UK airline insolvency – a better future?

Published on 3 September 2018

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A review of the failure of UK airlines is being undertaken by a government appointed review body led by Peter Bucks.

The review follows a call for evidence issued by the government in 2017 but has been put into sharp focus by the failure of Monarch airlines in October 2017. An interim report issued recognises the potential for other airline insolvencies in coming years.

The review is looking at a number of areas including consumer protection and consumer awareness but it will also focus on UK restructuring options. The need for a focus on restructuring options was highlighted by the different outcomes from the failure of Monarch and the failure of Air Berlin earlier in 2017.

When Monarch failed, the loss of its air operating certificate was immediate, partly because the company went into administration where the company is controlled by restructuring professionals. In contrast, Air Berlin filed for a “debtor in possession” insolvency procedure, where the company continues to operate under its current management.

In the case of Air Berlin, the company was obliged to file for insolvency due to the strict insolvency laws in Germany but the aircraft were able to keep flying using the company’s landing slots and this was funded by a loan from a state bank backed by the government and the EU. Under German insolvency laws, employees are also paid over a three-month period via government funding and this helped with the short-term cash flow.

Monarch’s situation was very different due to the loss of the air operating certificate. The aircraft were grounded in the UK and were taken back by lenders shortly afterwards. The government had to initiate a repatriation exercise to get other aircraft to destinations all over the world to repatriate passengers at a cost of £60 million. The company’s landing slots were sold by the administrators but the whole process was seen as “clunky” by the outside world; when compared to the Air Berlin experience.

The Italian airline, Alitalia, also failed in 2017. The insolvency procedure it entered allowed it to continue to operate and its cash flow was supported by the Italian government to the tune of €900 million. Alitalia was sold earlier in 2018.
The continuation of any airlines operations beyond an insolvency is likely to require some external funding and, given the impact on consumers, it is not unreasonable to expect governments to help. The continued funding may allow commercial lenders and leasing companies to consent to the aircraft being used (which involves their assets being flown into foreign and sometimes inhospitable jurisdictions).

The question for the government is whether the funding provided is a loan for working capital purposes, to be repaid if the business is rescued or, sunk costs as was the case with Monarch?

It is entirely appropriate for the review to also focus on consumer awareness and the effectiveness of current consumer protection schemes in existence. The impact on passengers travelling abroad when an airline fails is acute and is not limited to just getting home. There could be significant consequential losses from loss of earnings to extended airport car parking charges. Consumers do have insurance cover available but the interim report comments that many insurance policies can be withdrawn at short notice.

The review is to be welcomed and can usefully provide a sharp focus on the UK framework available for restructuring professionals when they get called in to help a failing airline.

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