Airline Insolvency Review - Plane Common Sense?

Monarch Airways falling into insolvency in October 2017 was quite a shock to the airline industry. It was still holding recruitment days in its last trading week.


Airline Insolvency Review – Plane Common Sense?

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The government had to arrange for 85,000 holidaymakers who were stranded abroad to be flown home at a cost of over £60m to the UK taxpayer, or just over £700 per passenger, although £20m was eventually recovered through the administration process.

 

Many other airlines have also gone into administration since then including WOW in March this year which is why the Department for Transport commissioned a review led by senior financial adviser Peter Bucks to examine ways in which passengers could be protected from insolvency events in future.

 

Among the reports key recommendations which were unveiled last week and which Bucks calls “practicable, effectual and affordable” are:

 

  • A new charge of 50p per passenger to fund a flight protection scheme that would protect passengers if their airline became insolvent while they’re abroad.
  • A change to UK aviation law to allow an airline’s own aircraft to continue to operate for a short time after entering administration so they could be used to repatriate passengers and bring them home.
  • Improve passengers awareness of insolvency issues and to purchase appropriate travel insurance including provisions such as Scheduled Airline Failure Insurance (SAFI) to protect them in the event of an airline’s collapse. This can also include credit and debit card protection.

 

Transport Secretary Chris Grayling said: “We will now consider the range of options put forward by the review, and will work to swiftly introduce the reforms needed to secure the right balance between strong consumer protection and the interests of taxpayers.”

 

Where the balance is depends on who you ask as there’ll be voices on either side of the debate defending their cases.

 

The main UK airlines – British Airways, easyJet, Jet2 and Ryanair – are relatively financially robust and could reasonably ask why they should have to pay or increase their own fares to absorb the costs of helping passengers flying with their less financially robust competitors?

 

A tweak to aviation law to allow insolvent airlines fleets and staff to be used to bring holidaymakers home might have the most reasonable chance of success and universal approval as well as being the most logical.

Currently if an airline goes into administration, it’s planes are repossessed or held by airports that are owed money. In the case of Monarch, other airlines were brought in at great expense while their own planes and flight crews were kept on the ground.

 

The report also recommends that airlines that have a “material adverse change” in their financial situation should be required to notify the Civil Aviation Authority (CAA) but this isn’t as straightforward as it sounds.  

 

Aviation is a cash-positive business. Customers pay weeks or months ahead of taking delivery by turning up for their flight. Airlines are able to keep trading and flying even if their finances are precarious.

 

The CAA is not without powers itself. After Monarch collapsed it insisted on a temporary Air Travel Trust fund that every UK outbound passenger paid £2.50 into which granted them Air Travel Organiser’s Licence (ATOL) scheme protection if they weren’t already covered. If the scheme had continued until after Monarch’s failure then the repatriation bill would have been funded entirely by the Trust Fund rather than by you or I.

 

R3, the trade body for insolvency practitioners in the UK think that the proposals don’t overcome the specific challenges if an insolvent airline were allowed to continue to fly.

 

R3 President Duncan Swift said: “One of the reasons why an insolvent airline’s planes are safely grounded is that they’re vulnerable to creditor action. It’s too easy for a disgruntled food or fuel supplier to block a plane on a taxiway at an overseas airport until they’ve been paid what they’re owed. This would pose a risk to passenger safety and disrupt the whole insolvency process.

 

“If full financial backing arrives then the risks of creditor action is lowered because creditors are more confident of being paid. Without this backing, there are other issues such as crew wellbeing and insurance costs that a special insolvency regime for airlines won’t make go away.

 

“There is also the proposal that the primary purpose of an airline administration be altered so that passenger repatriation takes precedence over duties to creditors. This would have an impact on creditors’ risk analysis when it comes to trading with or lending to an airline and could affect finance for the whole sector.”

 

The most sensible advice comes from Chris Horner, licensed insolvency practitioner of Robson Scott and R3 member who said: “European airlines are in a transitional period, so passengers should ensure that wherever possible they have valid SAFI insurance before travelling.”  

 

This might sound obvious but according to research nearly half of UK travel policies do not include SAFI as standard.

 

Purchases under any ATOL scheme are automatically covered, and a holiday provider must clearly state if they are registered under it. The scheme doesn’t cover flights which are booked separately however.

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