- At the time of writing, news reports suggest the collapse of Thomas Cook is estimated to require the repatriation of more than 150,000 passengers at an estimated cost to the government of up to £100m.
- The UK Department for Transport ('the DfT') published its Final Report on the Airline Insolvency Review ('the AIR') on 9 May 2019.
- The AIR proposes changes to the existing UK insolvency regime for airlines to make passenger repatriation a priority in the event of an airline insolvency. This will be achieved by the introduction of a special administration regime for insolvent airlines.
- There are a number of outstanding questions as to how the proposals will operate in practice, including how they will mesh with the current airline insolvency regime and whether the primary objective of the proposed special administration regime (repatriation) will have substantial knock-on effects for airline creditors.
- Whilst the proposals are commendable, critics have noted that the government has missed an opportunity by failing to respond to these recommendations and implement any reforms, prior to the compulsory liquidation of Thomas Cook on 23 September 2019.
The UK Department for Transport ('the DfT') published its Final Report on the Airline Insolvency Review ('the AIR') on 9 May 2019. The AIR proposes changes to the existing UK insolvency regime for airlines to make passenger repatriation a priority in the event of an airline insolvency. The review was commissioned following the collapse of Monarch Airlines in 2017, resulting in the need to repatriate 110,000 passengers at a cost to the UK taxpayer of around £60m. The AIR includes recommendations for a special administration regime ('SAR') for airlines and a privately funded passenger repatriation scheme. At the time of writing, the collapse of Thomas Cook is estimated to require the repatriation of more than 150,000 passengers with a cost of up to £100m.
The AIR's intentions are highly commendable. However, there are questions as to how effective its proposals will be in practice. Whilst consumers may benefit from greater certainty in the event of an airline failure, some creditors face the risk of reduced returns given the potential increase in administration expenses. This may, in turn, result in higher financing costs and reduced margins for airlines and, ultimately, more airlines struggling to stay afloat. That said, the proposals do not appear to cut across the enhanced aircraft repossession rights that certain creditors currently have under the UK's 'Alternative A' insolvency regime discussed further below. In addition, some critics have suggested that if any of these recommendations had been implemented, it might have led to the (special) administration, not compulsory liquidation, of Thomas Cook thus reducing the ultimate cost to the government of the collapse.
THE CURRENT POSITION
Aircraft operated by UK airlines tend to be leased, or mortgaged to lenders, or both. If the resulting leases or mortgages were entered into after 1 November 2015 they will usually fall within a treaty known as the Cape Town Convention. This may also be so where the term of a pre-existing lease is extended after that date. In 2015, the UK ratified the Cape Town Convention (and its Aircraft Equipment Protocol (together 'Cape Town')). It then implemented Cape Town into UK domestic law with effect from 1 November 2015. As so implemented, Cape Town introduced the 'Alternative A' insolvency regime for large civil aircraft into UK domestic law.
Under that insolvency regime, when an airline goes into UK insolvency proceedings, the airline has up to 60 days (the waiting period) to hand back leased or mortgaged aircraft that come within Alternative A ('Affected Aircraft') to their respective lessors or mortgagees (their 'Aircraft Creditors') or:
- cure all defaults under its agreements with its Aircraft Creditors (other than the fact of being in insolvency proceedings) and preserve and maintain the value of its Affected Aircraft; and
- undertake to comply with those agreements in future – with any breach of this undertaking entitling its Aircraft Creditors to repossess immediately their Affected Aircraft without a court order.
This is so, even if the airline is in English administration proceedings, which contain a moratorium on creditor enforcement action.
However, almost all UK airline insolvencies produce an immediate collapse of the airline (as with Thomas Cook). So, an Aircraft Creditor will almost never have to wait 60 days to repossess Affected Aircraft in a UK airline insolvency. Before Alternative A became English law, this was partly because the UK Civil Aviation Authority ('the CAA') would ground the insolvent airline's fleet by revoking its air operator certificate. Once Alternative A had become part of English law, it imposed an obligation on airlines retaining Affected Aircraft during the waiting period to preserve and maintain the value of those aircraft. However, that obligation is hard to fund and, as a result, discourages attempts to rescue the airline, favouring immediate liquidation of the airline instead.
THE AIR PROPOSALS
The proposals within the AIR include:
- Changing the UK insolvency regime for airlines to repatriate passengers as the first priority upon an airline insolvency.
- Creating an SAR for airlines. The SAR would enable airlines to operate in administration for a short period to fly home stranded passengers, prioritising this over duties to any other creditors. The SAR would also provide the CAA with greater oversight over financially distressed airlines before and during insolvency proceedings, a new regulatory toolkit and the flexibility to allow insolvent airlines to continue to fly their aircraft during repatriation operations.
- Creating a flight protection scheme, to ensure repatriation costs are met by consumers. This would be in the form of a 40p per passenger levy (initially set at 49p for the first five years to set up the fund).
SARs implemented in other industries (eg financial institutions) have proven effective in changing the primary objectives of an administration. However, the airline SAR will only last until the repatriation exercise is complete, when it will then 'convert' into a standard administration. With so many SARs already on the statute books, and the new proposed regime only having a limited window of operation, some query whether this new SAR is really necessary. Nevertheless, Thomas Cook is a timely reminder of the importance of passenger repatriation in the immediate days following any collapse.
In addition, in relation to the flight protection scheme, critics have pointed out that whilst 40p sounds inconsequential, margins in the airline industry are incredibly small, and ticket prices relatively inelastic. This may have serious implications for airlines' bottom lines.
Reduced funds for creditors
The AIR proposes a 'Flight Protection Scheme' to fund the costs of repatriating passengers. If that scheme does not cover all such costs, any shortfall will be administration expenses and consequently will come out of the limited pool of assets that are available for the airline's creditors.
In addition, under the SAR, following the repatriation exercise, lessors will have the right to choose the destination to which they require their aircraft returned. Since repatriation flights would only be run back to the UK under the SAR, the potential need to return aircraft to other countries may add additional complexity and costs to an airline administration, further reducing the potential returns to creditors.
Individual flights can be insured for US$1bn or more. Any administrator in charge of repatriation flights would therefore face considerable risks. It is perhaps unsurprising that one of the first considerations for an insolvency practitioner in relation to any appointment would be the source and level of any indemnity, but in a company where most of the assets are leased (with enhanced Alternative A repossession rights), there is a challenge to find a suitable indemnifier. The DfT suggests that, in these situations, the Secretary of State should have discretion to issue a suitable indemnity. However, many query whether this indemnity would be pitched at the right level. Some commentators question whether a DfT indemnity may have helped lead to an administration, as opposed to the compulsory liquidation of Thomas Cook.
Is a 14-day notice period too long?
The proposed SAR would include a requirement for the UK Secretary of State to be given 14 days' prior notice of any intention to appoint an administrator or seek a winding-up order against an airline. The intention is that this would create a window of opportunity to ensure the CAA is able to prepare for that airline's failure. However, in a business that is insolvent, 14 days is a long notice period. Even the current five business days' notice to prior qualifying floating charge holders can seem like an eternity when a company is about to collapse.
In addition, aircraft that are not repaired and maintained depreciate in value very quickly and may soon become non-airworthy. In a situation where 14 days' notice is required before any special administration commences, who will be responsible for this repair and maintenance? If the CAA takes all 14 days to consent, there is a risk that some of the aircraft required for the repatriation exercise are no longer operational.
Cape Town Convention/Alternative A
One aspect of the Cape Town Convention that has proven particularly popular with lessors is the application of Alternative A. As noted above, in states (such as the UK) which have adopted Alternative A, insolvent airlines have (usually) 60 days to cure any defaults under their leases or loans relating to Affected Aircraft, and must preserve those aircraft and maintain its value during that time. If an airline's defaults are not cured, lessors have a right to repossess the Affected Aircraft without the need for court sanction (as would normally be the requirement in an administration). Will the new SAR be at odds with this right under Alternative A? The SAR appears to suggest that Article A would take precedence. However, any uncertainty over a lessor's or mortgagee's rights on insolvency could negatively impact the market. Accordingly, this point should be specifically checked in any draft legislation implementing the AIR proposals.
No-deal Brexit: reliance on Model Law?
The SAR moratorium will only extend to action taken within England and Wales. Given aircraft cross multiple borders on a daily basis, funders and lessors would no doubt be keen to ensure that their aircraft cannot be detained in foreign jurisdictions pending payment of a local lien, for example.
The CAA states that the UNCITRAL Model Law on Cross-Border Insolvency may assist in these situations by ensuring the (English) moratorium is recognised abroad. However, most European states have not enacted the Model Law, relying instead on mutual recognition under the Recast EU Regulation on Insolvency Proceedings 2015. If the UK does not continue to be bound by and benefit from the Regulation post Brexit, it is unclear whether reliance on the Model Law will help on an insolvency, when speed and certainty are key.
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