# EUR-Lex - 52013DC0129 - EN

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# 52013DC0129

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS PASSENGER PROTECTION IN THE EVENT OF AIRLINE INSOLVENCY /* COM/2013/0129 final */**

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TABLE OF CONTENTS

1........... Introduction.................................................................................................................... 3

2........... State of play................................................................................................................... 4

2.1........ Insolvencies in the EU..................................................................................................... 4

2.2........ Passenger Impact........................................................................................................... 4

2.3........ Existing passenger protection.......................................................................................... 5

2.4........ Partial solutions and existing remedies.............................................................................. 5

2.5........ Protection of passengers has so
far been limited............................................................... 6

3........... The way forward: Positive
lessons and existing good practice........................................... 7

3.1........ Applicability of passenger rights...................................................................................... 7

3.2........ Passenger related measures............................................................................................. 8

3.3........ Rescue fares................................................................................................................... 9

4........... Conclusions.................................................................................................................... 9

COMMUNICATION
FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN
ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS

PASSENGER PROTECTION IN THE EVENT OF
AIRLINE INSOLVENCY

1.           Introduction

1.           The Single Market for air transport has brought
significant benefits to consumers. These include a wider variety of air
services (such as the development of "low cost" carriers and the
introduction of new routes) and a greater choice of fares due to increased competition.
However, competition places increased pressure on inefficiently run airlines or
those which inadequately respond to customer demand; stress points being highlighted
when demand declines and costs rise. Increased competition has paralleled a rise
in the number of airline failures, with 105 European scheduled air carriers becoming
insolvent between 2000 and the first six months of 2012[1]. The scale of such insolvencies varied with small airlines,
offering relatively few seats having little impact, to larger airlines, such as
Spanair, Malév and Windjet, causing major disruption for individuals. Passengers
who had departed, or were about to do so, when a carrier became insolvent ran
the risk of being left without assistance. Such failures have a greater impact
on passengers stranded away from home, particularly at points where there were
either no or limited alternative services. This issue has therefore raised both
public and political attention.

2.           Unlike other services or
transport modes, air tickets are often bought months before the flight departs.
To ensure seats are filled as early as possible air carriers encourage passengers
to purchase by offering lower fares the earlier a booking is made. Passengers can
therefore be more vulnerable to air service provider insolvency.

3.           The position of passengers
when an air carrier is declared insolvent will vary depending upon how their ticket
was purchased. The most significant difference being between standalone (flight-only)
tickets and those purchased as part of a package. Passengers who purchase a
package covered by the Package Travel Directive[2]
(PTD) are already protected. This Directive requires organisers to either refund
the consumer or make alternative flight arrangements
and provide interim assistance (e.g. hotels/refreshments) if a contracted air
carrier becomes insolvent.

4.           Regulation (EC) N°1008/2008[3], which governs the licensing of
European air carriers, requires Member States to take action should they not be
satisfied with the capital adequacy of an air carrier they licence. However, the
current EU legal framework does not establish any direct insolvency protection requirement
for flight-only ticket holders - such passengers usually having to ensure their
own protection.

5.           Regulation (EC) N° 1346/2000,
governing cross-border insolvency proceedings, entitles passengers resident in
another Member State to the insolvent airline to lodge claims for refunds or
damages in foreign insolvency proceedings. However, even if a passenger is
successful in his/her claim, which is not certain, there would inevitably be a
delay in receiving payment with the affected passenger having to meet their own
costs in the interim.

6.           There is evidence that the
awareness of passengers of the protection they may have is generally poor, even
for those covered by PTD. In a survey conducted for the Directorate General for
Justice of the Commission[4]
to support potential revisions to that Directive, 66% of respondents did not
know whether they were protected if the airline they were booked on became
insolvent. There is therefore a situation of market failure, as passengers are
inadequately informed about the risks they incur and may not take action to
protect themselves against them.

7.           In this context, especially
for flight-only ticket holders, it is important that passenger protection be
enhanced. Addressing this issue quickly could be achieved without new
legislation by more effective use of existing law. With this aim, this document
assesses the current state of play and considers what measures could
effectively be implemented by the Commission, vis-à-vis the competent national
authorities and stakeholders.

2.           State
of play

2.1.        Airlines insolvencies in the
EU

8.           Between 2000 and 2010 ninety
six scheduled service[5]
air carriers became insolvent. The frequency of airlines ceasing operations
fluctuated in this period with no distinct pattern. Peaks of fourteen air
carrier insolvencies were observed in 2004 and 2008, but only three failures in
2000 and 2007. In contrast by 2011 this had fallen to one[6], but rose to eight[7] major scheduled air carriers
ceasing operations in 2012. There is some relationship between the distribution
of insolvencies and the size of Member States aviation markets, the largest
number of insolvencies being of carriers registered in the UK and Spain (the first and third largest markets in the EU, measured in terms of passenger
numbers). However, this may only demonstrate an active intervention policy in
those Member States.

2.2.        Passenger
Impact

9.           An estimated total 1.4-2.2
million passengers were affected between 2000 and 2010[8], of which some 12% were
stranded away from home. The proportion of passengers stranded is low in
comparison to the total number booked to travel but could not do so, although again
this figure fluctuated and was higher in specific cases (e.g. Air Madrid). Despite
this the number of passengers impacted never exceeded more than 500,000 per
annum[9].
The highest number of failures, in terms of passengers, occurred in 2004, but
even then this only represented 0.17% of EU passengers travelling that year[10].

10.         It is estimated that between
2011 and 2020 some 0.07% of all flight-only passengers will be affected by air
carrier insolvency[11]. The number
will vary annually, but this percentage is likely to increase due to traffic
growth and as there are now fewer, larger carriers – the loss of any therefore having
a greater impact. The average number of passengers affected is estimated to increase
from 325,000 in 2011 to 480,000 by 2020. Of which, based on past statistics, some
12% are projected to be stranded.

11.         Whilst the overall proportion
of passengers affected is low, the impact of insolvency on individuals can be
significant. Apart from the inconvenience of the disruption itself, passengers
may incur a number of unrecoverable costs:

·
Where operations cease
before initial departure, passengers must choose between
rearranging the trip or forgoing their journey. If they rearrange, they must meet
the cost of alternative travel which, booked at short notice, will probably be
more expensive. If it is not possible to organise alternative travel, or the passenger
does not choose to do so, then they may forfeit any non-refundable components
of the trip (such as accommodation or car hire).

·
Where operations cease and a passenger becomes stranded,
they will usually have to arrange their own alternative travel. Again this will
usually be at short notice and likely to be much more expensive than the cost
of the original ticket. Capacity constraints may also lead to delay, with affected
passengers having to meet assistance costs and compete with others for such
services. Lack of available information may compound a passenger's ability to economically
make such arrangements.

12.         Between 2000 and 2012,
stranded passengers incurred the highest immediate costs from airline insolvency,
on average over €796.[12]
These costs varied depending on distance and the carrier concerned - stranded
passengers due to travel on short-haul "low cost" carriers incurring an
average cost of €335.[13]

2.3.        Existing
passenger protection provided under EU law

13.         Historically the problem of
passenger protection has been:

·
Neither the air carriers nor the competent
authorities have been able to sufficiently ensure in advance that necessary
appropriate arrangements are in place to re-route flight only passengers and
assist them in the interim to provide ensure that their other rights are
respected (e.g. information, assistance, and reimbursement).

·
Passengers' rights under Regulation (EC) No 261/2004
have not been fulfilled by the failing carrier - in particular rerouting stranded
passengers and in providing assistance (such as accommodation). This has meant affected
passengers have therefore had to be self-reliant

2.4.        Partial
solutions and existing remedies

14.         Member States have used
different financial tools (e.g. reserve funds, insurance schemes and bank
guarantees) to implement their PTD obligations. Some have individually sought
to address the flight-only issue by extending the cover offered under their PTD
arrangements to flight-only ticket holders. In Denmark, the Rejsegarantifonden,
a fund which provides protection under this Directive was extended on 1 January
2010 to offer passengers the option of protection on all flights from Denmark on carriers established in Denmark.

15.         Scheduled Airline Failure
Insurance (SAFI) permits flight-only passengers in some States (such as the UK and Ireland[14]) to insure against some of the
costs of air carrier insolvency. This commercial scheme is available on an individual
basis and is also occasionally included in general travel insurance. SAFI covers the cost of rerouting if a passenger is stranded or a refund of the original
ticket cost where a passenger cannot recover it. SAFI does not usually cover
the cost of purchasing another ticket on an alternative carrier if a passenger
has yet to start their journey, or any additional costs incurred as a result of
delay or other non-refundable losses such as car hire. Cover is usually not
available to any carrier known to be in financial difficulty and can be
withdrawn from the market with little notice. Despite
this the insurance sector considers there is room for increased use of insurance
products like SAFI[15].

16.         Payment for tickets
purchased via IATA-accredited travel agents are held within a central payment
mechanism, known as the Billing Settlement Plan (BSP), before being passed to
the airline (this is usually monthly, but this period can be shorter). If a
member airline becomes insolvent, IATA may voluntarily refund passengers whose
payments have not yet been passed to the airline. Such protection is limited - only
applying to those passengers who booked within the payment period i.e. at most up
to 30 days before the flight. Passengers booking via an IATA travel agent
further in advance of travel would not obtain a refund as the money is no
longer in the BSP system.[16]

17.         In some Member States purchases
made by a credit card (and some debit cards) allow consumers to claim a refund
from the card provider in the event of the service provider's insolvency.
However, this refund is usually limited to the cost of the original ticket and
in some cases subject to a minimum amount[17].

18.         Finally, assistance has in
some cases been provided by other airlines who agree to offer "rescue
fares" at a nominal charge.

2.5.        Protection
of passengers has so far been limited

19.         Of passengers purchasing flight-only
tickets affected by insolvency between 2000 and 2010, some 76% had no form of
protection other than Regulation (EC) No. 261/2004. This legislation only came
into effect in 2005 and in practice has until recently rarely been applied in insolvency
situations.

20.         The majority of passengers have
had to seek a refund of their original ticket as a creditor of the failed air
carrier through national insolvency procedures with varying degrees of success.
Of the remainder, 14% were able to claim a refund via their credit card
provider, with a further 8%, who purchased their ticket from an IATA travel
agent, also able to obtain a refund. Only 2% of passengers held additional protection
such as SAFI.

21.         As to other costs all but
those who purchased SAFI are limited to the recovery of the cost of their original
tickets. However, even those passengers able to obtain a full ticket refund are
estimated to be only able to recover 60-70% of their eventual flight costs if they
decide to rebook, as the incremental cost of new flights is not covered. Stranded
passengers recovered more of their costs if they held SAFI, but not under other
schemes. Direct assistance to passengers was only provided by national
authorities in a very limited number of cases.

3.           THE
WAY FORWARD

22.         The proactive approach
taken at a national level in early 2012 by Spain and Hungary following the
suspension of operations by Spanair and Malév[18]
ensured that those insolvencies were better managed in comparison to similar
failures. Whilst inevitably passenger experience varied, on average it would
seem passengers were better informed, re-routed more quickly and provided with
more immediate levels of care/assistance.

23.         To identify what specific
measures might mitigate the impact of airline insolvency the Commission wrote
to Member States on 17 April 2012 requesting information on the approach they
each took. The conclusions of that exercise are outlined below.

3.1.        Applicability
of passenger rights in cases of airline insolvency and financial monitoring

24.         There was consensus the
most desirable outcome for a passenger was an air carrier being able to
continue operations without them having to care about any financial issues.

25.         Passenger rights, such as
care, re-routing and compensation, under Regulation (EC) No. 261/2004 are
applicable from the sale of a ticket and are unaffected by an airline's financial
position. There is an obligation on Member States regulatory authorities to
make full use of their existing powers under EU law to ensure air carriers take
the necessary measures in this regard. Regulation (EC) No 1008/2008 gives authorities
powers in relation to the financial fitness of airlines to ensure that the
latter will be in a position to meet their obligations under the consumer
acquis. A number of Member States, the UK and Spain, therefore use Regulation
(EC) No 1008/2008 to ensure the obligations of Regulation (EC) No 261/2004 are
incorporated in air carriers business practices.

26.         Article 9(1) of Regulation
(EC) 1008/2008 states that the licensing authorities of Member States must suspend
or revoke the Operating Licence of a Community air carrier if they are no
longer satisfied it can meet its actual and potential obligations for a
12-month period. Article 9(2) requires licensing authorities to make an
in-depth assessment of the financial situation of a carrier and to review its
licence when financial problems are identified, or insolvency or similar
proceedings taken against it. Ideally national authorities should have an
active on-going dialogue with such carriers to identify issues.

27.         The monitoring practices of
regulatory authorities vary from annual and biannual management account
reviews, to monthly evaluations of all the airlines licensed. The visibility
provided by monthly evaluation, balanced by increased examination when problems
are identified, would seem to offer the most benefit. Certain Member States
target resources where they consider there is the greatest risk to passengers based
on objective criteria including size and type of operation, geographical
coverage, past financial trading and provision of "life line"
services.

28.         Given the ability of an
insolvent carrier to meet its obligations may be limited, improved monitoring
would allow Member States authorities to intervene at an early stage. This
would permit licensing authorities to anticipate and manage the suspension of
operations and ensure passenger right obligations are upheld
while funds are still available. It is therefore essential to identify as
early as possible carriers with potential financial difficulties prior to them becoming
public – as beyond this point it is often too late to act – and engage with
them. For example, where the UK licensing authority has identified financial
concerns with an air carrier in some cases it has required contingency plans be
put in place as a condition of retaining its Operating Licence. This plan would
include how a "wind-down" of operations might be organised to protect
passengers (particularly those outside the EU) if required.

29.         There are a number of
benefits to this approach. Disconnecting the decision on when operations should
be suspended from the failure itself has allowed company staff to re-route
passengers with the active help of other airlines before the carrier is
declared insolvent. Such a solution efficiently ensures appropriate assistance,
rerouting and information is provided to passengers. Such planning also allows
an air carrier to concentrate its resources on repatriating passengers who may
otherwise be stranded away from home (and to limit the number of passengers
taken out).

30.         A number of Member States
drew the Commission's attention to the merits of increased collaboration. Their
view being that subject to commercial confidentiality an authority holding
information of concern could draw the attention of the Member State where that carrier is licensed to the possible need for closer monitoring. Similarly, a
licensing authority concerned with the possible insolvency of a carrier it licenses
could liaise with authorities in other Member States to allow them to make
contingency preparations.

31.         Some Member States stated
that the consequences of a possible failure could be mitigated by promoting
with the carrier a progressive phasing out of unprofitable and/or distant
routes/destinations where passenger assistance could be more difficult to
arrange. In critical cases national authorities have actively managed their
licensing function to ensure that a business was wound down at the lowest point
in the carrier's demand cycle. Although there is no optimum time for an airline
to cease operations, clearly the failure in peak season (for example at
Christmas or Easter) when there is a shortage of alternative capacity has a
greater impact on passengers than otherwise.

3.2.        Passenger
related measures

32.         Accurate and timely communication
is key to minimising the impact of insolvency on passengers, particularly those
stranded with limited access to communication. However, effective channels of
communication between a carrier and its passengers should be the norm
irrespective of the financial status of the carrier - established channels merely
making managing its failure easier.

33.         Some authorities have required
carriers to accept certain restrictions to mitigate passenger loss, for example
through the use of escrow accounts where ticket money (including airport
passenger charges) is independently held until a passenger has flown, reducing
the potential impact of a failure.

34.         Recent experience has shown
that passenger interests are better protected/managed, where the enforcement of
Regulation (EC) No 261/2004 and Regulation (EC) No 1008/2008 is undertaken
within the same national authority, or where such bodies proactively cooperate.
This approach should be promoted in that:

·
Good communication channels improve the handling
of affected passengers - particularly where different national authorities enforce
each Regulation.

·
The designated national enforcement body for Regulation
(EC) No 261/2004 can identify where passengers might be stranded (obtaining data
from airline), and establish a coordinated action plan involving relevant
stakeholders (other carriers, airports, Member States' own government
departments (e.g. foreign affairs). Airports have a particularly important role
in this process: providing information to stranded passengers and ensuring
facilities, such as toilets and catering, are available. This approach would
ensure a more efficient use of resources and reduce unnecessary duplication. In
this regard, the Commission's proposal for the revision of Regulation 261/2004
introduces an increased role for airports in the event of airline insolvency
(Articles 5(5) and 14 of the revised Regulation).

·
When an air carrier fails the designated national
enforcement bodies could provide relevant passenger information (e.g. on "rescue
fares"), either directly (e.g. on its own website) or through information
channels - media, airports, social media, airline associations or on a failed carrier's
own systems.

3.3.        Rescue
fares

35.         In July 2011, AEA, ELFAA,
IATA, and ERAA[19]
advised the Commission that their members could assist in rerouting stranded
passengers by making available existing spare (or possibly additional) capacity
when insolvency occurs. In such situations member airlines charge affected
passengers a nominal "rescue fare" sufficient to cover outgoings such
as taxes and the marginal costs of carriage. In a number of recent airline
insolvencies such rerouting has proven effective in assisting stranded
passengers. However, such a solution is dependent upon the willingness of
competitor airlines to offer such fares and the route concerned. Airline
associations have suggested this process could be improved by Member States
coordinating and even funding such rerouting. Airports, for example AENA[20] following the insolvency of
Spanair, have also assisted by offering reduced or waiving passenger related charges.

36.         To ensure maximum public awareness,
Member States concerned have communicated the availability of such "rescue"
offers via national government websites.

4.           conclusions

37.         The Commission is conscious
of the impact on passengers of airline failure and in particular on stranded holders
of flight-only tickets.

38.         The Commission would draw to
the attention of Member States and stakeholders that Regulation (EC) No 261/2004
already provides an appropriate legal framework for passenger assistance in
cases of insolvency. However, experience has shown that this Regulation can be difficult
to enforce where an air carrier is closing down its activities unless, using Regulation
(EC) No 1008/2008, a carrier has been required to plan ahead and put in place measures
to protect passengers should it lose its Operating Licence.

39.         The Commission has
identified that proactive engagement by national regulatory authorities can
significantly improve the situation for affected passengers. Therefore, before
deciding to propose new legislation in this area, the Commission considers it
essential to strengthen the licensing oversight of EU air carriers under
Regulation (EC) No 1008/2008.

40.         The Commission will therefore:

·
Encourage the national authorities competent for
the enforcement of Regulation (EC) No 1008/2008 and Regulation (EC) No 261/2004
to coordinate their actions to ensure appropriate monitoring of the financial position
of air carriers and where necessary adopt a coordinated approach to the
suspension of their operations to minimise the impact on passengers;

·
Encourage greater cooperation and sharing of
best practice and information between the regulatory authorities of Member
States;

·
Engage with EU air transport associations to
formalise the existing voluntary agreements on the provision of rescue fares
and their effective promotion;

·
Engage with EU airport associations to develop
voluntary arrangements to complement "rescue fares" for example
offering reduced airport charges in such situations to minimise the costs to
passengers;

·
Engage with industry to encourage the wider and
more systematic availability of SAFI or similar insurance products across the
EU;

·
Engage with IATA to encourage the adoption of a
service level agreement to ensure that the Billing Settlement Plan (BSP) is
used to ensure the largest possible number of passengers recover what they paid
before an air carrier is declared insolvent;

·
Encourage the wider and more systematic
availability of information about credit card refund schemes or similar
products in a Member State to allow passengers to protect themselves against
the risk of insolvency under national law.

41.         The Commission will closely
monitor the application of these measures. Two years after the adoption of this
text, the Commission will review their performance and effectiveness and assess
whether a legislative initiative is needed to guarantee the protection of
passengers in the case of airline insolvency.

[1]               This figure includes managed "wind downs", takeovers
and consolidations, which may have little or no passenger impact – such as BMI
in 2012.

[2]               Council Directive 90/314/EEC of 13 June 1990 on
package travel, package holidays and package tours OJ L 158, 23.6.1990, p. 59.

[3]               Regulation (EC) No 1008/2008 of the European
Parliament and Council of 24 September 2008 on the common rules for the
operation of air services in the Community (Recast).

[4]               RPA, LE and Yougov, 2010. DG Justice Impact
Assessment Annex 2 – Enhanced insolvency protection for consumers purchasing
airline tickets – a survey.

[5]               Steer Davies Gleave, Passenger protection in the
event of airline insolvency - final report – March 2011.

[6]               Viking Hellas

[7]               BMI, Cirrus Airlines, Spanair, Malév, Cimber
Sterling, Skyways, Air Finland and Windjet

[8]               Central case scenario: 1.8 million, equivalent to
0.07% of all return standalone trips.

[9]               Almost 777 million passengers were carried by air in
2011 in the EU-27. Source: Eurostat.

[10]             Steer Davies Gleave report, pp. 41 to 44.

[11]             Steer Davies Gleave report, p. 41.

[12]             These costs are an average estimated to have been
incurred by stranded and booked passengers. Note this average is significantly
increased by the high costs incurred by the large number of passengers stranded
in Latin America following the failure of Air Madrid.

[13]             Steer Davies Gleave report, pp. 46 to 52. See table in
paragraph 14 for cost composition.

[14]             Whilst the UK and Ireland are the largest markets, SAFI has significant market share in Germany, Holland, Sweden, and the Czech Republic. In 2000-2010, SAFI cost between €3-5 per ticket, covering 2% of passengers
impacted by insolvencies.

[15]             External study - Stakeholder workshop - 30 March 2011 –
  Brussels - http://ec.europa.eu/transport/passengers/studies/doc/2011_30_03_minutes.pdf

[16]             Debates on BSP's qualities and shortcomings can be
found on DG MOVE's website: http://ec.europa.eu/transport/themes/passengers/studies/doc/2011_30_03_minutes.pdf

[17]             In the UK purchases in excess of €125 (£100).

[18]             Transit passengers immediately affected Spanair -
22,000 passengers - Source BBC news, Malév - some 7000 passengers- Source Malév
press release 3 February 2012

[19]             AEA (Association of European Airlines), ELFAA (European
Low Fare Airline Association), IATA (International Air Transport Association)
and ERAA (European Regional Airlines Association)

[20]             Aeropuertos Españoles y Navegación Aérea