The administrators of the airline Monarch Airlines Limited (Monarch) have won an appeal in the Court of Appeal1 regarding the rights of Monarch in and to certain “slots” at Luton and Gatwick airports, after Monarch went into administration at the beginning of October 2017.
The case is of significance as it re-affirms the value ascribed to slots by airlines and their financiers as rights of the airline, and that slots can, as a result, be traded for value even after insolvency.
Slots, and how they’re allocated in the UK
A slot is defined as “the permission given by a coordinator in accordance with this Regulation2 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, are allocated by Airport Coordination Limited (ACL), the respondent in the case and the coordinator for a number of airports in the UK. Slots are allocated on a twice-yearly basis, and the slots for the summer 2018 scheduling period were to be allocated by ACL by 26 October 2017.
As part of the basis for determining how slots are to be allocated, an airline that has held particular slots in one scheduling period in one year may be able to claim the equivalent slots in the same season in the next 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.
Review of ACL’s decision
Shortly 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 26 October 2017 deadline, ACL informed Monarch’s administrators that it would not allocate any of the relevant slots to Monarch but would reserve the slots 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 ACL’s decision at the Divisional Court but the claim was dismissed and the administrators appealed that decision to the Court of Appeal. According to the judgement, 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 on which slots are allocated to an “air carrier” – for example Article 8(1) of the Slots Regulation provides that “slots are allocated from the slot pool to applicant carriers”. Pursuant to the Slots 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
With Monarch’s entry into administration about 1,900 of Monarch’s employees were made redundant, with approximately 200 staff being retained to assist with the administration, and all aircraft operated by Monarch were being repossessed by their owners. With this background, much of the Court of Appeal’s analysis of the case centred on whether Monarch had ceased to be an “air carrier”, given its capacity to operate as an air transport undertaking would seem to have been vastly reduced as a result of entering administration.
As the court perceived the issues, the questions that arose were:
“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 ACL had erred in its decision not to allocate slots to Monarch in line with its grandfather rights under Article 8 of the Slots Regulation. In the course of making its arguments, 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 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 ACL as expressed by Mr. Justice Maurice Kay in the States of Guernsey Transport Board case,11 who said that their 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 does not have any “kind of investigatory and regulatory function.”
Accordingly, the Court felt, “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
By 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 ACL confirming that there would be no appeal, the administrators sold a number of the slots at Luton and Gatwick to airlines including IAG13 with interest from a number of carriers.
The case is important for airlines and for their creditors who see value in slots, their allocation and tradability. It might be argued that the result is perverse, that slots ought not be allocated to an entity where it is known that there is no reasonable prospect that the air carrier to whom the slots are issued will utilise those slots, but this is not a matter for ACL. Its role is to facilitate the allocation of slots and coordinate any trading of those slots – and ACL did so in this case, when the administrators sold those slots to others, recovering some coin for Monarch’s creditors.