UK: Monarch: Lessons To Be Learnt

Last Updated: 29 May 2018
Article by Rhys Griffiths

Monarch's failure was a tragedy. One of the UK's oldest travel brands called in the administrators during the early hours of Monday 2 October 2017. This led the CAA to undertake the "biggest ever peacetime repatriation" to bring home 110,000 customers stranded overseas at the time of the failure. Monarch's failure also led to the cancellation of more than 300,000 forward bookings and the redundancy of around 2,000 employees.

Monarch's failure sent shockwaves through the industry, with many travel companies incurring significant losses in refunding customers or sourcing alternative flights. This article summarises some (not all) of the "fallout", the lessons to be learnt and considers what might be different once the new Package Travel Directive ("New PTD") is implemented on 1 July 2018.

The obligation to source alternative flights for pre-departure customers

Monarch was a popular airline for travel companies to sell as part of a package or a flight-plus arrangement. However, this brought with it various legal obligations to refund or replace customer flights, without charge, when Monarch failed.

Package organisers had a choice whether to source alternative flights, if they were able to, to allow the holiday to continue, or to cancel the package. If the new flights amounted to a significant change to the package, or if the organiser cancelled, then the customer had to be offered a substitute package, if possible, or a full refund. The customer also had a potential claim for compensation for any losses suffered.

The position for flight-plus arrangers was not much better. They had to make "suitable alternative arrangements" for their customers. Where it was impossible to do so, or if such arrangements were rejected by the customer for a good reason, the customer had to be given a full refund. Customers also had a potential claim for compensation.

These legal obligations gave rise to enormous practical challenges for travel companies. They had to deal with a lack of seat capacity on Monarch's routes, financial loss in having to fund the cost of replacement flights, a lack of regulatory guidance as to what "suitable alternative arrangements" look like, and the logistical headache of having to communicate with huge numbers of affected customers. It is a great testament to the industry that it was able to negotiate this chaotic landscape, to keep customers happy and to avoid Monarch's failure leading to a domino effect in the travel industry.

The New PTD will introduce an expanded definition of a package such that the concept of flight-plus will disappear and become subsumed within the new package definition. The flight-plus obligations in the ATOL Regulations will be deleted. However, there would appear to be no equivalent obligations imposed by the New PTD on organisers to source replacement flights in relation to forward bookings, although there are similar obligations in relation to post departure customers and there are also the contractual terms to be taken into account.

If a travel company does decide to offer a replacement flight, then the customer will have similar rights as before. Provided that the travel company's booking conditions give it this flexibility, the customer will have to accept the new flight unless it can be said to amount to a significant change, in which case the travel company cannot insist that the customer accepts the change. Rather, the customer has the right to choose between: (i) accepting the change and seeking a price reduction (if the new package is of lower quality or cost); (ii) taking a substitute package (if the travel company decides to offer an alternative) and seek a price reduction; or (iii) cancelling the package with a full refund and seek compensation.

There is, however, a serious anomaly regarding the question as to whether organisers can simply choose to cancel the package and refund the customer their money. There were indications in the New PTD that this might be possible, but the draft UK regulations are silent on the point. One hopes that the long promised guidance from BEIS will put the position beyond doubt.

How can travel companies recover their losses?

The failure of Monarch led to significant losses for travel companies in having to provide refunds or replacement flights. Some managed this risk by taking out supplier airline failure insurance ("SAFI").

In what was a welcome surprise for some travel companies, the absence of SAFI did not mean that they were left without a means of recovering their losses. Rather, some travel companies were able to make "chargeback claims" through the corporate credit or debit cards used to pay Monarch. This included traditional credit / debit cards, and also the more recent phenomenon of virtual pre-paid cards used by many of the larger travel companies. In all of these scenarios, travel companies were able to initiate chargeback claims through the Visa or MasterCard scheme rules, even though the travel companies were not consumers and so were not able to make claims under section 75 of the Consumer Credit Act 1974. This is a form of financial protection which every travel company should explore.

Confusion around Flight-Only sales

The legal obligations on flight-plus arrangers to make "suitable alternative arrangements" are set out in the ATOL Regulations 2012. The ATOL Regulations provide no protection for the consumer against the failure of the airline for flight-only sales. As the flight-only ATOL Certificate makes clear, the customer is only protected against the failure of the ATOL holder (i.e. the travel company). There is no protection if the airline fails.

However, the position regarding flight-only sales is far from clear and it was a source of great confusion following the failure of Monarch. So much so, in fact, that Which? decided to carry out a piece of investigative journalism on the issue in the immediate aftermath of Monarch's failure and subsequently ran a story with the headline "Travel agents get it wrong on ATOL". This is an issue which could helpfully be clarified as part of the forthcoming ATOL reforms.

The future

The failure of Monarch shined a light on the UK's regulatory system, particularly on where the risk of airline failures should sit. The unsatisfactory answer is that the risk lies with travel companies, the customer and the airline's merchant acquirer. This piecemeal approach does rather beg the question as to whether there could be a better system to cater for airline failures. The Government announced in the Autumn Budget 2017 that it would launch an independent review in the event of an airline or travel company failure. Let's hope that this does lead to a fairer and simpler system for the future.

This article was first published in ABTA's Travel Law Today in May 2018

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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