Airline insolvency proposals may fail to take off

The government’s independent airline insolvency review, set up in the wake of the collapse of Monarch Airlines in 2017, has recommended developing a special administration regime (SAR) to keeping aircraft flying in order to repatriate travellers, but has run into industry opposition

The report’s recommendations include reforms to the UK’s airline insolvency regimes so an airline’s own aircraft can be used to repatriate its passengers should it fail.

There are also proposals for a new flight protection scheme amounting to less than 50 pence per person, which would protect passengers if an airline became insolvent while they were abroad, and calls to improve awareness and take up of safeguards which protect customers with future bookings, when airlines collapse.

Peter Bucks, chair of the airline insolvency review, said: ‘Although airline insolvencies are relatively rare, as we have seen in recent months they do happen – and at times have required government to step in to repatriate passengers at great cost to the taxpayer.

‘Our recommendations to government set out a series of practical suggestions to ensure that passengers are protected, particularly in the event of a large-scale collapse like Monarch.’

The proposals have received a mixed response from insolvency and restructuring trade body R3 which said the SAR allowing insolvent airlines to continue to fly failed to address other practical issues.

Duncan Swift, R3 president, said: ‘One of the reasons an insolvent airline’s planes are safely grounded at home in the UK is that – without well-publicised financial backing for a rescue – planes are vulnerable to creditor action.

‘It’s all too easy for a disgruntled food or fuel supplier to block a plane on a taxiway at an overseas airport until they have been paid what they are owed. This would pose a risk to passenger safety and disrupt the whole insolvency process.

‘If full financial backing is there, the risks of creditor action are lowered because creditors are more confident of being paid. Without full financial backing, there are other complex issues to resolve, including crew wellbeing and insurance costs. A special insolvency regime for airlines won’t make these problems go away.’

Swift also warned that the proposal that the primary purpose of an airline administration be altered so that passenger repatriation takes precedence over duties to creditors will have an impact on creditors’ risk analysis when it comes to trading with or lending to an airline, and could affect access to finance for the sector.

‘The government is already considering a number of reforms to the wider insolvency and restructuring framework, which we think would make more of a difference to rescuing businesses – including airlines – than the creation of a plethora of special administration regimes,’ he said.

However, Swift was more positive about the introduction of a flight protection scheme as a means to fund passenger repatriation, as this would spread the cost of the process without hitting taxpayers and creditors.

The report is open for comment as part of the government’s consultation on Aviation 2050, which closes on 20 June.

Airline Insolvency Review final report

Pat Sweet

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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