Currently, when a UK airline enters insolvency, its operations cease, aeroplanes are grounded and passengers are stranded – in part due to the heavy industry regulation and, in part, because of complex aeroplane financing arrangements. Any operational continuity enabling the repatriation of passengers would be a loss-making activity likely to deplete the amount of money available to the company’s creditors; a result that would be contrary to the aim of UK insolvency processes in general. This starkly contrasts with insolvent U.S. airlines, all of which have been in U.S. chapter 11 bankruptcy and continued their operations until restructured. The UK government proposals for reform would introduce very different systems for airlines.
The recent and notable insolvency of two UK airlines includes the administration of Monarch Airlines in 2017, which required the repatriation of approximately 110,000 passengers at a cost of £60 million, and the compulsory liquidation of Thomas Cook in 2019, which required the repatriation of approximately 150,000 passengers at a cost of approximately £100 million. In both cases, the repatriation of passengers was funded by the UK taxpayer and through the Air Travel Organiser’s Licence (ATOL) scheme. The administration of Monarch Airlines generated an appetite for a review of airline insolvency by the UK government’s Department for Transport.
The final report on the airline insolvency review (AIR) was published in May 2019. The AIR makes recommendations, including the introduction of a:
1. Special Administration Regime for airlines (SAR) that enables airlines to keep flying for as long as required to repatriate passengers;
2. Flight Protection Scheme, a formal repatriation regime funded by consumers at the point of sale in the form of a passenger levy (expected to be approximately 49 pence for the first five years, dropping to around 40 pence thereafter); and
3. Regulatory “toolkit” for the Civil Aviation Authority (CAA), the UK’s aviation regulation, which, among a number of oversight measures that monitor an airline’s financial health, allows the CAA to issue a temporary licence. The temporary licence will allow an airline to operate aeroplanes to repatriate customers.
In January 2020, the UK airline Flybe appeared to have delayed its possible insolvency by making a deal with the government to delay tax repayments. This news, together with the recent compulsory liquidation of Thomas Cook, highlights the need for the implementation of a new insolvency regime for airline insolvencies. The AIR proposes recommendations for an innovative airline insolvency regime; however, at a point before legislative implementation, that new regime will cause uncertainty as to its effect on creditors, who could see reduced proceeds in the event of insolvency.
This alert is relevant to airline companies in financial distress and their directors and creditors (in particular lessors and lenders), as well as insolvency practitioners.