Will airline insolvency reforms take off this year?

Despite discussion in 2019 about corporate insolvency reforms and the reintroduction of the Crown Preference for certain tax debts, the Queens Speech on 19 December 2019 did not indicate any concrete plans to legislate for these areas this year. Airline insolvency, however, has made the list for 2020.

Why is airline insolvency a priority?

In 2019 alone, 23 air carriers stopped flying, including India’s Jet Airways, Iceland’s Wow Air and the UK’s Thomas Cook (see our recent article Thomas Cook in Liquidation here), making it a record-breaking year for airline bankruptcies.

Airlines balance strong competition from low-cost carriers, ticket price sensitivity (demand for tickets is affected by the price of those tickets - causing a need to lower prices to increase demand), and varying fuel, wages, maintenance and fleet renewal costs on a tightrope. Very small market movements can, therefore, tip the balance and cause an airline to fail, leaving thousands of holidaymakers stranded abroad.

Upon insolvency, airlines and insolvency practitioners face numerous challenges on top of the repatriation of stranded passengers, including:

• complex financing arrangements for the manufacture and purchase of aircraft, and ownership and leasing arrangements;
• strict airline regulation which can impose limitations on the manner in which airlines operate and the ease with which enforcement action can be taken;
• complicated questions of conflict of laws and cross-border insolvency caused by the location and movability of valuable assets involved in operating an airline’s business; and
• a UK based insolvency regime which in almost all cases produces an immediate collapse of the airline.

Progress on the Airline Insolvency Reforms to Date:

• Following the failure of Monarch on 2 October 2017 the Government announced an airline insolvency review which commenced in 2018 (see our summary here).
• On 9 May 2019, the Department for Transport published the final report of the independently chaired Airline Insolvency Review (see our summary here).
• The new proposals were first included in the October 2019 Queen's Speech and largely repeated in the December 2019 version.

Purpose of the reforms:

The purpose of the reforms is to protect passengers in the event of an airline going bust by making sure the industry can get passengers home quickly and effectively in a way which will balance strong consumer protection with the interests of the taxpayer.

The Proposals:

• The development of a special administration procedure to enable an insolvent airline to continue to operate its fleet for a period long enough to repatriate passengers;

• Changes to the regulation of UK aviation to enhance the Civil Aviation Authority’s oversight of distressed airlines and regulatory and remedial powers;

• Reforms to airline insolvency, to strike a better balance between strong consumer protection and the interests of taxpayers. A key feature will be to compel airlines to pre-fund a Flight Protection Scheme, with each airline’s contribution being calculated on a risk-based approach, so as to reduce the need for government rescue funding having to be deployed in order to repatriate passengers who do not have access to alternative sources of recovery

• Extending the Civil Aviation Authority’s remit to apply to the repatriation of non-ATOL protected passengers.

• Establishing and enhancing a repatriation ‘toolkit’ of mechanisms for companies and passengers, including making it easier for the Civil Aviation Authority to grant a Temporary Airline Operating Licence so that an airline can continue repatriating passengers following insolvency.

Separately, the Government will reform airline insolvency laws by developing a capped statutory compensation scheme to support those facing the most serious hardship as a result of injuries or illness for which UK-based Thomas Cook Companies would have been liable.

The Queen’s speech can be found here and the briefing notes/guidance can be found here.

David Steinberg, Co-Head of Restructuring & Insolvency at Stevens & Bolton LLP, comments that:

These are worthwhile proposals, which have been put forward after consultation with the key stakeholders in any airline collapse. The proposed addition of the repatriation of stranded passengers as a ‘purpose’ of the special administration regime which ‘trumps’ the duty to the airline’s creditors is a key feature which should provide reassurance to insolvency officeholders who would otherwise be reluctant to spend the insolvent estate’s resources on benefitting only certain of the company’s creditors, potentially at the expense of others. However, a key issue for insolvency officeholders will be whether funding (whether through the Flight Protection Fund or through special funding which the proposals envisage may be made available by government bodies) will suffice to meet all the costs associated with pursuing the objective of repatriating passengers in such a way that other creditors’ interests are not prejudiced.

It is also interesting to note that the proposals dealing with the ‘risk-based’ pre-funding of the Flight Compensation Fund by airlines, the requirement on airlines to produce ‘living wills’ and the beefing up of the CAA’s financial oversight role in relation to airlines are closely based upon the regulatory regime which already applies to firms in the UK financial services sector. No doubt this will in due course give rise to the same complaints (whether from regulated firms about the costs of compliance or from creditors about regulators being ‘asleep at the wheel’) which have become familiar themes in the financial services sector.