Blog / Who’s next? Recent airline collapses and new laws to address the mess

23 May 2019

The past couple of years have seen a number of major airlines collapse, including Monarch and Air Berlin. Unfortunately, this year has already seen the number of casualties pile up with the likes of WOW Air, FlyBMI, Primera Air and Jet Airways all ceasing operations. With Thomas Cook – the UK’s oldest travel operator – the latest in jeopardy, we look at Lexology’s recent articles in an attempt to analyse this trend and explore the legislation being introduced to support the aviation industry.

Need some AIR – can airlines operate when insolvent?

When Monarch Airlines entered administration in October 2017, the situation was turbulent. With Monarch’s entire fleet suspended, over 100,000 passengers were left stranded overseas. To resolve the crisis, the UK government ordered the Civil Aviation Authority (CAA) to repatriate them all, regardless of whether they were Air Travel Organiser’s Licence (ATOL) protected, resulting in a massive £60 million bill for taxpayers.

To avoid such incidents reoccurring, the UK government set up the Airline Insolvency Review (AIR) to recommend possible changes for airline insolvency procedures in regard to passenger protection. AIR published its final report on 9 May 2019. The report’s primary recommendation was to implement a special administration regime (SAR) for airlines to allow the insolvent airline’s fleet to operate during insolvency to get stranded travellers home. Reed Smith LLP praises the introduction of the policy in its attempt to mitigate financial losses for bigger airlines that the current system was not prepared for. However, the firm also warns that this won’t stop creditors seeking to repossess aircrafts once an airline fails.

The situation with ATOL-protected customers is confusing and misleading. As Fox Williams correctly points out, the CAA wrongly stated that the travel firm is responsible for organising alternative flights or providing a full refund. However, current ATOL regulations do not actually cover the failure of an airline itself, but cover only against the risk of the travel agent’s own failure. In response, AIR proposed a mandatory £0.50 ‘all flights levy’ for all customers to address ATOL’s limitations. It is debatable whether the proposed levy is needed to protect all customers when an airline disbands, or whether this measure overstates the risk of an airline going into administration. The levy would raise prices even more in an industry that is already fiercely competitive over its costs.

Brexit music (for a film) – is Brexit to blame?

So why have more airlines failed this year? In FlyBMI’s case, which went into administration barely six weeks into 2019, they cited macroeconomic factors such as Brexit, alongside rising fuel prices, as the key reasons for its downfall. Bryan Cave Leighton Paisner explains that as a result of Brexit, UK airlines were excluded from the EU Emissions Trading Scheme in an attempt to reduce greenhouse gases. As a result, FlyBMI was unable to access the allowances it typically would have expected to receive as it tried to combat the spike in carbon prices.

Squire Patton Boggs reports that the effects of Brexit were also felt across Europe. With FlyBMI going out of business, an airport in northern Germany declared insolvency. However, in another article, Squire Patton Boggs suggests that FlyBMI, Ryanair and Thomas Cook’s recent financial struggles are down to the problem of too many airlines and too few passengers,  coupled with Summer 2018 being unexpectedly hot in the United Kingdom, making consumers reluctant to part with their (weak) pound for European holidays.

Love’s not a competition (But I’m winning) – competition across Europe

Despite Brexit, the weather and devaluedg currencies, Easyjet still sees strong demand for its seats, and in 2018 saw its full year profit rise from £550 million to £590 million. But how did it achieve this? It simply looked elsewhere – and Germany’s struggling aviation industry provided the perfect opportunity. Easyjet quickly swooped into the German aviation market and acquired a small percentage of Air Berlin’s assets. This shows that such vulnerable businesses are being circled by opportunistic investors.

But Easyjet was not alone. With the collapse of Air Berlin, the second-biggest airline in Germany, competition and dominance has been a rising threat across Germany. The German Federal Cartel Office (FCO) has investigated potential abusive practices by dominant enterprises on several occasions – recently opening an investigation into Lufthansa for allegedly excessive prices directly after the insolvency of Air Berlin. Taylor Wessing observes that Lufthansa was abusing its position as the now dominant player in the German aviation market. The FCO opened an investigation into Lufthansa after changing its website’s price algorithms to increase prices on average by 25 to 30%. However, Cleary Gottlieb Steen & Hamilton LLP writes that these price increases were only temporary, and Easyjet’s entry into the market helped to address Lufthansa’s dominant position – resulting in the FCO opting not to open formal proceedings.

In addition, covers the number of German airlines which have filed for insolvency in the past two years alone –  including Air Berlin, Azur Air, Small Planet Airlines, PrivatAir, Germania and Air Berlin. It’s interesting to note that Air Berlin didn’t just label rising fuel prices as the sole reason for its demise, but also state that a weak euro, aircraft carrier delivery delays and the absurd amount of maintenance events required for their planes contributed to the insolvency.

Elsewhere in Europe, Primera Air was another compelling example. The stricken Nordic budget airline traced its financial troubles to 2017. Back then, Aviation Laws News reported that Primera Air was forced to take an aircraft out of operation due to “severe corrosion” problems and, as a result, was forced to bear subsequent costs of rebuilding in excess of €10 million. This echoes parallels with Air Berlin’s unfortunate mechanical issues but the similarities between the two airlines don’t stop there. 

More resemblances emerged between Primera Air and Air Berlin when Airbus delayed the deliveries of several A321neo aircrafts, thus compromising Primera’s new low-cost long-haul project. It’s clear from this that it’s not just airliners feeling the strain, but aviation manufacturers too. Ultimately, this situation will have reverberations across the aviation market but, as Easyjet and Lufthansa have shown, problems always provide opportunities for those who are well-informed and well-advised.

Jet it go – The curious case of Jet Airways

Finally, India presents an unusual case study with the sudden and temporary shutdown of Jet Airways’ operations last month. While most airlines mentioned here had been struggling for some time, Legalics India noted that in the first quarter of 2017, Jet Airways had the lion’s share of the Indian airline market. It commanded 14.5% of domestic and international flight sales, swiftly followed by Air India (10.7%), Emirates (9.5%), Air India Express (6.2%) and Etihad Airways (4.9%). Further, the International Air Transport Association currently forecasts India to overtake the United Kingdom to become the world’s third-largest aviation market by 2026. Given Jet Airways’ favourable position in the market, this makes its fall from grace all the more surprising.

A few months ago, Bryan Cave Leighton Paisner noted that Jet Airways’ rather outdated practices and bloated costs had an impact on the now defunct airline. In addition, time was not on Jet Airways’ side when it came to phasing out its outdated aircraft in favour of a more fuel efficient version, realising that it was too little too late for the Indian airline.

So will Jet Airways be taking off anytime soon? Unfortunately not. Freshfields Bruckhaus Deringer speculates that Jet Airways will be brought under India’s new Insolvency and Bankruptcy Code (IBC) resolution as the Indian banks explore ways to recover the debt. India’s National Aviator’s Guild said “The value of Jet Airways has been deliberately eroded during the bidding process”, and pointed the finger squarely at the State Bank of India for the airline’s debts. This, Freshfields noted, stems from a lack of clarity over the Indian court’s interpretation of the IBC, and it remains to be seen whether the Indian courts will initiate bankruptcy proceedings yet, as other airlines and entities eagerly await to see if they can pick up a stake in Jet Airways’ assets.


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