Banking & Finance

The liquidation of Thomas Cook Group last month – and the ensuing cancellation of all flights and repatriation of 140,000+ customers – has prompted fresh scrutiny of the UK’s approach to airline insolvency.

Many will remember a similar situation with Monarch Airlines Limited in 2017, when the UK Government stepped in and the Civil Aviation Authority (CAA) coordinated another significant repatriation exercise to return customers to the UK.

Almost immediately following Monarch, the UK Government announced its intention to commission a review of airline insolvency, focusing on passenger protections in the event of an airline or travel company becoming insolvent. The review ran for more than a year, and the final report was published in March 2019.

The gap in passenger protections

This report identified “a gap” in protections available to air passengers; only air passengers with tickets purchased as part of a package covered by the ATOL scheme are fully protected – that is, can return to the UK quickly, at little to no extra cost –  if overseas at the time of a carrier’s insolvency. Financial protection, in the form of travel insurance, extended to the carrier’s insolvency in around half of customers’ policies. Other options – including consumer protections linked to the method of purchase – address financial loss, but may still result in the affected party incurring additional cost, delay and inconvenience in trying to return home.

The report focused on how best to secure repatriation for UK-originating passengers who found themselves abroad at the time of insolvency and made several recommendations.

Four key recommendations:

  1. The Flight Protection Scheme.

A formal scheme should be established with the aim of protecting all parties whose flight “out” originated in the UK and whose return flight to the UK is cancelled due to the carrier’s insolvency.

The CAA should be appointed as the co-ordinating body and have a duty to use reasonable endeavours to ensure that passengers are repatriated to the UK, on the same day (and to the same airport to which) they expected to return.

  1. The Special Administration Regime

A Special Administration Regime should be developed to allow an insolvent airline to continue to operate its fleet for a limited period, to allow passengers who would otherwise be affected by the insolvency to be repatriated.

  1. Regulatory changes

The UK’s aviation regulatory regime should be revised to:

  • allow airlines to operate in administration; and
  • provide the CAA with greater oversight of airlines, including:
  • annual certification by each airline of its financial fitness;
  • development by each airline of repatriation plans; and
  • a requirement to notify the CAA in the event of a material adverse change in its financial situation.
  1. Financial contributions

The review considered that it was the airlines, rather than the affected passenger, who would actually benefit from the proposed protections.  As such, it concluded that a flight protection scheme should be funded by UK airlines, and in two key ways:

  • UK airlines themselves would require to put up security capable of being relied on in the event of the airline’s failure; and
  • UK airlines also contributing a small levy per passenger.

The report suggested that, following repatriation, the scheme would acquire the rights of the repatriated passengers against relevant third parties, and have the benefit of the financial protection(s) to which those passengers were entitled.

Progress since March?

The report acknowledged that certain recommendations (e.g. increased multinational collaboration) were fairly low cost while others  (e.g. the proposed Special Administration Regime and regulatory changes) would need primary legislation and/or have more significant impacts for stakeholders. As such, no timeline was proposed for implementation. A number of stakeholders have expressed concern about the recommendations, including R3 which noted that the Special Administration Regime did not address the practicalities that prevent Insolvency Practitioners operating aircraft post-insolvency, including risks to assets and personnel.

The UK Government’s response to the review is still awaited.  In the wake of the Thomas Cook liquidation the report findings are, however, back in the headlines.

Whether and to what extent the company’s formal insolvency may also accelerate further consideration and debate, remains to be seen.

 

This blog was co-authored by Lucy McCann and Amy McVey.

Lucy McCann

Partner at Brodies LLP
Lucy has been a member of the Corporate Restructuring and Insolvency team at Brodies since 2007. Lucy advises on all aspects of personal and corporate insolvency and obtained her Certificate of Proficiency in Insolvency in 2011.
Lucy McCann