UK: Airline Insolvency Overhaul: A Summary Of The Final Report Of The Airline Insolvency Review

1. Introduction

On 9 May 2019 the Airline Insolvency Review (the AIR), chaired by Peter Bucks, published its Final Report on passenger protections in the context of airline insolvencies, having been commissioned by the Chancellor of the Exchequer in November 2017 following the high-profile collapse of Monarch Airlines. Chief among the report's recommendations are the implementation of a privately funded repatriation scheme, a new Special Administration Regime for airlines, and the commercialisation of the protection that currently exists under EU regulatory framework for customers who have purchased flights as part of a package, or together with other travel products (ATOL protection).

2. Background to the AIR

When Monarch entered administration in October 2017, there were 110,000 passengers situated overseas and 300,000 future bookings were lost. Faced with the prospect of passengers having to wait weeks to return home, the Government instructed the Civil Aviation Authority (the CAA) to repatriate not only the ATOL protected consumers, but all overseas passengers. The consequence of that decision was a £60 million taxpayer bill, which the Government has since struggled to recoup.

Consequently, the AIR was established to consider: i) new forms of repatriation and refund protection; and ii) methods of placing the ATOL scheme on a more commercial footing. The report notes from its outset that significant gaps exist in the protection against airline insolvencies currently afforded to UK air passengers. Indeed, whilst 80% of passengers benefit from some form of protection against financial loss, only one quarter of passengers are fully protected by virtue of the pre-existing ATOL scheme. The ATOL scheme is operated by the CAA and is funded, in part, by contributions from licenced travel companies (ATOL holders). Whilst the ATOL scheme has been effective in mitigating the financial losses sustained as a result of minor airline failures, such as FlyBMI and Wow Air both earlier this year, the Monarch collapse demonstrated the scheme's limitations in the context of large airline failures. Without Government intervention, the majority of passengers would have been left to arrange emergency travel and accommodation for themselves. The need for a scheme that is capable of withstanding such failures is further borne out by the precarious reality that only 13 airlines service 80% of UK travellers, whilst the AIR estimates the risk of an insolvency amongst the top 17 airlines within the next year at 13%.

3. Recommendations

The AIR's key recommendations are:

• The Flight Protection Scheme (the FPS)

The FPS would be a comprehensive private sector initiative to protect UK air passengers in the event of airline or travel company insolvencies and would be coordinated by the CAA. Under the FPS, funding would be administered by the CAA to effect the same-day repatriation of passengers by both the affected airline and assisting airlines. The FPS is proposed to extend to all UK-originating passengers who have return flights to the UK with an airline that becomes insolvent. It should be noted that the FPS would not cover refunds for lost bookings.

According to the report, the FPS would be funded exclusively by the private sector, with each airline that operates in the UK being required to provide financial protection based on the estimated cost of repatriating its own passengers. The AIR recommends that the majority of funding should be met through requiring airlines to grant security via financial instruments that can be relied on to pay out in the event of an airline's insolvency, which would be supplemented by a small central fund to cover the remainder of the airlines' exposure. To ensure universal participation, the report also recommends that the licences of all airlines operating in the UK should be conditional on making this financial contribution.

These costs are almost certain to be passed indirectly to consumers. Promisingly, however, the report estimates that the FPS would cost no more than 50 pence for each protected passenger. It should also be recognised that this proposed funding arrangement, which is clearly underpinned by the AIR's guiding principle to ensure that the beneficiaries pay, is aimed at ensuring sufficient funds are available to avoid taxpayer bailouts. As such, the proposal is a welcome development in the context of ongoing market turbulence.

• Legislative and regulatory changes

The report emphasises that, in order to optimise the benefits of the FPS, legislative and regulatory 'toolkits' must be developed to enable airlines to continue to operate aircraft for a limited time after they enter insolvency.

In relation to the legislative toolkit, the report's primary recommendation is the implementation of a Special Administration Regime (SAR) for airlines. Amongst other things, this would involve temporarily changing the legislative purpose of an airline's administration to the repatriation of its passengers, imposing a moratorium on creditors' actions, and arranging payments agreements with staff and suppliers to ensure costs associated with repatriation would be paid as expenses of the administration.

With regard to the regulatory toolkit, the report advances a proposal to grant additional powers to the CAA to enable it to manage repatriation processes effectively. These include the power to require annual certification of financial fitness, grant licenses to insolvent airlines, impose license conditions to encourage repatriating airlines to mitigate consumer risks, and create rules to require the provision of information by insolvent airlines.

• Enhancing the commerciality of ATOL

The proposal of a comprehensive repatriation scheme raises question marks over the ongoing application of the ATOL scheme. AIR anticipates these questions in its report by making recommendations to enhance the commerciality of the ATOL scheme. These recommendations largely seek to distance the Secretary of State's involvement in the Air Travel Trust (the ATT), being the body that finances ATOL protection through a combination of consumer contributions, insurance policies, and credit facilities. In particular, the report recommends the following changes:

• Amendments to the Trust Deed to remove the Secretary of State's powers in relation to the ATT;
• Removing the Secretary of State from the trustee appointment process; and
• Ensuring at least some of the trustees are independent of the CAA.

The question remains as to whether the ATOL scheme would remain viable alongside the FPS. As the report recognises, the risk of overlapping protection is significant. The AIR seeks to address this by suggesting that the FPS would not cover ATOL protected consumers. However, assuming airlines will build the cost of FPS protection into their pricing structures, this in turn raises the question of whether consumers could be persuaded to forego FPS protection in favour of 'gold standard' ATOL protection.

4. Conclusion

The recommendations of the AIR represent a welcome enhancement to the protection available to consumers that find themselves stranded abroad on the failure of their airline.

The introduction of the SAR, in particular, has the potential to provide passengers with a seamless repatriation service if the insolvent airline's fleet of aircraft are able to operate during insolvency to provide repatriation flights. How this will work in practice will remain to be seen, as the success of such an undertaking is likely to depend largely on the cooperation of creditors who might otherwise seek to repossess aircraft whilst they are outside of the jurisdiction of the English courts, and therefore outside of the protection of the SAR's moratorium.

How effective these measures are will only be truly understood once tested, however they represent a timely enhancement to the current framework in light of the financial volatility experienced recently within the airline sector.

The full report can be accessed here: http://www.gov.uk/government/publications/airline-insolvency-review-final-report

Reed Smith LLP provided legal advice to the Airline Insolvency Review on a number of the aspects covered in the Final Report.

This article is presented for informational purposes only and is not intended to constitute legal advice.