Airline insolvencies – Reforms on the horizon?

28 August 2019

In the wake of Monarch Airlines entering administration in 2017, the Government commissioned an independent review team to explore how consumers and taxpayers could be better protected when airlines become insolvent.

For a number of practical reasons, it is very difficult to keep an insolvent airline’s planes servicing routes. Consequently, Monarch’s administration left hundreds of thousands of passengers stranded overseas, and left taxpayers with an estimated £60 million repatriation bill.

The independent review published its final report in May 2019 (R3’s response is here), recommending a new insurance system for airlines, new powers for the Civil Aviation Authority (CAA), and the creation of a new Special Administration Regime for airline insolvencies. These recommendations are outlined below.

While some aspects of the review’s recommendations are welcome, others are problematic. They do not necessarily solve the issues which prevent insolvent airlines’ planes from flying, and, if introduced, may have serious financial consequences for the airline sector in future.

A Flight Protection Scheme

The review recommends that the Government introduce a ‘Flight Protection Scheme’ (FPS) to fund passenger repatriation in the event of an airline becoming insolvent. This scheme would be paid for by the airlines themselves, and the review estimates that this would cost up to 50p per passenger. This proposal will have financial implications for airlines, and additional costs may be passed onto passengers.

In response to the review’s original call for evidence, R3 recommended that passenger repatriation could be funded by an expansion of the existing ATOL protection scheme, which currently operates as an insurance mechanism for ‘package’ travel arrangements, so that it can cover ‘flights-only’ arrangements. The proposed FPS would fulfil a similar function to an expanded ATOL scheme.

Passenger repatriation

The review recommends three means of repatriating passengers, funded by the FPS: self- and assisted-repatriation, where stranded passengers arrange their own flights home; chartered repatriation, where a new, chartered fleet would be deployed; and a ‘keep the fleet flying’ approach where the insolvent airline would continue to operate for a short time.

The ‘keep the fleet flying’ approach would be supported by two further changes: changes to the CAA regime to allow insolvent airlines to retain their operating licence (this is currently suspended upon insolvency); and the introduction of a Special Administration Regime for airline insolvencies, which would prioritise passenger repatriation over maximising creditor returns.

R3 has a number of concerns with the proposal that the Government should consider a ‘keep the fleet flying’ option. This approach does not address of the practicalities of airline insolvencies which prevent an insolvent airline from flying, and it will have a serious impact on the risks of trading with and lending to UK airlines.

Practical challenges

Even assuming insolvent airlines keep their operating licence, there will be a number of reasons why an insolvency office holder (e.g. an administrator or liquidator) will not be comfortable with letting the airline’s planes continue to fly. For example, the airline’s planes can be vulnerable to action by overseas creditors, potentially putting aircraft and crew safety at risk: suppliers and other stakeholders may impound planes at non-UK airports, demanding repayment of debts in return for releasing the aircraft. Among many other factors, office holders will also consider crew wellbeing, and insurance costs.

Moreover, the daily costs of running an airline are exorbitant and – without cash coming into the business in the form of fresh ticket sales – money can run out fast. 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.

Consequences of a Special Administration Regime

The review’s proposal that a Special Administration Regime (SAR) prioritise passenger repatriation over maximising creditor returns could well have serious implications for the financial health of the airline sector, and the taxpayer.

As noted above, running an airline is expensive and continuing operations will deplete the value of what the insolvent airline can repay to creditors. By increasing creditor losses in the event of an insolvency, a SAR for UK airlines may well deter lenders, investors, and other companies from lending to, investing in, or trading with a UK airline in the first place. Similarly, the costs of repatriation may mean funds are not left over to cover office holders’ costs, disincentivising insolvency practitioners from taking airline appointments. This would leave airline insolvencies to be handled by the government’s Official Receiver – and funded by the taxpayer.

Recently, the Government has proposed that, in all insolvencies, the repayment of some HMRC debts be prioritised over repayment of most other categories of debt. This proposal has been met with strong criticism from UK lenders and business representatives, who have warned that the move will lead to a restriction on UK access to finance, trading and investment, driven by lenders and creditors reacting to the increased risks associated with insolvency. The airline SAR may have a similar impact.

New CAA powers

The review recommends additional powers for the CAA. As part of these increased powers, airlines would be required to: undergo annual certification to confirm financial fitness; develop repatriation plans and provide access to data; and notify the CAA when there is a material change in its financial situation. As above, the review recommends the CAA have the power to grant a temporary licence to allow an insolvent airline to continue to fly in support of a repatriation operation.

Next steps

It is up to the Government whether or not to introduce the review’s recommendations. The review itself acknowledges that more analysis of its recommendations is needed. The consultation is now closed and we are awaiting a response from the Government.