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20/02/2019

Airline Insolvencies – Why Can’t Planes Keep Flying?

With Flybmi following Monarch Airlines into administration, we thought it would be helpful to look at some of the issues involved in airline insolvencies.

Administrators in airline administrations face a unique set of challenges, and balancing an administrator’s statutory insolvency duties with public expectations and practical challenges can be tougher in these cases than in many other situations.

On the one hand, administrators have statutory duties to rescue the company as a going concern (or achieving a better result for the company’s creditors than they would have got in a liquidation), something which is often best achieved by keeping a company’s business in operation. In an airline’s case, with passengers potentially stranded overseas, there might also be public, political or media pressure to keep planes in the air. But administrators also have to think about the huge risks and costs involved in running an insolvent airline, including the risks to creditors’ returns and to the health and safety of passengers and crew.

In airline insolvencies, it can therefore be best for creditors, passengers, and others if planes are grounded.

The Cost of Running an Airline

Airlines generate huge liabilities on a day-to-day basis. These costs can increase quickly, too. A single delayed plane can lead to immediate cost implications: should the delay be long enough, accommodation for passengers and crew must be arranged. Even with a short delay, keeping a plane ready on the airport tarmac is costly and leads to further delays – and further costs.

While the costs of running a solvent airline can be problematic, they can be insurmountable with an insolvent one. The fact an airline is insolvent suggests that limited cash will be available to fund its activities, while every additional flight is likely to make the airline’s financial position worse. It’s highly unlikely that fresh cash from new bookings will be available either.

In cases where airlines have continued to operate during an insolvency process, a key factor is often the availability of significant government funding. Both AirBerlin and Alitalia were provided with loans by their national governments, for example (although the Alitalia funding is subject to an EU state aid investigation).

The administrator must balance the costs of running an airline with maintaining the value in a company and maintaining the value which can be returned to creditors.

Operational Risks

Even if the funding issue is fixed, there are a number of other practical difficulties for an administrator to consider in an airline insolvency.

To operate, UK airlines are required to have a valid Air Operator Certificate, issued by the Civil Aviation Authority (CAA). This licence can be immediately provisionally suspended once an airline enters an insolvency procedure (see, for example, Monarch); this would prevent an airline from flying.

Then there are the liability and insurance costs. As you might imagine, the costs associated with an air accident mean airline insurance is expensive. The administrator can either fly with insurance (and the costs involved) or they can decide the risk of an accident is too great and insurance too expensive, and opt against flying. It’s also important to remember that administrators do not have the benefit of limited liability: they are personally liable if things go wrong.

Another practical concern is that creditors such as airports, airport service and maintenance providers might take matters into their own hands, and seize assets of the insolvent airline in lieu of payments owed, or suspend provision of goods or services. This is a particular problem for airlines serving destinations outside of the EU.

Theoretically there are protections against creditor action in the EU: UK insolvency procedures trigger an EU-wide moratorium which protects an insolvent company from creditors taking unilateral enforcement action. This can allow an insolvent company to continue to trade effectively, and, by keeping the company’s assets under its control (and available for use or sale), helps office holders keep a company going and maximise returns to creditors.

However, this protection ends outside the EU (and, post-Brexit, may not apply in the EU either). And, in practice, the EU regulations are no guarantee that a creditor can’t disrupt things.

The safe operation of a commercial flight can involve dozens of separate suppliers, from fuel trucks or cleaners, to maintenance crews and airports themselves. Any of these, if owed money, could take direct action to block a plane’s departure until they’re paid what they’re owed. While a court could resolve any creditor action, this wouldn’t be immediate and a plane would still be stuck on the tarmac while things are sorted out.

This creates a strong incentive to keep planes grounded, ‘home’, and safe from creditor action. The administration order for Monarch Airlines was made when all its planes were back in the UK, for example.

Aircraft leasing and crew wellbeing are further operational issues. The companies which lease aircraft to the insolvent airline will be keen to regain control of their planes (and administrators may be keen to return the planes to avoid accruing ‘parking’ and other charges for unused aircraft), while the stress of the situation on the airline’s crews will also be something for administrators and regulators to consider.

All of these factors put significant pressure on an administrator to keep planes grounded.

What changes can be made?

In 2018, the Government launched an independent review of airline insolvencies (led by Peter Bucks). This followed 2017’s Monarch Airlines administration, which had left a large number of passengers stuck overseas. The inquiry has been focused on better protections for passengers in airline insolvencies, and how the costs of passenger repatriation might be shifted from the taxpayer’s shoulders.

In July 2018, the review’s interim report suggested that a Special Administration Regime could be introduced for airlines. Among other things, this would introduce a new objective for airline insolvencies: passenger repatriation. This objective would take priority over maximising creditor returns.

As set out above, there are significant reasons why this might not be the best idea: keeping an insolvent airline flying so that it can repatriate passengers is risky. Planes could be detained overseas. There might not be money available to fund flights. New planes might have to be chartered at additional cost. And, if there is money, spending it on passenger repatriation means creditors might get nothing they’re owed back.

While passengers stuck overseas are in a difficult position, it’s really important to think about the bigger picture: if creditors won’t see a return after an airline insolvency, they may have to think long and hard about whether they want to continue to trade with an airline. Banks may toughen their lending criteria for airlines, or stop lending to the sector altogether. Smaller creditors – like caterers or cleaning firms – might face insolvency themselves if they see nothing back from an insolvency procedure. Airline insolvencies create problems for passengers, but ‘fixing’ things for them could create huge problems elsewhere.

There are alternative solutions, however. The Government is in the process of consulting on a range of new business rescue and restructuring tools, some of which might help airlines take early action to avoid insolvency in the first place. And, rather than rely on insolvent airlines – and their creditors – or the taxpayer to fund repatriation, existing passenger insurance schemes could be expanded instead.

At the moment, the ATOL scheme protects passengers when they book a flight and accommodation package. These protections could be widened to cover flights-only purchases. While this might marginally increase the cost of flight tickets, it would also spread the burden of funding passenger repatriations and relieve pressure on the taxpayer and creditors in a much fairer way.

You can read R3’s response to the airline insolvency review’s ‘call for evidence’ here. 

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.