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Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related policy and law reform, in Australia and internationally. No legal advice is offered or given.

How to best handle a major airline collapse

When a government sets up an inquiry into how to deal with the insolvency of a certain industry, the industry and those involved in it might become a little nervous.

Airline Insolvency Review, March 2019

A Review Report commissioned by the UK government into the processes available to deal with the insolvency of airlines was released in 2019. It recommends the establishment of a Special Administration Regime (SAR) for airlines that would, inter alia, prioritise passenger repatriation over maximising creditor returns. It would be assisted by government guarantees of financial assistance to the administrator.

If an airline does fail, there are complex legal and financial issues not fully addressed under the UK’s current insolvency regime. Also, passengers can face financial losses from tickets that become worthless and also personal welfare losses if they are left stranded overseas.

There are a range of refund protections already available to passengers through credit and debit cards and other payment services. Passengers can also take out travel insurance with a supplier failure cover. The report considered that these and the UK’s Air Travel Organiser’s Licence (ATOL) protection for package holidays provide an adequate level of protection for forward bookings, though ATOL does not cover individual flights.

The Review Report recommended a formal repatriation protection scheme to be put in place and recommended appointing a coordinating body to repatriate passengers.

Insolvency

The Review was tasked with investigating how airlines could wind down in an orderly fashion to conduct a repatriation with minimal need for government intervention.

While keeping an airline’s fleet of aircraft flying at the point of insolvency would be an optimal solution to the repatriation problem, there are many difficulties in continuing to operate an insolvent airline, even limited to repatriation purposes.

For one thing, the Report notes that repatriation of passengers would be loss making and carry large risks, contrary to the objectives of administration or liquidation in the UK, and the duties of the IP. The insolvency can also lead to an immediate loss of key employees, systems and suppliers, and trigger the withdrawal of the airline’s operating licence by the CAA.

As the Review acknowledges, the practice of operating an airline in UK administration is understandably rare.

These significant challenges

‘may well be impossible to overcome without a significant amount of money, or specific interventions to modify the terms under which an airline insolvency takes place in the UK’.

Special Administration Regimes

In other industries, there are SARs that provide additional powers and processes, suited to the industry concerned, for example banks. These exist in Australia in relation to banks, insurers and others. The UK SARs include authority for the state to provide a grant, loan, or indemnity to the insolvency administrators.

R3

The Review’s proposal is that a SAR for airlines prioritise passenger repatriation over creditor returns is criticised, for one, by R3. It considers that such a priority

‘could well have serious implications for the financial health of the airline sector, and the taxpayer. … ‘[R]unning an airline is expensive and continuing operations will deplete the value of what the insolvent airline can repay to creditors. By increasing creditor losses in the event of an insolvency, an SAR for UK airlines may well deter lenders, investors, and other companies from lending to, investing in, or trading with a UK airline in the first place. Similarly, the costs of repatriation may mean funds are not left over to cover office holders’ costs, disincentivising insolvency practitioners from taking airline appointments’.

An Official Receiver

R3 concludes that the review proposal could

‘leave airline insolvencies to be handled by the government’s Official Receiver – and funded by the taxpayer’.

Both the UK, and New Zealand, have had government Official Receiver roles since the late 19th century, following decades of turbulent reform competition between creditor control of insolvency, and control by the state.

Thus the 1982 UK Cork Report said that insolvency has

‘never been treated in English law as an exclusively private matter between the debtor and his creditors; the community itself has always been recognized as having an important interest in them’.

And in In re Barlow Clowes Ltd, Millett J said that:

‘The liquidation of an insolvent company can affect many thousands, even tens of thousands, of innocent people. … In the case of a major trading company it can affect its customers and suppliers and the livelihood of many thousands of persons employed by other companies whose viability is threatened by the collapse of the company in liquidation. An insolvent liquidation cannot be dismissed as “just a case about money”.’

The UK Official Receiver is presently handling insolvencies that have major public and economic impacts – Thomas Cook, British Steel, Carillion Constructions – and the collapse of a major airline would be comparable to those in their impact, as it was with the collapse of Monarch Airlines in 2017. Ansett Airlines in Australia is another example.

The idea of a SAR may be needed, just as banks and insurers qualify for their own insolvency regimes, commonly on the basis that they are ‘too big to fail’, or at least to fail in a disorderly fashion. In those industries, greater powers are given to the regulators and the courts to direct and control the insolvency, and greater protection is given against creditors, including cross-border claims. Bank depositors has added protection.

Given the need for greater government input by way of funding, and the economic and public impact of an airline collapse, a role for the Official Receiver may arise.

The probability of an airline becoming insolvent

The Review Report refers to ‘transition probability tables’ that can estimate the probability of an airline becoming insolvent over the next 12 months.

They might be lighting up right now, in the UK and Australia.

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