In the Eye of the Storm

June 2004

Lost Cost Airlines in the Spotlight

In recent weeks, low cost airlines have hit the headlines, particularly the larger carriers whose climb to ever increasing profits has hit an unexpected decline in passenger numbers. The success of the low-cost business model for the likes of EasyJet and Ryanair has led to an explosion of competing low cost carriers and has driven price reductions with the full service airlines. It is bonanza for both leisure and business travellers in terms of the low fares that one can find, but such a battle in the skies is bound to result in casualties. In recent weeks, the low cost carrier “Duo” collapsed leaving 52,000 fares booked with little chance of the passengers recovering prepayments for tickets. A number of full service scheduled airlines are also in financial dire straits.

Scheduled Airline Insolvency

There is no bonding of scheduled airlines, whether they are full service or low cost, exposing all pre-booked passengers to financial loss in the event of financial failure. The CAA has proposed that its ATOL regime, better know for protecting holiday makers when a tour operator fails, be extended to cover the failure of scheduled airlines. This will require legislation but the failure of Duo will strengthen their case to extend the protection. Their consultation on extending the ATOL regime to scheduled airlines ends in May 2004 but until the law is changed passengers must run this risk. However, for business travellers and business travel agents making their bookings, there is already scheduled airline failure insurance in the market at very modest cost. Seat consolidators selling discounted scheduled airline seats are already obliged under their own ATOL Regulations to put this insurance protection in place for passenger booking consolidated seats. For the very low cost involved, this insurance is certainly a benefit for business travellers using all typed of scheduled service, and will bide them over until such time as the ATOL regime is extended.

Denied Boarding Compensation Regulations

The EU’s extension to the compensation rules for all airline passengers when a flight is cancelled, delayed or a passenger with a valid ticket is denied boarding is on track to be implemented into legislation in the immediate future. This will increase compensation pay outs to a level ranging between €200 per passenger up to €600 for long haul flights, depending upon the length of carriage to be travelled. Up until now, the compensation payable has been a fixed amount in euros or the price of the ticket, whichever is the lower, enabling low cost carriers to refund the ticket price in view of the low value charged. The new EU Regulations do not give the option of compensating by a lower value air fare and this may well require low cost carriers to compensate passengers. to a value far in excess of the price paid for the ticket. As a result of this, the European Low Fares Airlines Association (ELFAA) has applied to the High Court for a judicial review of the proposed Regulations prior to their being implemented in about February 2005. ELFAA argue that the Regulations will be particularly painful for the low cost carriers, and could possibly result in their having to implement substantial fare rises, as well as being discriminatory as they do not apply to other forms of transport such as trains and ferries.

Watch this space for the outcome of the application for judicial review.

Paris Slots Lead to Arguments

EasyJet has announced legal proceedings following its failure to get sufficient slots in France, particularly at Paris CDG and Orly. The airline seeks to remedy the situation against Cohor, an independent French body responsible for slot allocation by starting a legal claim in the French Courts.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. Piper Smith Watton cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.