Airline insolvency reform hits turbulence

Government pledges to overhaul the airline insolvency regime in the wake of Thomas Cook’s collapse have run into opposition

R3, the insolvency and restructuring trade body, has warned more consultation is needed on plans to change how planes are utilised following an administration. 

During a ministerial statement updating the House of Commons on government efforts to get stranded Thomas Cook passengers home, transport secretary Grant Shapps said: ‘Our efforts will then turn to working through the reforms necessary to ensure that passengers do not find themselves in this ridiculous situation again.’

Shapps said: ‘We need to look at the options within ATOL [Air Travel Operators Licence], and also to ascertain whether it is possible for airlines to be wound down in a more orderly manner.

‘They need to look after their customers and we need to be able to ensure that their planes can keep flying so that we do not end up having to set up a shadow airline for no matter what period of time.

‘This is where we will focus our efforts in the next couple of weeks, but in order to do this we will require primary legislation and, dare I say it, a new session of Parliament.’

In the wake of the collapse of Monarch airline in 2017, the government set up an independent commission to review the airline insolvency regime, chaired by Peter Bucks, which issued its final report in May this year.

Among its recommendations is a proposal that airline insolvency procedures prioritise passenger repatriation over repayments to creditors, by allowing planes to continue to fly despite the airline being in administration, and also by introducing an insurance scheme to cover the costs.

Shapps referenced these proposals in his statement, saying: ‘There are ideas around, including allowing what happens in Germany, where the airline is run in administration, and, separately, the interaction between ATOL and a proposed additional charge per flight of perhaps 50p or so for every flight taken, regardless of whether it is to a holiday destination.

‘It is also the case - this is where I think there will be a degree of agreement - that German insolvency rules allow for administrations to take place, and then for aircraft to carry on being used and for other buyers to come in during the administration process. That is not something that our current rules on airline liquidation and insolvency allow for.’

Shapps said the Bucks review suggested rules ‘that are not dissimilar to the German rules to allow our airlines to trade in administration’, which he argued ‘would make repatriation massively easier, because we could use those airlines’.

Challenging this view, Duncan Swift, president of insolvency trade body R3, warned that while the desire to ‘keep the fleet flying’ is understandable, there are practical reasons why this can be difficult to do when an airline is insolvent.

Swift said: ‘During an airline or travel company insolvency, planes are vulnerable to being held hostage by overseas creditors and suppliers and other stakeholders, which puts aircraft, crew and passenger safety at risk. Using chartered flights avoids this scenario.

‘Changing the law in the UK won’t necessarily change the behaviour of creditors overseas. We’re yet to see a convincing solution to this potential problem.’

Swift also pointed out that without some form of insurance scheme, repatriation efforts would need to be funded by the insolvent airline itself.

‘This would completely deplete what could be repaid to the airline’s creditors and would make lending to or trading with an airline a very risky business. ATOL protection could provide funding for repatriating package holiday travellers, but a solution is needed for flights-only travellers, too,’ he said.

Shapps said  the primary legislation required to introduce any changes to the airline insolvency regime would not happen until a new parliamentary session, but was subsequently corrected by the Speaker, John Bercow, who said that in procedural terms, there is no bar to the introduction of primary legislation in the course of the current session, if the government is minded to schedule it.

Swift warned against introducing legislation without more detail as to how a proposed solution would work.

‘Like most areas of insolvency, airline and travel company insolvencies are complex and need legislation that considers and caters for the full breadth and depth of people and groups affected, rather than something that is focused just on passengers.

‘Repatriation of passengers is understandably an early priority, but they’re not the only stakeholders that have to be considered in the overall process,’ he said.

Pat Sweet

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