John Pearson May 16 2018 Slots can be traded for value even after insolvency Vedder Price PC | Aviation - United Kingdom John Pearson Aviation IntroductionSlots and their allocationACL decisionWas Monarch an air carrier?CommentIntroductionMonarch Airlines Limited's administrators have won an appeal with the Court of Appeal(1) regarding Monarch's rights in and to certain 'slots' at Luton and Gatwick Airports after it went into administration at the beginning of October 2017.The case is significant, as it reaffirms the value ascribed to slots by airlines and their financiers as rights of the airline and the fact that, as a result, they can be traded for value even after insolvency.Slots and their allocationA 'slot' is defined as:"the permission given by a coordinator in accordance with this Regulation(2) to use the full range of airport infrastructure necessary to operate an air service at a coordinated airport on a specific date and time for the purpose of landing or take-off as allocated by a coordinator in accordance with this Regulation."(3)The slots in question at Luton and Gatwick were allocated by Airport Coordination Limited (ACL), the respondent in the case and the coordinator for a number of UK airports. Slots are allocated on a twice-yearly basis, with the slots for the Summer 2018 scheduling period to be allocated by the ACL by October 26 2017.As part of the basis for determining how slots are allocated, an airline that has held particular slots for one scheduling period in one year may be able to claim the equivalent slots in the same season in the following year.(4) In determining the appropriate allocation of slots, the ACL also places other slots into a pool with the intention of distributing 50% of them to new entrants(5) – a process that was relevant to the case.ACL decisionShortly before it entered administration, Monarch applied for slots at Luton and Gatwick on the basis of its operation of the corresponding slots from the Summer 2017 scheduling period. However, shortly before the October 26 2017 deadline, the ACL informed Monarch's administrators that it would not allocate any of the relevant slots to Monarch, but would reserve them pending a determination by the UK Civil Aviation Authority as to whether Monarch's operating licence should be revoked or suspended.Monarch's administrators applied for judicial review of the ACL's decision at the Divisional Court, but the claim was dismissed and the administrators' appealed to the Court of Appeal. According to the judgment, the administrators sought the allocation of slots so that they could obtain the maximum value for Monarch's creditors:"Monarch does not pretend that it envisages using the slots it has requested itself. It hopes to exchange the slots for other, much less valuable ones and receive a payment reflecting the difference in worth. According to the company's administrators, this would result in a proper realisation of Monarch's assets."(6)Was Monarch an air carrier?The Slots Regulation provides the basis by which slots are allocated to an air carrier – for example, Article 8(1) of the regulation provides that "slots are allocated from the slot pool to applicant carriers". Pursuant to the regulation, an 'air carrier' means "an air transport undertaking a valid operating licence or equivalent at the latest on 31 January for the following summer season or on 31 August for the following winter season".(7)When Monarch went into administration:approximately 1,900 Monarch employees were made redundant;approximately 200 staff were retained to assist with the administration; andall aircraft operated by Monarch were repossessed by their owners.Much of the Court of Appeal's analysis of the case centred on whether Monarch had ceased to be an air carrier, given that its capacity to operate as an air transport undertaking would be vastly reduced following administration.The court considered the following questions:"i) Has Monarch ceased to be an 'air carrier'?ii) Should Monarch, even if still an 'air carrier', be denied slots on the basis that allocating them to it would be inconsistent with the purpose of the Slots Regulation?iii) Should the Court anyway decline to grant Monarch any relief in the exercise of its discretion?"(8)In the Court of Appeal, Monarch successfully argued that it was an 'air carrier' within the meaning of the Slots Regulation, and that the ACL had erred in its decision not to allocate slots to Monarch in line with its grandfather rights under Article 8. In the course of making its arguments, the ACL conceded that if there was a temporary cessation of business by an airline, this would not preclude the airline from claiming that it was still an air transport undertaking. The Court of Appeal held:"It cannot be supposed that an undertaking inevitably ceases to be an 'air carrier' for the purposes of the Slots Regulation whenever, and as soon as, it becomes unable to operate air transport services… What matters most, perhaps, is that the wording of the Slots Regulation provides no guidance on where any line should be drawn. Had it been intended that there should be such a line, the Slots Regulation could be expected to have said something about it, but it does not."(9)The court acknowledged that there might be an argument as to whether there was a realistic possibility that the air carrier was capable of resuming its operations, but that this assessment was not something that fell within the ACL's remit "had it been intended that a coordinator should undertake such functions, the Slots Regulation could be expected to have said something about it, but it does not".(10)The court went on to consider the role of the ACL as expressed by Justice Maurice Kay in States of Guernsey Transport Board,(11) which said that its role had a "very limited remit, consistent with the need for and flexibility" for the purpose of arranging the allocation and coordination of slots and that it had no "kind of investigatory and regulatory function".Accordingly, the court felt that:"there is a compelling case for saying that matters relating to an undertaking's financial circumstances and ability to continue in business are best left to, and intended to be left to, the licensing process. Approaching matters in that way achieves certainty, avoids the need for a coordinator to undertake a potentially difficult assessment of an undertaking's position and prospects, and avoids the danger of a coordinator's work cutting across that of the licensing authority."(12)CommentBy overturning the Divisional Court's decision, the Court of Appeal accepted Monarch's administrators' submission that, despite entering administration, Monarch retained its grandfather rights. Following the judgment, and with the ACL confirming that there would be no appeal, the administrators sold a number of the slots at Luton and Gatwick to airlines including IAG, with interest from a number of carriers.The case is important for airlines and their creditors which see value in slots, their allocation and tradability. It might be argued that the result is perverse and that slots ought not to be allocated to an entity where it is known that there is no reasonable prospect that the air carrier to which the slots are issued will use them, but this is not a matter for the ACL. The ACL's role is to facilitate the allocation of slots and coordinate any trading of those slots – and it did so in this case, when the administrators sold on the slots to others, recovering some value for Monarch's creditors.For further information on this topic please contact John Pearson at Vedder Price LLP by telephone (+44 20 3667 2900) or email ([email protected]). The Vedder Price LLP website can be accessed at www.vedderprice.com.Endnotes(1) R (Monarch Airlines Ltd) v Airport Coordination Ltd,  EWCA Civ 1892.(2) European Council Regulation 95/93, January 18 1993 (the Slots Regulation).(3) Article 2 of the Slots Regulation.(4) Sometimes known as 'historic precedence' or 'grandfather rights'; Article 8 of the Slots Regulation.(5) Subject to there being enough applications from new entrants; Article 10 of the Slots Regulation.(6) R (Monarch Airlines Ltd) v Airport Coordination Ltd,  EWCA Civ 1892, paragraph 8.(7) Article 2(f)(i) of the Slots Regulation.(8) R (Monarch Airlines Ltd) v Airport Coordination Ltd,  EWCA Civ 1892, paragraph 48.(9) Paragraph 56(i), supra.(10) Paragraph 56(ii), supra.(11) R v Airport Coordination Limited, ex parte States of Guernsey Transport Board  EU LR 745.(12) R (Monarch Airlines Ltd) v Airport Coordination Ltd,  EWCA Civ 1892, paragraph 56(vi).