Reviewing the Airline Insolvency Review

26 June 2019

Aviation and the demands on the aviation sector have changed rapidly over the last five years and changed beyond recognition from 30 years ago. These demands are only expected to increase as passenger needs and expectations change and technology evolves.

To ensure that UK's aviation sector is fit for the future, the Government has recently been consulting on a strategic plan, 'Aviation 2050'; this consultation closed on 20 June, and you can read R3's response here.

For R3, a key part of this plan will be how it incorporates recommendations made by the independent Airline Insolvency Review. This review was established in the wake of the 2017 Monarch administration, which saw thousands of passengers stranded overseas and the taxpayer footing the bill for their repatriation. The Government established the review with the aim of exploring how passengers and the taxpayer could be 'better protected' in the event of an airline becoming insolvent. Our response to the Airline Insolvency Review is here.

We have set out our thoughts on some of the Review's key recommendations below.

Passenger repatriation

Ideally, we would have wanted to see the existing ATOL protection scheme (which ensures travellers don't lose money or become stranded abroad if their ATOL holder collapses) expanded to cover repatriations for 'flights-only' arrangements. This would have meant the risk burden of the need for repatriation fell on passengers, rather than the taxpayer, and meant that if an airline became insolvent its passengers would know they would be able to fly home without incurring extra costs.

However, the Airline Insolvency Review proposed an alternative in the form of a 'Flight Protection Scheme' (FPS) to fund passenger repatriation in the event of an airline becoming insolvent. This approach, like our proposal, would divert the risk and costs of passenger repatriation away from taxpayers and creditors and would be financed by a combination of security from the airlines, with a range of charges depending on the risk the airline faces of insolvency, and a small levy, which would be payable per passenger.

No doubt the airline industry will take the opportunity to provide its feedback on these proposals through this consultation. It's going to be interesting to see how Government manages their response with the needs of the broad range of stakeholders affected by airline insolvencies.

Grounding planes in insolvencies

One area we had concerns around was what happens to planes during airline insolvencies. The Airline Insolvency Review recommended a 'keep the fleet flying' approach, which would see the insolvent airline continuing to operate for a short period time supported by changes to the Civil Aviation Authority's (CAA) licensing regime and the introduction of a Special Administration Regime (SAR) for airline insolvencies.

This concerns us for two reasons. First, because it does not address the practicalities which prevent an airline from flying if it becomes insolvent, and second, because it will have a serious impact on the risks of trading with and lending to UK airlines.

During an airline insolvency, insolvency office holders are uncomfortable with letting the airline's planes continue flying for a variety of reasons. The most notable of these is the fact that planes are vulnerable to action by overseas creditors and suppliers and other stakeholders. Both of these put aircraft, crew and passenger safety at risk - a risk which must be avoided at all costs.

We also have to consider the fact that the daily costs of running airlines that would be subject to this new regime are likely to be very substantial without the mitigation of cash coming into the business in the form of fresh ticket sales. Whether the FPS will be large enough to fund the full scope of an airline's operations, rather than simply funding charters or emergency ticket purchases, remains to be seen. Either way, it would be better if the insolvency practitioner working with the insolvent airline has the final say on whether its planes should be grounded or not.

And we have concerns about the impact an SAR may have on lending, investing and trading with airlines as continuing operations during an insolvency will deplete the amount of money the airline is able to repay to its creditors. If creditor losses are increased in the event of an insolvency, it may well deter lenders, investors, and other companies from lending to, investing in, or trading with UK airlines in the future - bad news for business growth, business rescue and for the entrepreneurs who are associated with the airline industry and much of the innovations that have come from it over the last two decades.

A better alternative

We believe it would be more helpful if the Government were to concentrate on introducing a wider package of restructuring reforms than on introducing a series of Special Administration Regimes across different sectors of the economy. A series of reforms to the UK's corporate insolvency framework were proposed in 2016 that included in a number of new procedures or potential changes which could have a significant impact on airline insolvencies and could address some of the current difficulties. Introducing these would provide airlines - and other companies - with means of avoiding insolvency in the first place.

The alternative - a series of SARs - would create administrative burdens and would make the UK's insolvency and restructuring framework harder to navigate. Given that our current approach is recognised by the World Bank for its ability to swiftly and efficiently return money to creditors, rescue businesses and preserve jobs, there has to be a way stranded passengers can be repatriated that doesn't undermine or risk undermining the insolvency framework we have now. Hopefully, the outcome of this consultation will find a way of achieving both of these objectives.

A watching brief

Now the consultation has closed, we await the Government's response. Hopefully it will take into account the concerns we and others have about how to handle airline insolvencies - and find a means of managing them that balances the needs of our world-ranked aviation sector (and its passengers) with preserving our world-class insolvency framework.