well as to ensure all non-critical payments were put on hold to preserve liquidity in the business. The business' key stakeholders were approached to discuss funding arrangements with a clear and quantifiable plan that they could fund. The anticipated key concerns for the funding stakeholders were:
- business continuity
- maintenance of operational standards
- robust budgeting.
The directors needed to be confident that the business had the liquidity it needed in order to achieve the transition without this aim being jeopardised by further cash-flow issues or creditor action. Given the circumstances fell well outside of the ordinary course of business for the industry, these arrangements were necessarily bespoke and required an innovative approach, in order to develop and document them within a timescale of hours, not days or weeks.
The group ultimately secured sufficient funding to allow the business sufficient time to execute its orderly transition. As part of the funding package, the company agreed to provide weekly cash-flow forecasts for the transition period and operational updates, and gave a commitment to meet minimum service standards.
Wrongful trading risk
In light of the imminent insolvency of the company at the end of the transition period, the directors were keenly aware of their responsibilities to minimise losses to suppliers and other creditors of the business. Ensuring that they could not be criticised personally, by reason of having continued to trade for a period, was critical to the implementation of the transition objective.
The directors wanted to be sure that:
- creditor positions would not be worsened during the course of the transition; or
- if creditor positions were worsened (through the ordinary course of trading), there was sufficient funding to allow a pre-closure payment to bring individual creditor positions back to their pre-crisis levels.
On the basis of the advice provided (including weekly analysis of individual creditor positions), the directors of the Group were satisfied that they had taken every step with a view to minimising the potential loss to creditors that they ought to have taken and therefore had mitigated as far as possible the risk of criticism of their decision to trade on during the transition period.
TUPE issues and process
The directors were keen to protect employees and limit job losses where possible. This was essential to achieve the overarching objective of securing a continued delivery of services. At the same time, it was recognised that redundancies would be the inevitable result of a shutdown if services were not transitioned to new suppliers.
In order to avoid potential liabilities to employees, which would hit funds available to creditors, consultation about both potential transfers of staff and redundancies was commenced immediately. All employees were placed at risk of redundancy and informed that the aim was to avoid redundancies through securing a transfer of their employment where possible.
The directors were keen to ensure that every step was taken to comply with the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) to protect jobs where possible. However, TUPE requires an organised grouping of employees who are assigned to the business or contract in question. As a result, it was recognised that there would be a group of head office staff who were unlikely to be protected by TUPE and, due to the way in which staff were organised, there was a risk that some operational staff would be insufficiently assigned to individual contracts.
In practice, there was a fine balance to be achieved (through active dialogue with trade unions and alternative suppliers) in the application of assignment requirements under TUPE, maximising jobs secured and ensuring that some new suppliers had sufficient staff to continue operations, while others did not inherit reflect a strict application of TUPE or meet employees' individual aspirations to transfer to perceived `preferred suppliers', resulting in some interesting individual challenges that had to be addressed.
Throughout this process, while tempting to solely focus on securing transfers of staff, it was also important not to forget those staff who remained at risk of redundancy yet were essential to maintain operational delivery throughout the transition period. Resource pressures limited the amount of direct consultation that could take place, so regular updates and alternative communication paths were essential to achieve effective consultation and support for these staff during the transition process.
Operational wind down process
Once funding had been secured, the work commenced on transitioning the operations to alternative service providers. Given the operational complexities of the business the Group provided services under 55 separate contracts, averaging 1,600 `turns' per day this process was far from simple, and involved complex discussions/negotiations between:
- 43 airlines
- 4 airport authorities
- 6 incoming ground handling providers
- unions and employee representatives
- trade creditors
- equipment lessors
- the government.
As the funding provided to the business was contingent on maintaining service at pre-agreed levels, it was critical to the overall success of the wind down that operations remained uninterrupted, and that employees (who faced considerable uncertainty) continued to turn up for work. Employee and union communications were therefore key.
Ultimately, in order to ensure a manageable migration process, operations (and their associated customer contracts) were transferred to new operators in three blocks during the final month of trading. Any remaining head office staff that were not covered by TUPE, or required to assist in the final closure of the corporate legal entities, were made redundant on the final transfer date.
The logistics of managing this process were, to say the least, highly challenging and required close coordination and cooperation between the management team, their advisers, the airlines and airports (and their advisers), the new operators (approximately six in total) and various sets of legal advisers, in addition to the numerous bilateral negotiations that were required with stakeholders.
Employee communications and HR processes
Stabilising the workforce was critical to implementing an orderly wind down of operations and ensuring business continuity to prevent travel disruptions. Aviator employees were needed to report for their shifts and continue to service aircraft. To achieve this outcome, the company, advisers and legal team's efforts were focused on:
- addressing the initial concerns from the workforce who were aware of Aviator's financial challenges
- conducting productive dialogues with unions and employee representatives
- adhering to the legal requirements governing TUPE and potential redundancy consultations that were running in parallel
- formulating and documenting staff retention incentives to avoid the loss of certain key employees during the transition
- mitigating efforts by the media to sensationalise the situation with storylines about potential travel chaos across the UK and Europe; and, most importantly
- being respectful in our communications and being as transparent as possible given the uncertainties for employees.
In the highly charged time period before a plan had been agreed and funded, managing the workforce was challenging. Given the close working proximity between Aviator's staff, the airlines and other ground handling operations at each airport, they were aware of the business' funding challenges and had threatened a work stoppage if there were no immediate assurances on payroll. Unfortunately, while financial solutions were being developed, Aviator wasn't in a position to give the assurances demanded by employees for several days, which initially heightened tensions with the workforce.
Upon confirmation of the wind-down funding, Aviator's CEO immediately updated employees of the planned withdrawal from UK operations, as well as Aviator's commitment to seek TUPE transfer for as many employees as possible. We then led, in concert with Aviator's human resources and internal communications team, an ongoing communications and HR rhythm that entailed:
- twice weekly updates to all staff from Aviator's CEO, detailing progress of the TUPE efforts with each airline at all airports
- weekly updates to the extended leadership team about efforts under way and guidance for managing questions from their teams an overview of the consultation process, including the process for electing representatives, and a weekly cycle of consultation meetings at each airport for those employees not represented by unions
- weekly meetings with union representatives
- weekly Q&As to address questions raised in works council and union meetings.
From a media perspective, FTI's communications team managed all incoming inquiries and ensured that the media understood that the process was under way to deliver a controlled wind down. We also ensured that the media offices of airlines and airports were fully aligned so that there was consistency in the messaging about the process to mitigate travel disruption and protect as many jobs as possible. As a result, there was little negative media coverage of this situation, and the coverage that did result reflected the coordinated plans under way to execute a controlled wind down of operations.
Although the Aviator UK corporate entities were ultimately placed into liquidation, the operations were successfully transferred to new providers, with more than 95 per cent of all employees transferring with the contracts. The transfer of employees and the protection of entitlements, as well as the completion of the transition with no travel disruption to the general public (against many expectations) meant that the project was a resounding success.
Some of the key learning points from this case study are summarised in the following text:
- A new management team had been brought into the business and a turnaround plan had been commenced however contingency plans had not yet been fully worked up at the point that lender support for the UK business was withdrawn. Consequently, the business was not prepared to deal with the liquidity shortfall that occurred.
- Relations with employees were challenging in the early stages of the wind down. The threat of a work stoppage escalated tensions. Early engagement and provision of open, transparent communication (to the extent legally possible) is key.
- Rapid and proactive engagement with the media, combined with an orderly process to ensure that all stakeholders (airlines, airports and Aviator) were communicating the same objectives, prevented sensationalist headlines, which could have derailed an otherwise controlled process.
- Mitigating wrongful trading risks for directors during a wind down process in a business with very tight margins and bespoke, specifically allocated funding arrangements requires robust, accurate and real-time reporting on creditor positions and forecasts, as well as coordination with key suppliers.
Alternative funding sources for a turnaround should be fully investigated, especially in network businesses where a collapse will have a major impact on other stakeholders.
Continuous, clear and open communication to employees ensures lower absenteeism and is vital to the operation of outsourcing businesses, especially ones with strict penalties for poor operational performance.