Summary

The risk of airline insolvency in non-crisis times is low: 0.04% of total EU passengers were affected by an insolvency from 2011-2019. Existing instruments and voluntary measures adequately protect passengers against the consequences in the rare instance when an airline ceases operations.

This includes Scheduled Airline Failure Insurance and a commitment by the industry to provide “rescue fares” (i.e. heavily discounted tickets) to help repatriate stranded passengers of another airline.

In addition, consumers are protected against the risk of airline insolvency through the requirements on financial fitness and oversight by licensing authorities under Regulation No (EC) 1008/2008.

Some stakeholders have nevertheless called for a specific insolvency protection scheme for airlines following the unprecedented COVID-19 pandemic, while hardly any other economic sector has such an obligation.

This would not be justified relative to the normal risk and would also have unintended consequences. Such a scheme would reduce the competitiveness of European airlines, resulting in less choice and connectivity and higher fares for consumers.

To further reduce the risk of airline insolvency upstream, the revision of Regulation 1008/2008 could be used to ensure more consistent and effective implementation of the requirements on the financial oversight of airlines.

This could be complemented by guidance from the Commission to ensure that the rules are consistently implemented across the EU as well as information campaigns at the EU and national levels to raise awareness among consumers of the options that are already available to protect themselves.

Introduction

Passengers travelling by air in the EU are protected against airline insolvency when booking a flight as part of a package holiday or “linked travel arrangement”Purchasing travel services from different providers through a linked online booking process, e.g. a flight and car rental through an online travel intermediary under Directive (EU) 2015/2302. For flights that have not been booked as part of a package, there are adequate existing protections and measures to repatriate passengers in the event of an airline insolvency. Hardly any other economic sector has a formal legal obligation to protect customers in case of bankruptcy. General business law (e.g. rules for creating a business or bankruptcy procedure) is used to regulate such matters in different EU Member States and on a global level.
Airline insolvencies are rare and affect a small proportion of the travelling public. Indeed, between 2011 and 2019, 0.04% of total passengers in the EU were affected by airline insolvency.Steer, Study on the current level of protection of passenger rights in the EU, 2020. Available here. In the same period, more than 8 billion passengers travelled by air.Based on Statista data, accessed on 27.04.21. Available here There are already several efficient measures available to passengers in case an airline fails:

• Where tickets have been purchased with a credit card, customers can file claims for services not rendered and obtain a refund.
• Travel insurance products can be purchased, such as Scheduled Airline Failure Insurance (SAFI), which covers the cost of a cancelled flight and repatriation.
• IATA’s Billing and Settlement Plan (BSP) may allow IATA to reimburse travel agents and hence customers for payments made to a given airline in some cases.
• Voluntary industry agreements to provide “rescue fares” to facilitate the repatriation of stranded passengers at low cost.

Consumers are also generally protected against the risk of airline insolvency through the requirements for financial fitness and financial oversight by licensing authorities under Regulation No (EC) 1008/2008, notably in relation to the granting or extension of operating licenses (AOCs).

Nevertheless, some consumer groups have called for a specific insolvency protection scheme to be imposed for flight-only tickets to ensure that passengers can be refunded or repatriated when an airline ceases to operate, be it in the form of compulsory airline insurance or a guarantee fund, especially following the impact of the COVID-19 pandemic on air travel.
Introducing a major regulatory change on this basis would be unjustified and disproportionate, given the low incidence of airline insolvency in normal times, and the fact that the unprecedented COVID-19 crisis exposed all economic operators, including travel companies, to acute financial risks. Otherwise, healthy businesses have been severely affected by circumstances that were unparalleled in modern history and entirely unforeseeable.

Imposing such a scheme would lead to unintended consequences, such as lowering the competitiveness of European airlines, increasing the price of fares to the detriment of consumers, and reducing European connectivity, while the problem concerns a small proportion of travellers and consumer protection is already well-established.

To further reduce the risk and ensure the stability of air services in the EU, the requirements for financial fitness and oversight by licensing authorities under Regulation No (EC) 1008/2008 should be consistently and effectively applied throughout the EU. In the context of the planned revision of Regulation 1008, it would also be worth considering if these measures could be improved.

These rules can serve as an early warning system that enables authorities and airlines to take measures to mitigate consumer risk in a targeted manner, avoiding blanket regulation that would impose additional burdens on airlines with sound finances and raise costs for consumers. From a regulatory and consumer perspective, a precautionary approach that seeks to identify and manage risks upstream is preferable to an ex-post approach that aims to minimise damage in the few cases when it occurs.

In addition, initiatives to raise public awareness of the options available to protect against the unlikely event of airline insolvency could reduce the number of non-covered passengers, such as information campaigns or consumer guidelines by the European Commission, national authorities, or consumer bodies.

Low risks and available instruments

Like other commercial enterprises, airlines can occasionally become insolvent. However, such incidents are rare and affect only a small number of passengers. For the period 2000-2010, an estimated 0.07% of return trips were affected by airline insolvency in the EU. 12% of this group were stranded away from home.Steer Davies Gleave, Impact assessment of passenger protection in the event of airline insolvency, 2011. Available here. No more than 0.17% of passengers were affected in any individual year.European Commission, Communication on Passenger Protection in the Event of Airline Insolvency, 2013. Available here.

This low overall risk was confirmed in 2020 by an external study for the European Commission on passenger rights in the EU: For the period 2011-2019, 0.04% of total EU passengers were impacted by insolvency. The number was as low as 0.01% in 2015 and 2016, and 0.14% at its highest in 2019 when the bankruptcies of Thomas Cook, Germania, Adria, Aigle Azur, and WOW Air occurred.Steer, Study on the current level of protection of passenger rights in the EU, 2020. Available here. During this period, more than 8 billion passengers travelled by air in the EU.Based on Statista data, accessed on 27.04.21. Available here

Improving awareness among passengers of the measures available to protect themselves against the unlikely event of airline insolvency would reduce risks further. As noted by the external study, “the number of non-covered passengers could be reduced simply through improved consumer guidelines by better publicising the most effective way to purchase tickets, or what to check for in their insurance policy.”Steer, Study on the current level of protection of passenger rights in the EU, p. 209. It would be important to increase the proportion of consumers who consider the risks and benefits of having insurance when booking travel. Information campaigns by the European Commission, national authorities, and/or consumer bodies (e.g. ECC-Net) should be pursued to this end.

Those measures include already well-established processes like refunds from credit card issuers for services not rendered, or the purchase of SAFI, in addition to the possibility for reimbursement through IATA’s BSP.

What further reduces the risk for passengers is that there is a market mechanism in place. When an airline insolvency does occur, the industry (both A4E and IATA) has made voluntary commitments to provide “rescue fares” to assist stranded passengers to return home, subject to capacity and availability. These significantly reduced fares are available for a period of up to two weeks from the date of the bankruptcy and where there is a route match with the insolvent airline. Such fares were made available to stranded passengers in the cases of Thomas Cook (October 2019), Germania (February 2019), Flybmi (February 2019), Primera Air (October 2018), Cobalt Air (October 2018) and Monarch (October 2017), for example.

To increase consumer awareness, public authorities in the relevant EU Member State(s) should also communicate the availability of different options and where to locate them when insolvency occurs through channels such as government websites and social media accounts.

In some cases, like “rescue fares”, the relevant information is already advertised on airline websites, in other cases the passenger needs to contact the customer service center of the airlines offering this service, while the industry will inform the Commission and national authorities when such fares are made available.

Mitigating risks upstream

The Air Services Regulation (1008/2008) sets out conditions for airlines to obtain an operating license including compliance with certain financial standards. The Regulation also requires national authorities to monitor compliance with these conditions including the financial situation of the airline. Where an airline cannot meet its actual or potential obligations for a 12-month period, the national authorities can revoke or suspend the license or grant a temporary license for up to 12 months in case there is a realistic prospect of financial restructuring and recovery.See Articles 8 and 9 of Regulation (EC)No 1008/2008. Available here.

These requirements enable authorities to stay aware of the financial situation of airlines and to take measures to mitigate the impact of a potential bankruptcy on consumers, for example by establishing contingency plans with airlines and airports or planning the timing of the cessation of operations during the off-peak season when fewer passengers will be affected. Some Civil Aviation Authorities increase monitoring and dialogue with the airline concerned if the financial outlook worsens but this approach could be more consistently applied.

These measures have already had a substantial effect on reducing the risk of bankruptcy for new or younger airlines. As per the Commission’s evaluation of Regulation 1008/2008, the number of airlines becoming insolvent within the first year of operations has decreased by 70% while there has been a 41% decrease in insolvencies during the first four years of operations.European Commission, Evaluation of the Regulation (EC) No 1008/2008 on common rules for the operation of air services in the Community, 2019. Available here

Few other sectors (e.g. banking) have such a legally mandated system of practical surveillance, which complements existing general business law across EU Member States. Ensuring that these provisions are effectively implemented in all EU Member States would further reduce the risks of bankruptcies occurring in the first place and mitigate the consequences for consumers in the rare cases that they do. It allows for an early warning system that provides authorities with the necessary information and tools (e.g. further investigation, increased monitoring) to manage risks in cooperation with carriers that may face financial challenges (e.g. through structured dialogue).

Improvements, such as measures to enhance cooperation between authorities in different Member States, could be considered in the context of a revised Regulation 1008/2008. Consideration could also be given to providing airlines with a reasonable timeframe in which to continue operations after entering into insolvency proceedings in order to allow more passengers to complete their journeys or be repatriated, which has proven an effective mechanism where it has been implemented.

Unintended consequences of further regulation

Addressing the risk of potential insolvencies upstream would be preferable for the public and the industry in terms of costs and efficiency. By contrast, an ex-post approach, such as a requirement for compulsory airline insurance against insolvency or the creation of a guarantee fund, would only seek to deal with the effects of airline failures when they have occurred.

The latter approach would be legally complex and costly relative to the low risk and the limited number of passengers that would be affected, but its impact would be felt by all parties.  For example, a guarantee fund would probably be financed through surcharges on tickets sold by all EU airlines. Even in the case of a small fee for individual passengers, it would add up to a significant impact on airline revenues considering the low profit margins of the air transport industry. This, in turn, would have the unintended consequence of reducing EU airlines’ competitiveness and leading to higher fares for consumers overall, which would have a particular impact on lower-income or price-sensitive consumers. Higher average fares would lead to reduced demand and affect the commercial viability of some routes, which is likely to result in less choice and connectivity for consumers in Europe.

In addition, the 2011 Steer study for the European Commission estimated that as much as 85% of a fund would be eaten up by administrative costs. This indicates that such an approach would be highly inefficient, while only potentially benefitting a very small proportion of total passengers.  It is unlikely to deliver any tangible benefits for the passengers of financially stable airlines, who would be required to subsidise the passengers of less financially stable airlines for the same level of cover. This could have a distortive effect on competition and the unintended consequence of incentivising risk-taking by less prudent carriers.

Moreover, a unilateral decision by the EU to impose new forms of insurance or fund requirements on the industry could also distort competition for EU carriers at the global level or have significant political consequences if such requirements are applied to all carriers operating to/from the EU.

In the first instance, the conclusions of the Commission’s Communication on passenger protection and airline insolvency should therefore be acted upon:

• “Regulation (EC) No 261/2004 already provides an appropriate legal framework for passenger assistance in cases of insolvency. However, experience has shown that this Regulation can be difficult to enforce when an air carrier is closing down its activities unless, using Regulation (EC) No 1008/2008, a carrier has been required to plan ahead and put in place measures to protect passengers should it lose its Operating Licence.”
• “The Commission has identified that proactive engagement by national regulatory authorities can significantly improve the situation for affected passengers. Therefore, before deciding to propose new legislation in this area, the Commission considers it essential to strengthen the licensing oversight of EU air carriers under Regulation (EC) No 1008/2008.”European Commission, Communication on Passenger Protection in the Event of Airline Insolvency, 2013. Available here.

The Commission is planning to propose a revision of Regulation 1008/2008, although the initiative has been delayed because of COVID-19.European Commission, Smart and Sustainable Mobility Strategy, 2020. Available here A4E believes that the cart should not be put before the horse, and that the planned revision, including any relevant changes to financial oversight provisions, should be completed first before any new regulatory schemes related to airline insolvency are considered, whose costs are likely to outweigh the benefits.

Conclusion

The risk of airline insolvency in normal times is low and there are existing instruments and voluntary measures that adequately protect passengers against the consequences in the rare instances where an airline ceases operations.

While the unprecedented COVID-19 crisis has exposed all economic operators to financial risks, including airlines and other travel companies, a major regulatory change such as mandatory insurance against insolvency or a guarantee fund would have unintended consequences, including higher prices for consumers and distorting competition in the market.

However, to further reduce the risk of airline insolvency upstream, the revision of Regulation 1008/2008 could be used to ensure more consistent and effective implementation of the requirements on the financial oversight of airlines, which would allow national authorities to address the risk of potential bankruptcies before they occur and take action to mitigate the impact on consumers in advance.

This could be complemented by interpretative guidelines from the Commission to ensure that the rules are consistently implemented across the EU as well as information campaigns at the EU and national levels to raise awareness among consumers of the options that are available to protect themselves, such as SAFI, and the availability of rescue fares to repatriate stranded passengers in the unlikely event of an airline failure.