Universal levy among options the UK’s independent Airline Insolvency Review will consider. Ian Taylor reports
The UK Airline Insolvency Review, set up by the government following the failure of Monarch Airlines, aims at recommendations “to protect all [air] passengers whose journeys begin in the UK” in line with a long-time demand of the travel sector.
A Call for Evidence published at the end of last week confirms the review will consider extending financial protection against failure to all UK-originating flights, with a levy on all flights among the options to pay for it.
The UK travel trade has consistently demanded protection against airline failure be extended to all scheduled airline passengers and the aviation regulator, the Civil Aviation Authority (CAA), has previously proposed an all-flights levy.
However, scheduled airlines have consistently opposed such a move and the UK Department for Transport (DfT) has previously ruled it out.
The review Call for Evidence points to Ryanair as the reason for an overhaul, noting: “Europe’s largest airline by volume of passengers is regulated by the Irish equivalent of the UK’s CAA.
“However, the largest flows of passengers for the airline are on its routes to and from the UK. It would seem appropriate to start from a position of trying to protect all passengers whose journeys begin in the UK.”
It warns that a largescale failure “could overwhelm” the Air Tour Operator’s Licence (Atol) scheme which currently offers protection to UK package holidaymakers.
The review was set up after Monarch Airlines ceased flying on October 2 last year and the DfT ordered the CAA to organise the repatriation of Monarch passengers at a cost of £60 million.
The Call for Evidence notes the success of the CAA operation but questions whether it could repeat the repatriation if a larger airline or a non-UK carrier failed, or if a failure occurred in peak season.
It suggests: “The repatriation of Monarch’s passengers was an operational success largely due to the CAA’s role as the airline’s licensing authority, their access to information necessary to enable advance planning and the availability of alternative aircraft capacity at the end of the peak season.
“Whether such plans could be applied and scaled up to larger airlines, airlines licensed by other authorities or at different times of the year is questionable.”
At the same time, the Monarch failure “demonstrated protection is far from universal, often overlapping and many consumers are unaware or unsure of what protection if any they benefit from”.
The document concludes: “The nature and extent of protection is heavily dependent on the route by which a consumer makes an air ticket purchase.”
In an introduction to the Call for Evidence, review chairman Peter Bucks notes airlines “face many of the same risks” as travel firms, including “continuing downward pressure on prices”.
He warns: “These factors have heightened the likelihood of insolvency and increased the risk faced by consumers.” Bucks suggests “a fundamental re-think of the status quo”.
‘Subsidy by taxpayer’
The current system of consumer financial protection against airline failure sees the travel industry “benefit from a form of subsidy” by the taxpayer, according to the review.
In its Call for Evidence, the Review committee argues: “The current systems of protection do not deliver confidence that the welfare of citizens will be protected . . . Many passengers have no or only partial protection, whilst others may have several layers of protection.”
It suggests that when governments act to protect passengers’ interests when a carrier fails: “Ultimately, such action usually makes the taxpayer carry some of the burden.”
As a result, says the review’s Call for Evidence: “The travel industry benefits from a form of subsidy from the taxpayer.”
It argues: “Risk and the correct management of risk is at the very heart of this issue. For passengers, an airline failure crystallises the financial risks inherent in handing over money well in advance of service delivery.
“For some passengers, failure will create the additional problems of being away from home without any immediate means of getting back and the associated personal risks relating to accommodation and welfare.
“When governments have intervened to protect passengers’ interests in situations such as Air Berlin and Monarch, they do so to correct this flawed risk management.”
The review suggests: “How you ensure passengers are not unwittingly exposed to risk, and the taxpayer is protected from subsidising the use of riskier airlines by bailing out their customers when they fail, will require better or more consistent risk transfer than is presently the case.”
One option to address this would be to ensure “the cost of protection is factored into upfront flight costs” and “to price in risk to air travel in general”.
That could be arranged “through mandatory personal travel insurance paid for when purchasing an airline ticket or a legal requirement on airlines to protect their passengers from their own insolvency”.
The review will also consider changes to airline insolvency, including proposals “to keep the fleet of an insolvent airline operating through administration” or to “enable regulators to intervene earlier or ensure passenger funds are handled differently when an airline is at greater risk of insolvency”.
It will apply four principles in reaching its recommendations – aiming to “minimise taxpayers’ exposure”, “avoid duplication where possible”, “minimise constraints on UK airlines’ competitiveness” and provide “simplicity for consumers”.
Contrast in handling of Air Berlin and Monarch
The Airline Insolvency Review contrasts the different approaches taken by the German and UK governments to the insolvencies of Air Berlin, in August 2017, and Monarch Airlines last October.
It notes: “Air Berlin had a fleet of over 140 aircraft operating a range of short, medium and long-haul services, including to the US.
“Upon entering administration, Air Berlin was provided a €150 million bridging loan, backed by the German government, which enabled it to continue operating aircraft until October.
“Monarch Airlines had a fleet of 33 aircraft operating within Europe. Upon entering administration all operations ceased with immediate effect: all aircraft were grounded leaving over 100,000 passengers abroad without their intended flight home.
“The UK Government mounted an operation, organised by the CAA, to repatriate UK residents at a cost of approximately £60 million.”
The review will publish an interim report in the summer, with final recommendations to be sent to the secretary of state in December.
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