Half of us will travel by air this year – whether it’s a domestic flight-only journey or an all-inclusive package to the Costas.
British airports manage more than three million air traffic movements every year, and the UK accounts for roughly 25% of the European aviation market: the third largest in the world.
More than 350 airlines serve the UK, but just 17 of those account for 80% of the UK market. A year ago, Monarch was one of those airlines.
“One of our key messages is the risk of one of these airlines becoming insolvent over the next 15 years is quite high,” says Peter Bucks, chairman of the Airline Insolvency Review - set up following the collapse of Monarch last October.
“And that probability is expected to grow over time – significantly,” he adds, peering purposefully over his spectacles at me.
It is Bucks’ first trade interview since launching the review, and he is not pulling any punches.
The reality, says Bucks, is that with passenger demand - according to IATA - set to double over the next 20 years, the risk of insolvency becomes greater, as does the number of passengers an episode would affect.
When Monarch failed, 110,000 passengers were left stranded overseas and a further 750,000 had forward bookings.
The government and CAA stepped in and launched Britain’s biggest peacetime repatriation programme. It cost the taxpayer £60 million and left a £16 million dent in the Air Travel Trust Fund (ATTF).
Abta was highly critical of the intervention, warning that it set a dangerous precedent, and the ATT has called for clarity on what the Monarch response means for the so-called “Atol fund”.
While Bucks’ interim report acknowledges governments have historically chosen to act, citing the 2017 failure of Air Berlin, one thing is clear: the UK government is intent on ensuring it does not have to get its hands dirty again.
Indeed, Bucks’ remit seeks a solution to airline insolvency that “minimises the impact on the taxpayer” and involves “minimal government intervention”.
The review was announced during the autumn budget and formally convened in January, with Bucks appointed chairman. I immediately admire his candour.
“I think we spent the first four months trying to work out what the questions were,” he explains with a wry smile. “Once we defined those, we had a much clearer idea of what we needed to achieve.”
A call for evidence yielded 33 responses from across the industry. Two public events fell flat though. “No one actually turned up,” Bucks admits. “It’s just not front-page news – but it should be.”
Monarch certainly was – a factor the government is well aware of.
When Monarch failed on October 2 last year, smack bang in the middle of the Conservative party conference, prime minister Theresa May and transport secretary Chris Grayling had to act swiftly to avert a PR disaster – and they did.
All 110,000 Monarch customers were rushed home, despite only around 20% of them having Atol protection. While effective, the repatriation was controversial.
ATTF chairman Michael Medlicott recently wrote to Grayling to warn that the government’s intervention “raised important policy questions concerning wholesale repatriation of non-Atol-protected passengers”.
Bucks’ first priority was therefore to make sense of the current regulatory quagmire. “It’s far from a simple landscape,” he says.
The report notes current protections “often overlap” while falling short of universal coverage. Some are statutory, some aren’t. There’s Atol, travel insurance, EU261, consumer credit, and so on.
“Passengers may unwittingly pay twice or more for the same protection,” it says. “Others – intentionally or otherwise – may not have paid for protection and carry the risk of insolvency themselves.”
The issue, the report acknowledges, is exacerbated by a lack of consumer awareness – as well as awareness of the level of protection they want and the price they are prepared to pay.
“One of our key messages is that the risk of one of these airlines becoming insolvent in the next 15 years is quite high”
Peter Bucks, chairman, Airline Insolvency Review
It also heeds political imperatives: “Government may feel compelled to act for public policy reasons, despite the moral hazard of protecting passengers who failed to protect themselves,” it reads.
For Bucks, this concept of “moral hazard” versus political risk is critical, balancing the need for intervention against consumer detriment. In essence, it presents a strong case for “universal” protection that transcends Atol.
“The Atol scheme has done extremely well,” says Bucks. “But because it only covers package travel, it leaves the majority of air passengers departing UK airports uncovered. Whether it makes sense to extend Atol coverage, we haven’t concluded.
"But we can see significant potential advantage in separating airline failure risk from other supplier failure risk [which would be covered by Atol].”
This “separation” is perhaps the crux of the matter. Bucks wants to “refine existing protections” to create something simple and easy to understand, without overlap, “provided by the market”.
All this appears to be pointing towards a framework in which airline insolvency is independent of other protections, funded by the market and the response likely coordinated by the CAA.
One possible solution is requiring airlines to source adequate insurance.
However, should a mandatory insurance model be preferred, the cost could still yet fall on passengers, airlines or ticket vendors.
The report states that with airlines exhibiting “increasingly complex financial structures”, reducing their flexibility and ability to adapt to market conditions, competition and geopolitical risks, an insolvency episode is far from unlikely.
Bucks notes Monarch’s demise was accelerated by “geopolitical events” in the Med and north Africa.
“One advantage is each airline would have to buy protection that is market-gauged,” Bucks says.
In short, those running airlines structured in such a way that they are more prone to insolvency could expect that protection to cost more.
“I think universal coverage is probably what one needs,” says Bucks. “Buying an air ticket that includes protection seems quite an elegant way of doing it.”
The review does explore other financial models that could mitigate insolvency, were it to conclude the market was unlikely to be able to source or fund the necessary protection.
In Denmark, for example, there is a static fund which sees airlines pay two Danish krone (20p) per passenger into a repatriation pot.
“We can see significant potential advantage in separating airline failure risk from other supplier failure risk”
Peter Bucks, chairman, Airline Insolvency Review
“We may find the market doesn’t have the capacity to provide enough cover,” says Bucks. “If that was the case, even under that model, we’d still need to put in place a funding mechanism like a static fund or specialist insurance provider.”
Funding insolvency protection, though, is only one part of the solution. “If financial protection is provided to everyone, there is still left the practical questions about how you take this money and use it
to get people home,” says Bucks.
“Any large-scale repatriation needs centralised coordination and decision-making. This could be done by the CAA – they are very well equipped and uniquely placed to do it.
“They have the relationships and contracts with providers of aircraft capacity. They have the leverage with overseas-registered airlines. We will certainly recommend some form of formalised protocol.”
Seats could still be an issue, however. Only some well-served routes, the report finds, would be able to absorb the influx of passengers that insolvency would generate.
“Even on the north Atlantic route – the most heavily travelled in the world and best provided – were BA to fail, its passengers would have to fight over spare seats with other airlines,” says Bucks. “On summer sun routes, where there tends to be a relatively small number of carriers operating, it’s going to involve delay and administration – and come at great expense.”
The CAA has “constant stock” arrangements of around 60 aircraft, but Bucks warns this is unlikely to be sufficient to fully mitigate a larger insolvency.
“There comes a point of critical mass,” he says. “Even with conditions being favourable, mounting a Monarch-style repatriation exercise using chartered aircraft to replace a fleet that has 60 or more aircraft [compared with Monarch’s 30 aircraft] – an easyJet or a Ryanair – would be more or less impossible.”
Airline insolvency is relatively rare, and Bucks acknowledges there will not be a one-size-fits-all solution. The report hypothesises a three-pronged “toolkit”, including self-organised repatriation, organised charter and keeping fleets flying through an “orderly wind-down”, akin to the German government’s support for Air Berlin in its death throes.
There are two key problems that Bucks must solve: whose balance sheet should absorb the risk of insolvency, and how should these funds deliver a repatriation exercise.
A final report will be drafted in November for publication before the end of the year. Stakeholders will shape and test the models during a series of workshops.
“We’ll war-game it, if you will,” says Bucks with a smile.