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On 23 September 2019, following several turbulent months, UK travel giant Thomas Cook Group filed for compulsory liquidation. All the tour operator’s aircraft were grounded, leaving almost 150,000 British holidaymakers stranded across Europe, the US and North Africa. The UK Civil Aviation Authority launched the largest peacetime repatriation in history, codenamed ‘Operation Matterhorn’. It is estimated that the repatriation cost £500 million, with an as yet unidentified percentage of the bill to be footed by the UK taxpayer.  

The UK Government has come under significant criticism for its handling of the situation, particularly as a similar issue had already occurred in 2017, when the collapse of Monarch airlines led to the state-funded repatriation of 85,000 customers. The Government was also criticised at that time for  not taking enough action, which led  to UK ministers ordering a review of airline insolvency rules; however, this review was not published until May 2019 and there has been no formal response to it from the Government.

Leasing airline equipment – the Cape Town Convention

In the days after Thomas Cook’s collapse, the Times reported that the company’s sister airline, Condor, based in Germany, was continuing to fly. This sparked confusion among Thomas Cook customers and the wider public as to how this could happen.

In the airline business, it is common practice for aviation equipment (e.g. airframes, aircraft engines and helicopters), to be leased rather than sold outright. The UK is party to the Convention on International Interests in Mobile Equipment 2001 (the “Cape Town Convention”).

Under the Cape Town Convention, when the administration of an airline company commences, the insolvency practitioner is required to return possession of any leased airframes or aircraft engines to the creditor within 60 days. If the administrator fails to do this, any moratorium is disapplied, the creditor does not need to obtain a court order for possession and has the right to export the aircraft with the assistance of the Civil Aviation Authority. In effect, this means that UK administrators of an insolvent airline are not in a practical position to continue to trade. Consensus among UK insolvency practitioners is that this is not a bad thing, with the additional pressure of public safety liabilities in the event of an accident, being, perhaps, too much to handle.

By contrast, Germany is not a party to the Cape Town Convention. In the example of Condor, following the liquidation application of Thomas Cook, the sister airline immediately applied for a rescue loan from the German Government for short-term assistance to enable the airline to continue running.

Review of, and proposals for, protections for customers - will they take off?

On 1 November 2019, the House of Commons released a briefing paper titled “Airline Insolvency Review.” The paper provides an outline and review of the various types of protection available for passengers against financial loss in the event of airline insolvency. These include the Air Travel Organiser’s Licence (ATOL) scheme, individual travel insurance policies, and credit and debit card payment insurance.

In addition, the paper provides recommendations as to how the UK may better deal with airline insolvencies in the future, with particular attention paid to the costly process of repatriation. Under the current law, the Civil Aviation Authority is required to source its own aircraft to replace cancelled flights, as the planes belonging to the insolvent airline will be grounded and paperwork examined to determine which parts belong to whom.

The House of Commons has proposed the introduction of a ‘Special Administration Regime’ (SAR). Rather than adhere to the standard administration process created under the Insolvency Act 1986, an SAR instead creates a bespoke administration regime for that sector, providing a set of specific tools that can be used to manage an airline’s insolvency. For example, following the collapse of Lehman Brothers in 2008, an SAR for investment banking was developed to facilitate the return of assets belonging to the failed firms’ clients. The primary purpose of an SAR for airlines would be the repatriation of stranded passengers and would permit the airline’s own aircraft to be used for a “limited” time for this purpose. The proposed SAR would also provide a Secretary of State-appointed administrator with the powers to use all available funds for the purposes of repatriation, including insurance cover, staff pay and amounts due to essential product suppliers. These actions would take precedence over duties to creditors.

In the review, the House of Commons acknowledged comments that any repatriation efforts are at risk of delay from frustrated creditors outside of English courts’ jurisdiction, who might seek to repossess their aircraft.

The paper ends by recognising the complexity of the issues raised and made no suggestion for a timescale during which reform should be implemented. It acknowledges that the introduction of a new SAR would require new legislation, which can be a lengthy procedure. The Government is yet to provide any formal response or recommendations. In addition, the opinion of UK insolvency practitioners, who may be adversely opposed to the introduction of an SAR, shouldn’t  be overlooked.

Issues such as airline insolvency take up a relatively small section of the public and press attention span, despite huge numbers of people, both customers and staff, having been affected by the collapse of Thomas Cook. As time passes, and other legal-political issues such as Brexit take precedence, it will be interesting to see whether any further action is taken before the next unfortunate downfall of a UK airline company.

If you have any questions about anything featured in this blog, please contact our Business Restructuring and Insolvency Team.

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