Government report from the independent Airline Insolvency Review published
By Steven Wood, ICAS
29 May 2019
The Department for Transport has published the final report from the independent Airline Insolvency Review (the Review), which was commissioned following the collapse of Monarch Airlines in October 2017. Steven Wood looks at the key recommendations made.
At the time of the Monarch Airlines collapse in October 2017, over 110,000 passengers were overseas, and more than 300,000 bookings for future holidays were lost. The government instructed the Civil Aviation Authority (CAA) to undertake a repatriation operation to bring home not only those passengers whose holidays were protected by the Air Travel Organiser’s Licence (ATOL) scheme but all those overseas. The decision was taken because there were too few spare seats on other airlines flying the same routes as Monarch which would have left many passengers to wait weeks to return to the UK and be unable to fund accommodation.
The Review reveals that the vast majority of travellers are carried by a small number of airlines, with the top five having nearly 60% of the UK market, and 80% held by just 13 airlines. The Review estimates the likelihood of any of these top 13 airlines becoming insolvent in a given year is generally low (between 0.1% and 3% depending on the airline) but if it were to happen, large numbers of people would be affected.
The analysis in the Review suggests that around 80% of passengers who book outbound flights from the UK have some form of protection against financial loss which, at the least, would enable them to recover the money they had paid for tickets that have become worthless because their airline has failed. However, only those 25% or so who have bought a travel product protected by the ATOL scheme are assured of being able to get home in a timely way at little or no extra cost. This leaves around 75% of passengers who would need to access and pay for alternative travel arrangements themselves if they are left overseas when an airline collapses.
The Review, therefore, concludes that for passengers to be protected in the event of airline failure, this gap should be addressed and makes the following key recommendations:
Repatriation
The report recommends that a formal repatriation protection scheme (the Flight Protection Scheme) is put in place and facilitated by the CAA. The purpose of the Scheme would be to protect any air passenger whose journey began in the UK, and who has a ticket to return on an airline that becomes insolvent while they are already overseas.
The CAA would have a duty to use its “reasonable endeavours” to see that passengers are repatriated to the UK, on the same day and to the same airport to which they expected to return.
Civil Aviation Authority Powers
The report further recommends that the government works with the CAA to introduce a more complete regulatory toolkit, to allow it to manage a failure more effectively. The following measures are recommended:
- Annual certification to confirm financial fitness;
- Development of repatriation plans and access to data as required;
- A requirement for the Board of a UK airline to notify the CAA when there is a material adverse change in its financial situation; and
- The ability to grant a temporary special purpose licence to enable an airline to conduct a repatriation operation, even where the airline does not have a future.
Paying for the Scheme
The Review recommends that any mechanism to pay for the Scheme should be mandatory for UK originating passengers, practicable and apply no matter how a passenger books.
It recommends a financing structure for the Scheme that would see the majority of costs met through requiring airlines to put up security that can be relied on to pay out on their failure.
To cover the remainder of each airline’s exposure and provide an income stream from which to meet the Scheme’s expenditure and establish reserves against future claims, the Review recommends airlines also be charged a small, per passenger levy. The estimated costs of both the security and levy together, once the Scheme is fully up-and-running, are estimated to average around 40 pence per passenger. To capitalise the fund, an additional surcharge of 9 pence per passenger would be required for a five-year transition period.
To avoid duplication of protection with existing schemes the Review recommends adopting the principle that no passenger who holds an ATOL Certificate should be taken into account when calculating an airline’s contributions to the Flight Protection Scheme; and where a passenger would have been entitled to recover a loss from a third party had the Scheme not paid for repatriation, the Scheme should have the right to seek to recover money from that third-party up to the limit of the protected loss.
Refunds
There are a range of refund protections already available to passengers through credit cards, debit cards and other payment services. Passengers can also take further steps by booking an ATOL protected holiday or taking a travel insurance policy with supplier failure cover.
The report considers that these provide an adequate level of protection for forward bookings and therefore does not recommend setting up any additional layer of refund protection.
ATOL
The ATOL scheme was created in 1973 to provide financial protection to customers booking package holidays including flights, by holding funds to provide repatriation and refunds and reducing exposure to the risk of insolvency through financial oversight.
The ATOL scheme differs from the Flight Protection Scheme being recommended because it offers protection against the failure of a travel organiser to deliver all elements of the travel package. It not only provides repatriation protection but also for the refund of bookings made for future travel.
Reaction
The response from the UK’s aviation sector has not been favourable. Airlines UK, the trade body for the UK registered airlines have responded "Airlines face rising costs and this is not the time to make it more expensive to travel. 50 pence may not sound much but airlines operate on wafer-thin margins and passengers already pay over £3 billion each year to the Treasury in Air Passenger Duty. The chances of booking with an airline that goes bust remain extremely small. When it’s happened, airlines have demonstrated their commitment to bringing passengers home through voluntary rescue fares which worked extremely well and without any taxpayer liability."
Next steps
The Transport Secretary will consider the range of options put forward by the Review.
Any views on the report’s recommendations should be relayed by stakeholders as part of the ongoing consultation on Aviation 2050, which closes on 20 June 2019.