Summary

  1. The debate on EU 261 polarises consumers and airlines, in a way that I believe harms both. The solution is for policymakers, consumer advocates and airlines to consider what is in the consumer interest more broadly so that future regulation serves all interests better.

A polarised debate

  1. Regulation (EC) No. 261/2004, commonly referred to as ‘EU 261’, regulates airlines’ obligations to their customers when they deny boarding, cancel flights or there is a delay. 
  2. The continued extension of consumer rights – through case-law and proposed reform of EU 261 – pits airlines against their customers. Change happens only in one direction – apparently favouring the consumer, and penalising the airline in a zero-sum game. The continuance of the debate in this form depends on a single understanding of the consumer interest – that the consumer interest is best served by making airlines pay (whether through compensation, care and assistance, or a combination) for inconveniencing their customers.
  3. Aghast at the mounting cost of compensation, at a line of Court of Justice jurisprudence that is distinctly ‘pro-consumer’ and at growing regulatory supervision of their compliance with EU 261, airlines have pleaded for a return to balance – that regulators should somehow weigh up the inconvenience caused to passengers by delay, denied boarding and cancellation, against the jobs and GDP which aviation stimulates, and that – somehow – if regulators truly understood the value of aviation in the community, they would not allow such harsh regulation to persist.
  4. In so arguing, airlines have – in a way – fallen into a trap of agreeing to a debate on wholly unfavourable terms, such that the only way the airlines can win is by limiting or resisting the extension of rights to their customers. It is not surprising that policymakers have not been persuaded.
  5. If instead the debate were directed to answering the primary question: ‘What is the consumer’s interest in relation to air travel’… then some other ideas may emerge.
  6. First, paying compensation is a cost of business. An increased cost must be recovered either through lower margins or higher prices or a combination of the two. Lower margins may imperil the long-term survival of the business, while higher prices have two effects: reducing consumer demand and forcing remaining consumers to pay higher prices – both effects reduce consumer welfare.
  7. You could object that ‘good’ airlines will suffer less than ‘bad’ airlines, which is as it should be. But that argument makes two unsustainable assumptions: first, that all airlines compete with each other in one market (in fact, most competition takes place at a route-by-route level and only marginally at a network – network level); and secondly, that airlines have control over the circumstances that cause delay, cancellation and denied boarding (in fact there are not only many players in this game, including air traffic control and ground handlers, but a range of circumstances may arise that can no longer be considered ‘extraordinary’, but over which an airline may have no control – e.g. a technical fault on an aircraft at a remote station where no spare aircraft can be expected to be available). In short, EU 261 does not in practice separate the ‘good’ from the ‘bad’.
  8. Secondly, since much competition takes place at a local level, if airlines fully allocated the compensation costs to particular routes (or, at a more detailed level, to a particular flight on a particular route), they may find that some routes that are currently reported to be profitable cease to be so. Weather, time of day and other circumstances can combine to make a delay or a cancellation more likely on a particular route. If an airline cancels a flight or even a whole route, the consumer loses. The remaining competitor(s) on the route – if there are any – may face less competition and have more scope for raising fares; another way in which the consumer loses. 
  9. You could object that where one airline leaves a route, another will take its place.  But that does not always happen – again, it depends on the route.
  10. The great leap forward in aviation in the EU was liberalisation, the creation of an EU open aviation area. The consumer has benefitted from being able to fly from more places to more places, with often fierce competition keeping prices keen.  Local communities that were once cut off are now connected. Old military airfields have become municipal airports - yet it is likely that the more marginal routes will be most vulnerable as compensation bills rise.
  11. So, instead of agreeing to a debate on terms of consumer versus airline, it may be more productive for airlines to frame it as compensation versus connectivity – as a debate between two different conceptions of the consumer interest. The next step is for airlines to calculate exactly how passenger rights compensation affects route-by-route performance.