Airline Insolvency Review: What is it, what are the recommendations and when will passengers see changes?

Our travel correspondent has read the entire report so you don’t have to

Grounded: passengers booked on Jet Airways would not be covered by the proposed rescue scheme (Jet Airways)

The Airline Insolvency Review was set up by the Department for Transport (DfT) after the collapse of Monarch in October 2017 to look at ways of protecting passengers in future.

The review, chaired by Peter Bucks, recommends a “Flight Protection Scheme” to foot the bill in future collapses, meaning airline passengers face another extra fee on their tickets: a levy of up to 50p, for a fund to repatriate travellers if their carrier goes bust.

Here is everything you need to know about the Airline Insolvency Review.

What’s the background to the review?

Following the collapse of Monarch Airlines in October 2017, the government decided to repatriate 85,000 British holidaymakers stranded abroad. It cost £60m, which is over £700 per person; the government clawed back almost £20m, but it still left the taxpayer subsidising everyone who was brought home by an average of £476.

After that, the Department for Transport (DfT) asked Peter Bucks, a senior financial adviser, to come up with ideas to handle future airline failures in a more orderly fashion, and to bring home or refund passengers without the government getting involved.

What does the review recommend?

1. Setting up a “Flight Protection Scheme” to foot the bill in future collapses. This would require every airline to come up with a form of insurance that, in the event it goes out of business, would pay the costs of bringing people home more or less when they were supposed to.

2. Creating a legal route to allow defunct airlines to keep flying long enough to bring people home.

3. Improve travellers’ awareness of flight and holiday protection.

Peter Bucks calls the proposals “practicable, effectual and affordable”.

That all looks sensible. Any issues?

Yes, starting with the Flight Protection Scheme. The review reckons this would cost up to 50p per passenger. On the average transatlantic flight costing perhaps £500 return that is a minuscule one-tenth of one per cent. Even on a dirt-cheap £25 no-frills trip it is only two per cent.

But the airlines are furious about anything that adds cost and complexity to the operation.

The majority of British travellers fly on British Airways, easyJet, Jet2 and Ryanair, all of which have rock-solid finances. None of them sells tickets beyond a year ahead, and the chances of any of them failing within that time are microscopically small. So they ask: why should we get tangled up in more red tape, and increase our costs, to bail out passengers of less robust airlines?

“The vast majority of consumers who contribute in higher airfares would never receive any benefit,” says Dale Keller, representing airlines flying to the UK.

Airlines also say the risks are overstated, and point to the recent failure of Wow Air of Iceland, when 13 airlines offered rescue fares under an industry voluntary agreement and the Civil Aviation Authority didn’t get involved.

The review itself accepts: “Notwithstanding the Monarch failure in 2017, airline insolvencies are rare and the overwhelming majority of passengers are not affected.”

What about the idea of keeping “zombie” airlines on life support?

At present whenever an airline goes bust, its planes are repossessed by the leasing company – or kept on the ground by airports which are owed money. After the Monarch collapse, other airlines were brought in at enormous expense while the bankrupt airline’s planes, and unfortunate flight crews, were idle.

At the same time in Germany, a chronically unprofitable airline, Air Berlin, was failing. But the German government pumped in €150m (£130m) kept it flying for a couple of extra months until the end of the summer season so that holidaymakers wouldn’t be left stranded (and also so that hundreds of thousands of travellers would get the holiday they expected).

On a strict cash-per-person basis that was much cheaper than the Monarch rescue, and it was far better for everyone in terms of reducing distress.

Why don’t people understand flight and holiday protection?

Because it is complicated and messy. Typically people can have three layers of protection: an Atol certificate, travel insurance against airline insolvency, and credit-card cover.

Four out of five travellers have some sort of protection. When Monarch collapsed, the first call was against credit-card firms, so travel insurers and the Atol scheme were largely unaffected.

But “cover” can mean different things – a family whose holiday is scuppered don’t want the money back, they want the actual holiday – which, if one is available, is likely to cost a great deal more.

So this review is only one aspect of a much wider debate. And there is a possibility that the Flight Protection Scheme becomes yet one more element of confusion.

Any other problems?

Yes, as shown by the tens of thousands of British travellers stranded in India by the shutdown of Jet Airways in April. Because the airline has not declared bankruptcy and is still technically a going concern, passengers with worthless bookings for cancelled flights from Delhi and Mumbai to Heathrow would not have been covered by the rescue plan envisaged by the review.

Also, lots of people book outbound on one carrier but inbound on another. For example, someone who had flown from Manchester to Malaga on easyJet but was booked on Monarch to fly home would not have protection under the recommended scheme.

Wouldn’t it be better to treat the cause rather than the symptoms – and stop airlines like Monarch trading when they’re insolvent?

It’s tricky. The review recommends that a British airline which has “a material adverse change” in its financial situation should be required to notify the Civil Aviation Authority. But there are several concerns.

First, aviation is a cash-positive business: people pay weeks or months ahead of taking delivery by turning up for their flight. So airlines can keep on trading and flying even when their finances are precarious.

Next, the CAA already has some powers: for a while before Monarch collapsed, it insisted every outbound passenger paid £2.50 for Atol protection. Had this continued until the airline's eventual failure, the bill for repatriation would have been picked up by the Air Travel Trust fund rather than the taxpayer.

Third, Flybe is a prime example of how an airline in financial trouble can emerge in reasonable shape; it went into last winter predicting tens of millions of losses, but has been rescued by a consortium including Virgin Atlantic and has continued to fly normally.

When will we start paying the levy and see other changes?

Not this year, and probably not next. This is all feeding into a wide-ranging aviation strategy which will involve much more consultation and, ultimately, legislation.

But the airlines are determined to fight anything that they say makes their lives more difficult.