COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT

Accompanying the document

Proposal for a regulation of the European Parliament and of the Council

amending Regulation (EC) No 261/2004 establishing common rules on compensation and assistance to passengers in the event of denied boarding and of cancellation or long delays of flights and Regulation (EC) No 2027/97 on air carrier liability in respect of the carriage of passengers and their baggage by air

TABLE OF CONTENTS

1........... Introduction.................................................................................................................... 6

2........... Procedural issues and consultation of interested parties.................................................... 6

2.1........ Organisation and timing................................................................................................... 6

2.2........ Consultation and expertise.............................................................................................. 6

2.2.1..... External expertise........................................................................................................... 7

2.2.2..... Consultation process....................................................................................................... 7

2.2.3..... Consultation of the Impact Assessment Board................................................................. 8

3........... Context.......................................................................................................................... 9

3.1........ Description of the legal framework in place...................................................................... 9

3.2........ Developments since the entry into force of the Regulation............................................... 10

4........... Problem definition......................................................................................................... 12

4.1........ Nature of the problem................................................................................................... 12

4.2........ Underlying drivers of the problem.................................................................................. 13

4.2.1..... Insufficiently effective and uniform enforcement across Europe....................................... 13

4.2.1.1.. Difficulty in interpreting key aspects of the Regulation..................................................... 13

4.2.1.2.. Inconsistent and insufficiently effective sanctioning policies.............................................. 14

4.2.1.3.. Complex complaint-handling processes and insufficient means of individual redress......... 15

4.2.2..... Certain costs of the obligations imposed by the Regulation constitute strong disincentives for compliance 16

4.3........ Who is affected, in what ways and to what extent?........................................................ 20

4.4........ Likely evolution of the problem (baseline scenario)........................................................ 21

4.5........ Should the EU act?....................................................................................................... 23

5........... Objectives.................................................................................................................... 24

5.1........ Policy objectives........................................................................................................... 24

5.1.1..... General objectives........................................................................................................ 24

5.1.2..... Specific objectives........................................................................................................ 24

5.1.3..... Operational objectives.................................................................................................. 25

5.2........ Possible trade-offs between policy objectives................................................................ 26

5.3........ Consistency with other EU policies................................................................................ 26

6........... Policy options............................................................................................................... 27

6.1........ Possible types of EU intervention.................................................................................. 27

6.2........ Initial screening of the policy measures........................................................................... 28

6.3........ Description of policy options......................................................................................... 36

7........... Analysis of impacts....................................................................................................... 42

7.1........ Economic impacts......................................................................................................... 42

7.1.1..... Impact on enforcement................................................................................................. 42

7.1.2..... Impact on compliance cost............................................................................................ 46

7.1.3..... Impact on the functioning of the internal market and competition..................................... 51

7.1.4..... Impact on competitiveness of EU airlines....................................................................... 52

7.1.5..... Impact on administrative costs/burden........................................................................... 52

7.1.6..... Impact on public authorities........................................................................................... 53

7.1.7..... Overview of economic impacts..................................................................................... 54

7.2........ Social impacts.............................................................................................................. 55

7.2.1..... Impact on passengers/consumers.................................................................................. 55

7.2.2..... Impacts on employment................................................................................................ 59

7.2.3..... Impacts on fundamental rights....................................................................................... 60

7.3........ Environmental impacts.................................................................................................. 60

7.4........ Comparing the options.................................................................................................. 61

8........... Monitoring and evaluation............................................................................................. 63

ANNEX 1: Public consultation: participation................................................................................ 65

ANNEX 2a: Basic data and estimates......................................................................................... 67

ANNEX 2b: Breakdown of delays by cause............................................................................... 68

ANNEX 3: Passenger surveys on airline compliance with air passenger rights............................... 69

ANNEX 4: Unclear rights under Regulation 261/2004 and other EU consumer law...................... 71

ANNEX 5: Complaint handling by NEBs.................................................................................... 74

ANNEX 6: Competition with other modes and with non-EU carriers........................................... 77

ANNEX 7: Relation between Regulation 261/2004 and other EU and international law................ 79

ANNEX 8a: Underlying assumptions of the baseline scenario....................................................... 82

ANNEX 8b: Underlying assumptions of cost calculations............................................................. 84

ANNEX 9: Cost estimates........................................................................................................ 101

ANNEX 10: Preliminary screening of policy measures............................................................... 106

ANNEX 11: Preliminary screening of policy measures – detailed analysis of some measures....... 125

ANNEX 12: Administrative cost and burden calculations........................................................... 138

ANNEX 13: Summary presentation of the impact of measures and options on the compliance cost 140

ANNEX 14: Sensitivity analysis of the calculations..................................................................... 151

ANNEX 15: Underlying methodology for estimations................................................................ 153

ANNEX 16: Detailed table on comparison of options................................................................ 158

ANNEX 17: Comparison of passenger rights between transport modes..................................... 160

ANNEX 18: glossary of terms and acronyms............................................................................ 163

1. Introduction

The liberalisation of the European air transport market has generated significant benefits for consumers, including a wider choice of air services and intense price competition between air carriers leading to lower air fares.

In order to limit any potential negative impacts on service quality, a number of accompanying measures have been taken at EU level to protect air passengers. In particular, Regulation 261/2004[1] (hereinafter "the Regulation") introduced new rules on compensation and assistance in the event of denied boarding, short-notice cancellation, long delay and involuntary downgrading. Moreover, Regulation 2027/97[2], which translates the Montreal Convention[3] into EU law, contains provisions with regard to compensation where baggage has been mishandled.

2. Procedural issues and consultation of interested parties

2.1. Organisation and timing

The work on the impact assessment (IA) was started in April 2011. It was prepared by DG Mobility and Transport (MOVE) with the contribution of an Impact Assessment Steering Group in which the following Directorates General have participated: the Secretariat General, DG Health and Consumers, DG Justice, DG Competition, DG Enterprise[4].

The group has met three times, on 27 April 2011, on 26 June 2012 and on 23 July 2012 and was consulted by writing, on 22 November 2011, 26 July 2012 and 1 August 2012. DGs were invited to send their comments on the final draft IA report until 1 August 2012.

This proposal is part of the Commission's work programme for 2012 (ref. 2012/MOVE/010). It involves the revision of the above mentioned Regulations 261/2004 and 2027/97.

2.2. Consultation and expertise

The constant monitoring by the Commission of the functioning of EU legislation on air passenger rights has been accompanied by several external studies/consultations since 2009, the results of which are available on the Commission website.[5]

2.2.1. External expertise

An evaluation of the past application of the Regulation was carried out by the consultant Steer Davies Gleave and was finalised in February 2010[6]. The purpose of the study was to assess whether the measures taken since the Commission's Communication in 2007[7] have been successful in ensuring that passengers' rights are adequately protected, or whether other measures needed to be taken (see section 3.2, page 10).

In 2012, a further study was finalised by Steer Davies Gleave in support of the present IA[8], studying the current market situation and problems and assessing quantitatively the impacts of numerous policy measures in view to address these problems.

The Impact Assessment Steering group prepared the terms of reference for the study. Furthermore, the study was carried out in parallel with the Commission's work on its IA report, thereby directly contributing with data and estimates in function of the Commission's needs for its own report.

2.2.2. Consultation process

Participation

In the context of the present IA, a public consultation was carried out between 19 December 2011 and 11 March 2012 which focussed on questions with regard to a possible revision of Regulation 261/2004. 410 submissions to the consultation were received (see annex 1 and the Commission's website[9] for more detailed information on the consultation).

Given the large number of issues covered, the Commission instructed its consultant to undertake – complementary to the public consultation - individual interviews and consultations with 98 stakeholders selected in order to cover all stakeholder groups. These individual consultations allowed to deepen the issues with regard to the specific interests and know-how of the stakeholders concerned.

Finally, on 30 May 2012, the Commission and the European Economic and Social Committee co-organised a conference presenting the main results of the public consultation, and giving stakeholders the opportunity to respond to these results. The representative organisations that responded to the public consultation were invited to this conference. The presentations and the minutes of the conference can be found on the Commission's website[10].

It follows from the above that the Commission minimum standards for the consultation have been respected.

Main points of view

The consumer and passenger representatives mainly focused on poor compliance and inadequate enforcement, especially in the case of the rights to financial compensation in case of delay; they stressed that complaint handling and enforcement are not effective and that, despite the provisions within the Montreal Convention, passengers are insufficiently protected when baggage is mishandled. The European Disability Forum (EDF) highlighted some specific issues with regard to often limited compensation for loss/damage to mobility equipment and the prioritisation of assistance for disabled passengers and passengers with reduced mobility in situations of mass disruption.

Airlines and their associations mainly considered that the financial cost of the Regulation is excessive, particularly that airlines face unlimited liability for incidents which are not their fault (e.g. volcanic ash cloud crisis in April 2010). The airlines heavily criticised the consequences of the Sturgeon judgement – i.e. the right to financial compensation in case of long delay – on the grounds of alleged incompatibility with international law and excessive economic "burden".

Although in the majority of cases airlines and passenger representatives expressed opposing views, there were some areas of agreement – for example, the need for clarification of extraordinary circumstances (although not about how it should be clarified), or requiring airlines to provide more information to passengers regarding flight disruptions.

The views of the travel agent and tour operator associations were on many issues similar to those of the airlines, but with some notable exceptions such as in regard to the right to rerouting or to the use of individual segments of a flight ticket ("no show" policy).

The views of airports frequently lay somewhere between the airline/travel agent and consumer/government viewpoints. Airports and travel retailers expressed strong opinions with regard to specific issues of relevance to their own operations, but in the remainder of other issues usually did not state any opinion. Airports expressed particularly strong opposition towards the options that they be given any responsibilities under the revised Regulation, or that airlines be explicitly given the right to claim compliance costs from responsible third parties.

The national and sub-national authorities that responded to the public consultation expressed views on most issues which were similar to those of the consumer/passenger associations, but they were more sensitive to economic, budgetary or legal constraints and led to mixed opinions on some issues such as the scope of the Regulation, compensation for delay, enforcement and complaint handling. Most of the government respondents also agreed that action was required, and in the interviews some said that the Regulation needed to be significantly revised to improve its operation.

2.2.3. Consultation of the Impact Assessment Board

Following the submission of a draft IA report to the Impact Assessment Board (IAB) on 2 August 2012, the IAB sent its favourable opinion on 21 September 2012. The Board's comments were fully taken into account in the final IA report:

· The problem definition was strengthened by providing more detailed data and analysis on the reasons behind the insufficient application and enforcement of passenger rights; the report better explains the relations with the Montreal Convention and provides more precise references to the supporting evidence and to the annexes.

· The range of options was broadened, mainly by adding an additional policy option that is directly inspired from the EP's report mentioned in section 3.2 (page 11). Furthermore, the various policy measures were formulated more precisely and stakeholders' views with regard to various policy options and measures were clearly presented.

· The calculation of costs and benefits was strengthened by a better explanation of the underlying assumptions and methodology and by clear references to the relevant parts of the annexes. The analysis of consumer benefits was further developed.

· The section on future monitoring and evaluation was clarified by setting out the future evaluation arrangements and identifying relevant indicators.

3. Context

3.1. Description of the legal framework in place

Regulation 261/2004 became applicable on 17 February 2005 and, depending on the circumstances of the travel disruption, it requires air carriers to:

· provide passengers with assistance, such as meals, refreshments, telephone calls and hotel accommodation;

· offer re-routing and refunds;

· pay a flat-rate compensation of up to €600 per passenger, depending on the flight distance; and

· proactively inform passengers about their rights under the Regulation.

Note that the airline is not obliged to pay the financial compensation if it can prove that the cancellation or delay was caused by extraordinary circumstances. However, the obligations for care and assistance are upheld even in situations of extraordinary circumstances. The Regulation does not precisely define the concept of "extraordinary circumstances".

The Regulation is applicable to flights operated by EU and non-EU carriers departing from EU airports towards any airport and to flights operated by EU carriers and departing from a non-EU airport towards an EU airport. By application of air transport agreements between the EU and some third countries (e.g. Iceland, Norway and Switzerland), these countries are considered like EU countries for the purpose of the application of the Regulation. As modifications of the geographical scope of the Regulation would create problems of extra-territoriality and hence compatibility with international law, there were not further developed in this report (such measures are mentioned in annex 10, page 109).

The Regulation also requires Member States to establish national enforcement bodies (NEBs) to ensure the correct application of the Regulation (via the introduction of dissuasive sanctions into national law).

The rights of passengers under the Regulation are not to be confused with their rights under the Montreal Convention. As confirmed by the European Court of Justice, the rights in Regulation 261/2004 are of a different nature to those in the Montreal Convention: whereas the Montreal Convention is concerned with individualised damage to travellers, to be assessed on a case-by-case basis depending on the individual circumstances of the passenger (and where the burden of proof lays on the passenger), Regulation 261/2004 set up standardised entitlements (with regard to assistance and care) applicable to all passengers, regardless of their individual circumstances. Also note that the Montreal Convention has no provisions with regard to denied boarding or cancellation.

As regards mishandled baggage, under the Montreal Convention (and Regulation 2027/97), a passenger may be entitled to compensation in case of lost, damaged or delayed baggage (but with a limit of about €1200). However, airlines are not liable if they have taken all reasonable measures to avoid the damages or it was impossible to take such measures. Unlike Regulation 261/2004, Regulation 2027/97 and the Montreal Convention do not impose the establishment of enforcement bodies to ensure their correct application.

Air passengers' rights are further reinforced by more general EU law that is described in the relevant sections of this report, such as the Package Travel Directive 90/314 (see section 5.3, p.26) and Directive 93/13 on unfair contract terms (see section 6.1, p.27 and annex 7, p.78). The Commission proposal on alternative dispute resolution (ADR) and its relevance in the present context is explained in section 4.4 (p.21).

This IA report focusses on the protection of air passenger rights in case of disruption of their travel plans (implying a possible revision of Regulations 261/2004 and 2027/97).

3.2. Developments since the entry into force of the Regulation

In April 2007, the Commission issued a Communication on the operation of the Regulation, which concluded that substantial improvement to enforcement and compliance was required[11]. It identified that further work was also required in a number of areas, including the clarification of key terms.

The study by Steer Davies Gleave of February 2010 and mentioned in section 2.1.1 above has shown that the Commission and the Member States have made significant progress to improve the application of the Regulation since 2007: the activity of the NEBs has significantly increased both in terms of complaint handling and sanctioning. However, there still remain problems with regard to the insufficient compliance of air carriers with the Regulation and the ineffective and inconsistent enforcement in many Member States.

The 2010 study served as input to the Commission Communication of 11 April 2011[12] which reported on the varying interpretation being taken on the Regulation's provisions, due to grey zones and gaps in the current text, and the non-uniform enforcement across Member States. It further pointed towards the difficulties that passengers encounter in seeking to enforce their individual rights.

The Commission White Paper on Transport adopted on 28 March 2011 mentions among its initiatives for service quality and reliability the need to "develop a uniform interpretation of EU Law on passenger rights and a harmonised and effective enforcement, to ensure both a level playing field for the industry and a European standard of protection for the citizens".[13]

On 29 March 2012, the European Parliament (EP) adopted a resolution[14] on the functioning and application of established rights of people travelling by air, in response to the above mentioned Commission Communication. The EP believes that proper application of the existing rules by Member States and air carriers, enforcement of sufficient and simple means of redress and providing passengers with accurate information concerning their rights should be the cornerstones of regaining passengers’ trust. The EP regrets that the enforcement bodies set up by the Member States do not always ensure effective protection of passenger rights, to the detriment of air passengers. With regard to the upcoming revision of the Regulation, the EP asks the Commission to clarify the passengers' rights, in particular the notion of ‘extraordinary circumstances’ and the rules governing the provision of assistance and the right to redress and compensation.

Case law has also had a decisive impact on the interpretation of the Regulation and, hence its application. In the IATA ruling (C-344/04), the ECJ confirmed its full compatibility with the Montreal Convention and the complementarities between the two legal instruments. In case C-549/07 Wallentin-Herrman, the Court clarified when a technical problem in an aircraft cannot be regarded as an ‘extraordinary circumstance’. In the Sturgeon case (Joined Cases C-402/07 and C-432/07, further confirmed in the Joined Cases C-581/10 and C-629/10), the ECJ held that a long delay of at least three hours at arrival entitles passengers to the same compensation as in the case of a flight cancellation (with the same exceptions for extraordinary circumstances), since the inconvenience suffered by passengers is similar. Since the ECJ rulings are directly applicable and legally binding from the date that the relevant Regulation came into force, all the carriers are legally obliged to respect them.

Note that in its resolution of 23 October 2012 on passenger rights in all transport modes[15], the EP specifically asks the Commission to examine the effects of the Sturgeon judgement in the context of a revision of Regulation 261/2004.

Besides the issues linked to interpretation and enforcement of the Regulation, the volcanic ash cloud crisis of April 2010, when airspace in large parts of Europe was closed for several days, showed that the Regulation exposes the airlines to significant (and unlimited) costs and practical problems for assistance and rerouting in the case of such large scale events. This aspect was raised again during the snow crisis of December 2010.

In this context, this IA report analyses the extent and underlying reasons of the observed shortcomings of the current legal framework and assesses how these shortcomings could be overcome.

4. Problem definition

4.1. Nature of the problem

The wide consultation process, the external expertise mentioned above, the ex-post assessments (see section 3.2, page 10) conducted and the internal analysis used over the last years about the application of Regulation 261/2004 (and complementarily the Montreal Convention and Regulation 2027/97 in so far as they concern mishandled baggage) have shown that very often air passengers do not enjoy the rights to which they are entitled in case their travel plans are disrupted, i.e. in instances of denied boarding, long delays, cancellations or mishandled baggage.

As shown in annex 2 (p.66), the frequency of such disruptions is relatively low in "regular years" (i.e. without major disruptions like the ash cloud crisis in 2010): on average less than 1.5% of passengers are affected by delays of more than two hours and less than 1% by cancellations, but such events have a significant impact for the affected passengers and their frequency may suddenly increase during exceptional events.

Testimony by consumer organisations and NEBs in the course of the public consultation indicates that airlines are far from fully complying with the obligations under the regulatory framework and under Regulation 261/2004 in particular.

Surveys (see annex 3, p.68) carried out in Germany, Denmark and the UK[16] [17] suggest that in a large proportion of cases airlines are failing to offer disrupted passengers the assistance required under the Regulation:

· three quarters of the surveyed passengers were offered the rerouting to which they are entitled, but other care such as meals, refreshments and accommodation was offered in less than half of the cases;

· only a fraction of the surveyed passengers that were entitled to financial compensation did receive it.

Besides, the surveys show that the provision of information on disruption and the rights of passengers under the Regulation is poor: less than half of the affected passengers seem to be correctly informed about their rights as required by the Regulation.

Furthermore, testimony from consumer organisations indicates that passengers generally do not receive adequate compensation for mishandled baggage as foreseen by the Montreal Convention and Regulation 2027/97 (e.g. a quarter of the air transport complaints received by the European Consumer Centres relate to this problem). In particular, associations representing disabled passengers and passengers with reduced mobility (PRM) indicate that compensation for damage to or loss of their mobility equipment, which is subject to the limits stipulated by the Montreal Convention, is often insufficient to meet the cost of its repair or replacement given the high value of this type of equipment. It would appear that such passengers are not adequately informed about the option, which the Montreal Convention provides, to make at check-in a special declaration of interest in delivery at destination (which raises the limit of compensation payable up to the actual declared value of such equipment) or that air carriers request a high fee in accepting such a declaration.

4.2. Underlying drivers of the problem

When it comes to compliance with regulatory obligations, there are in theory two counteracting forces at work. On the one hand, enforcement (both sanctioning policy and individual enforcement) should give a direct incentive to airlines for compliance. On the other hand, costs induced by the Regulation that cannot be recovered in an appropriate manner could lead airlines to try to find ways to avoid granting passengers their rights.

The 2010 and 2012 external studies, the 2011 Commission Communication and the contributions to the public consultation confirm that the observed lack of compliance is encouraged by a combination of two factors:

(1) An insufficiently effective and uniform enforcement regime across Europe, and

(2) Certain costs of the obligations imposed by the Regulation constitute strong disincentives to compliance

4.2.1. Insufficiently effective and uniform enforcement across Europe

In the current situation, most stakeholder groups reported that the enforcement system put in place by the regulatory framework is not sufficiently effective and is not applied in a uniform manner across the EU. This situation not only reduces the protection of passengers' rights, but it also endangers the level-playing field between EU air carriers.

The stakeholder consultation, together with the studies and Commission internal analysis, allowed to identify three main problematic aspects with the current enforcement system:

(1) Difficulty in interpreting key aspects of the Regulation;

(2) Inconsistent and insufficiently effective sanctioning policies;

(3) Inadequate complaint-handling processes and insufficient means of individual redress.

4.2.1.1. Difficulty in interpreting key aspects of the Regulation

EU law – i.e. Regulation 261/2004 or general consumer law, mainly Directive 93/13 on unfair contract terms - contains a certain number of grey zones, creating legal uncertainty that hinders the proper enforcement of EU law leading to many disputes between air carriers and passengers. Air carriers are enticed to interpret measures in their favour while passengers may take an opposing view. The difficulties in interpretation have consequently led to the high number of referrals to the European Court of Justice (ECJ), where especially the rulings in the Wallentin-Hermann and the Sturgeon & Bock cases have had a significant impact on the interpretation, application and cost of the Regulation.

The lack of a definition of "extraordinary circumstances"

Airlines are required to pay financial compensation to passengers where a flight is cancelled - depending on when the passenger is informed of the cancellation - or where a flight is delayed by more than three hours at arrival. However, the airline can avoid paying compensation if it can show that the cancellation or delay was caused by “extraordinary circumstances which could not have been avoided even if all reasonable measures had been taken” (Article 5(3)).

The ruling of the European Court of Justice of 22 December 2008 in the case Wallentin-Herrmann v Alitalia (C549/07) has narrowed the meaning of the term "extraordinary circumstance" by ruling that a technical problem in an aircraft which leads to the cancellation of a flight is not covered by the concept of ‘extraordinary circumstances’ within the meaning of that provision, unless that problem stems from events which, by their nature or origin, are not inherent in the normal exercise of the activity of the air carrier concerned and are beyond its actual control.

As confirmed by most stakeholder groups during the public consultation, despite the Wallentin-Herrman ruling many stakeholders believe that the term is still unclear, both in relation to what circumstances can be considered extraordinary, and what type of ‘reasonable measures’ a carrier would have to take in order to meet the criteria for exemption from payment of compensation. As a result, it appears that different NEBs – and different national judges - adopt different interpretations, in part depending on their reading of the ECJ's judgement.

Regulatory complexity

As confirmed by the contributions of consumer groups to the public consultation, the application of passengers' rights is further hindered by the complexity of the Regulation. This is also refelected by the thousands of passenger inquiries received by the Commission's Europe Direct Contact Centre (EDCC) and which contain – apart from questions on non-compliance – many questions which reveal passengers' difficulties to understand their rights or how to enforce them. This relates mainly to the following issues:

· unclear rights: EU law - be it Regulation 261/2004 or general consumer law - remains vague with regard to the rights of passengers for a number of issues closely related to disruptions of a passenger's travel plans. These issues are further developped in annex 4 (p.70): rights of the passenger in case of a missed connecting flight, advance rescheduling, right of rerouting, "no show" policy, booking errors, tarmac delays, flight diversions.

· confusion about the NEB's role with regard to general enforcement (monitoring and sanctionning) and individual enforcement (complaint handling, possibly mediation);

· in view of the number of different time thresholds existing in the Regulation, problems in understanding how it applies to a particular case: different time thresholds for compensation (3 hrs), for care/assistance (2, 3 or 4 hrs depending on flight distance) and for the right to reimbursement (5 hrs).

4.2.1.2. Inconsistent and insufficiently effective sanctioning policies

The enforcement policy varies in terms of effectiveness across Member States (see also annex 5, p. 73): the various NEBs do not have access to the same level of resources, their sanction policies differ and they do not interpret various parts of the Regulation in the same way. Currently no formal coordination procedure exists between the national enforcement bodies (NEBs) and informal coordination (via the NEB network) seems to have reached its limits as informal meetings of NEBs lack the authority to take binding decisions.

During the public consultation, consumer groups mainly complained about the ineffectiveness of the enforcement policy, while airlines referred to a lack of consistency between national policies.

Moreover, Article 16(3) of the Regulation requires Member States to impose sanctions for infringements which are effective, proportionate and dissuasive, the intention being to create an economic incentive for air carriers to comply with the Regulation. However, the enforcement by the Member States often falls short of these requirements and the sanctions regime often does not provide an economic incentive for carriers to comply with the Regulation.

The identified problems generally do not arise from failings by the NEB, but from wider legal or administrative issues in the State concerned:

· legal or procedural impediments to imposition of sanctions, which means that the sanctions regime cannot provide an incentive;

· difficulties in either imposing or collecting sanctions in relation to carriers not based in the State, meaning that sanctions cannot provide an incentive for these carriers to comply with the Regulation; and

· sanctions which are too low to provide an economic incentive for carriers to comply with the Regulation, taking into account that only a very small proportion of passengers impacted by an infringement are likely to complain to the NEB.

Note that enforcement as improved over time, but not enough to overcome all shortcomings (see section 3.2 with regard to previous evaluations). The option for the Commission to act against Member States is limited by the vague definition of the NEBs role in the Regulation. Moreover, in the absence of any information obligations on their monitoring and sanctioning activities, the provision of information from the NEBs to the Commission remains irregular and lacks detail (despite improvements thanks to regular informal contacts in recent years).

Finally, the provisions of the Montreal Convention with regard to mishandled baggage are not enforced because no specific enforcement body is foreseen neither by the Montreal Convention nor by Regulation 2027/97. Affected passengers are entirely dependent on the policy and goodwill of air carriers and the in-court and out-of-court means of settlement or have to rely on private travel insurance (where available).

It follows that, in the absence of a credible and dissuasive enforcement policy, air carriers are not encouraged from granting air passengers their rights especially if their competitors are not doing so.

4.2.1.3. Complex complaint-handling processes and insufficient means of individual redress

As confirmed by contributions from consumer associations to the public consultation, individual means of redress for passengers are limited and the complaint-handling process can be complex:

· Inadequate complaint handling procedures: many passengers face difficulties in submitting a complaint to an air carrier, either because the contact details of the air carrier are difficult to obtain, the process of filing a complaint is unclear or the air carrier does not respond within a reasonable time period to the submitted complaint or its answer is insufficiently detailed. Similar shortcomings are reported with regard to the NEBs; in addition, in particular passengers are often confused by the role of NEBs with regard to individual enforcement (compared to general enforcement).

· Inadequate means of court and out-of-court dispute settlement: small claims procedures in civil courts can be slow and expensive and judges often lack relevant experience in aviation law. Many passengers are therefore discouraged from pursuing their claims in court. But out-of-court procedures – either via NEBs or via alternative dispute resolution mechanisms (ADR) – only exist and apply to air transport in some Member States. Note that the latter issue is already being addressed by another EU initiative (see page 22).

As the current system does not provide adequate tools to passengers to enforce the Regulation independently, passengers are being discouraged from claiming their rights in situations where they are entitled to them. This can be seen in the low claim rate for financial compensation in case of cancellation or long delays (where financial compensation is not automatic but needs to be claimed). Indeed, data from airlines indicate that only between 5 and 10% of passengers entitled to compensation do actually claim it. This low "claim rate" can be explained by two factors: first, the low awareness of passengers about their rights, also because reportedly airlines do not always correctly inform their passengers about their rights; and second, the above mentioned difficulties linked to complaint handling seem to discourage many passengers from even claiming their rights.

4.2.2. Certain costs of the obligations imposed by the Regulation constitute strong disincentives for compliance

The public and targeted consultations have shown that:

(3) Airlines are not able to bear or to price in costs and risks (of assistance/care and compensation) in certain situations:

(a) in extraordinary events of long duration, which are beyond the airlines control, the obligations are potentially of an unlimited duration;

(b) in certain small-scale operations (with small aircraft on short distances), the costs of the Regulation increase disproportionately to the air fare;

(4) Certain aspects of the financial compensation (which comes on top of care and assistance) have a strong disincentivizing effect;

(5) Airlines are liable for care and compensation where disruptions are due to third parties, but the latter do not get economic incentives to take measures to reduce the frequency and/or the severety of such disruptions.

As shown below, all these elements imply that, in current circumstances, airlines cannot recover or insure in an appropriate manner certain costs induced by the Regulation. This acts as a strong disincentive for compliance.

Note that annex 6 (p.76) shows that the competition of air carriers with non-EU airlines could constitue an additional but limited disincentive to comply for the directly concerned carriers. But for reasons of extra-territoriality, Regulation 261/2004 is not applicable to flights operated from third country airports by carriers from third countries.

(1) Airlines are not able to bear or to price in costs and risks (of assistance/care and compensation) in certain situations

Unlimited liability with regard to some obligations in extraordinary events of long duration

While financial compensation is not due in situations of extraordinary circumstances, Regulation 261/2004 does not fix a limit in time to the cost of assistance and care to be provided by the air carrier, even in situations which are beyond its control. This unlimited and unpredictable liability complicates the airlines' financial planning as it is currently impossible to insure and therefore may constitute a risk to their financial stability.

The experience of the ash cloud crisis in April 2010 has shown that, although the cost of the Regulation remains limited in "regular" circumstances, it can quickly take disproportionate dimensions for example when an event takes place that causes mass disruption.The cost of the right to care, especially the accommodation costs for several nights, and the cost (and the difficulty of organisation) of rerouting via alternative transport modes (if available) have been significant. If the Regulation had been fully complied with during the crisis, it would have increased airlines' combined costs by an estimated €960 million (which is roughly 1.5 times the expenses for care and assistance in a "regular" year, and this within a period of less than a week). See annex 9 (p.100) for an overview of the costs linked to the ash cloud crisis.

The frequency of such events is very low and consequently, air carriers are not able to estimate its probability and to adequately price this risk into their fares, although a single such event will require considerable resources. Therefore, where such an event occurs, air carriers may not have available sufficient resources to cope with the care and assistance to so many passengers. Moreover, it is unlikely that airlines could find insurance to cover against business disruptions during such events which could impact flights throughout Europe for a prolonged period and which would lead to exceptionally large claims. The association of insurers CEA stated that it would not be possible to offer insurance to cover the risk of these events, because their frequency and severity are difficult to properly assess and because the limited scope of the aviation insurance market means that it would be difficult to maintain an adequate insurance capacity without charging very high premiums.

The public consultation has confirmed widespread dissatisfaction from both, consumer groups and airlines, with the application of passenger rights during the ash cloud crisis. Airlines complained about the practical and financial difficulties of implementing the Regulation in such an event, while consumer organisations complained about insufficient compliance by air carriers. The cost of the expected care and assistance could sometimes become a multiple of the value of the transport service the passenger originally acquired and the organisational and/or financial capacities of airlines (and airports) were overtaken by the huge number of stranded passengers in such a short time period; the situation led to frustration on both sides, airlines and passengers, with regard to a situation which could not have been foreseen at the time the Regulation was adopted.

Certain costs of care/assistance are out of proportion with regard to the carrier's revenues for certain small-scale operations

As shown in annex 9[18] (p.100), the impact of the Regulation's obligations varies by air carrier type. Despite some data limitations[19], data provided by some of the interviewed air carriers indicate the main reasons behind these differences. For example, charter carriers, which mainly carry package travellers, typically do not cancel flights, but may then experience long delays for such flights – therefore, the compliance cost for charter carriers is primarily on delays (e.g. hence a stronger impact of the Sturgeon judgement than for other carrier types). The absolute compliance cost is similar for low-cost and traditional scheduled carriers but, because low-cost carriers' tickets are typically of a lower value, the compliance cost as a percentage of carrier revenue is much higher for the low-cost carriers. This low-value-ticket effect also applies to regional carriers but, in addition, the absolute compliance cost is also higher for regional carriers. This small-scale effect observed for the large category of regional carriers is even more pronounced when looking at the smallest types of operations, i.e. short-distance flights with small aircraft.

When the Regulation was introduced in 2004, the specific impact that its provisions could have on small regional operations was not taken into account. However, as shown in annex 9 (p.100), the incremental cost[20] of the obligations of the Regulation appears to be heaviest for the regional carriers[21]. There are clear indications in the data analysed by the consultant that the absolute and relative cost of the obligations under Regulation 261/2004 increases the smaller the scale of the operations. Data analysis and stakeholder contacts point towards a higher cancellation rate that increases mainly accommodation costs and financial compensation and which is due to numerous underlying reasons, for example the use of smaller aircraft which are more vulnerable to adverse weather, the high frequency of take-offs and landings which makes small regional aircraft more vulnerable to technical defaults or the fact that regional carriers typically have small aircraft fleets and therefore less replacement options than bigger carriers.

The higher costs translate into higher prices which can be significant enough to discourage passengers from travelling by air to make that journey or from travelling at all. Passengers do not necessarily value these rights as high as the price increase that they involve. This may have a negative impact on regional accessibility as these carriers often serve islands or other remote areas which are very dependent upon air transport.

The main cost driver for the regional carriers is the cost of accomodation to be provided to stranded passengers (which is part of the category "care" in the table on page 102 of annex 9). Given the low value ot tickets on very short routes (e.g. less than 250 km), the provision of accomodation can easily imply a cost higher than the ticket value.

(2) Disincentivizing effect of certain aspects of the financial compensation

Resistence from air carriers against financial compensation has increased since the Sturgeon judgement, which extended compensation payments from cancellations to long delays, and the Wallentin judgement, which extended compensation to many cases where the flight disruption is not due to an airline's commercial decision (e.g. technical defaults). In the public consultation, the airlines confirmed their view with regard to compensation, often referring to the cases where compensation went beyond the value of the ticket. Note, however, that consumer groups are opposed to a reduction in compensation levels.

The financial compensation can have a disincentivising effect in two ways:

1. The Sturgeon judgement has fixed a one-trigger time threshold of 3 hours for compensation in cases of delay. However, many delays cannot be resolved within the three hours fixed in the judgement and this – in combination with the next point – strongly discourages airlines from complying, as suggested by airlines and their associations during the consultation. In addition, as shown in section 7.2.1 (on p.55), a short time threshold may increase the number of flight cancellations.

2. The standardised compensation in the Regulation serves to compensate a loss of time which is common to all passengers (individual damage suffered beyond this common element is governed by the conditions for compensation specifed in the Montreal Convention)[22] . However, the amounts fixed in the Regulation[23] can in many cases go beyond the value of the damage (i.e loss of time) incurred by passengers as established by economic studies[24]. This aspect plays a significant role in discouraging airlines from granting passengers their rights, especially with respect to the short time thresholds for compensation for delay (Sturgeon) and in combination with the restrictive definition of extraordinary circumstances (Wallentin).

(3) Lack of economic incentives for third parties to take measures to reduce the frequency and/or the severity of flight disruptions.

The application of Regulation 261/2004 has shown a lack of transparency with regard to the liability of the different actors in the industry chain. The party responsible for flight disruptions is not always clearly identified and the cost of passenger rights is mostly borne by the air carriers, with limited possibilities of recourse against a possible responsible third party. Although most of this cost will ultimately be borne by the passenger, in ticket prices, such system may fail to give sufficient incentives to third parties to address the origins and the severety of the flight disruptions and further reduces the incentive on airlines to comply with these rights.

Article 13 of the Regulation does not preclude air carriers from claiming costs from third parties where they are responsible for the disruption. However, in itself, it does not provide any such right and to date airlines state they have not been able to claim successfully against third parties. The main third parties, who could be responsible for disruption, are principally airports, air navigation service providers (ANSPs) and ground handlers. But in practice it is very difficult to claim against these bodies in view of legal obstacles in contracts or national law (e.g. airport conditions of use generally only allow claims in very exceptional cases which are difficult to prove; airports and ANSPs are usually government bodies and may have State immunity from claims; ground handlers are protected by the IATA Standard Ground Handling Agreement, which means that in most circumstances airlines cannot claim costs from them[25]).

Note that, during the public consultation, most stakeholders argued in favour of such a form of "burden sharing", but the airports were clearly opposed to any measure that would shift part of the compliance cost to them.

Table 1 : Synoptic table of problem and drivers

Problem: Lack of compliance with EU regulatory framework

Driver 1: Insufficiently effective and uniform enforcement across Europe || Driver 2: Certain costs of obligations imposed by the Regulation act as disincentives for compliance with passenger rights

Difficulty to interpret key aspects of Regulation Inconsistent and insufficiently effective sanctioning policies Inadequate complaint-handling processes and insufficient means of individual redress || Strong disincentives in specific situations (extraordinary events of long duration, small-scale operations) Certain aspects of financial compensation discourage compliance Lack of incentives for responsible third parties

4.3. Who is affected, in what ways and to what extent?

Various categories of actors are affected by the identified problems:

1. The citizens/passengers who are the beneficiaries of the transport services and of the passenger rights granted by the Regulation: as mentioned above, in many cases they are not granted the rights to which they are entitled.

2. The air carriers which provide the transport services and which are due to respect air passengers' rights: the obligations flowing from air passenger rights incur costs for the airlines and which become disproportionate in certain circumstances.

3. The (at least 27) national enforcement bodies which are responsible for ensuring the correct application of the Regulation: inconsistent policies between them affect the level of protection of the passengers and the level-playing field between airlines. The enforcement of passenger rights requires human and financial resources that weigh on national budgets.

4. Airports – first, because the flight disruptions usually take place in airports; second, because airports sometimes provide care and assistance to passengers, where airlines fail to provide it – for whatever reason.

4.4. Likely evolution of the problem (baseline scenario)

In the baseline scenario – which assumes unchanged policy – the scale of the problems is not expected to evolve significantly (except for out-of-court means for individual redress). Overall, it is not expected that over time airlines will get more incentives to comply with the air passenger rights regulation. The underlying root causes are not expected to significantly change over time.

Grey zones in the Regulation

Some of the regulatory grey zones in the Regulation may be addressed through judgements issued by the Court of Justice. Indeed, the ECJ has been seized on more than 20 prejudicial questions with regard to Regulation 261/2004, many of them still outstanding. But in most cases, these judgements concern one particular issue, leave open others and take considerable time to be decided. In addition, although in legal terms these judgements address the lack of clarity in the text of the Regulation, it would be clearer for passengers, airlines, and enforcement bodies if the obligations of the Regulation were clear in the text.

General enforcement (monitoring and sanctioning)

Studies of the enforcement of the Regulation (see section 3.2) have shown gradual improvements over time, but this improvement has been slow. In the initial years after the Regulation took effect, the Commission had to intervene in particular because some Member States had not yet set up the processes to do so (for example, penalties had not been introduced into national law). However, almost 7 years after it took effect, many Member States still do not enforce the Regulation effectively and therefore it is likely that some Member States will continue not to do so. In addition, constraints to public finances in many Member States may result in reductions in staff at enforcement bodies, which may reduce the effectiveness of enforcement.

Individual enforcement (complaint handling)

The possibilities of individual redress are expected to improve under the impulse of general consumer legislation.

On 29 November 2011, the Commission proposed a Directive on alternative dispute resolution for consumer disputes (Directive on consumer ADR)[26] and a Regulation on online dispute resolution for consumer disputes (Regulation on consumer ODR)[27]. These proposals are now being discussed in the European Parliament and in the Council.

Under the proposed Directive on consumer ADR, Member States shall ensure that all contractual disputes between a consumer and a trader arising from the sale of goods or the provision of services can be submitted to an ADR entity. This also includes disputes between passengers and air carriers. The proposal ensures that passengers will be able to find information on the competent ADR entity in the main commercial documents provided by the air carrier.

The proposal for a Regulation on consumer ODR aims at establishing a European online dispute resolution platform ("ODR platform"). The proposed ODR Regulation establishes a network of ODR facilitators for the single EU-wide ODR platform, in the form of an interactive website which offers a single point of entry to consumers and traders who seek to resolve a dispute. Consumers and traders will be able to submit their complaints through an electronic complaint form which will be available on the platform’s website in all official languages of the EU. The platform will check if a complaint can be processed and seek the agreement of the parties to transmit the complaint to the ADR scheme which is competent to deal with the dispute.

Disincentives from the cost of the legislation

The incremental compliance cost of the legislation on airlines is expected to increase more or less in line with airlines' revenues. At unchanged legislation (baseline scenario), the incremental cost of the legislation on airlines will increase from €0.9 billion on average over 2007-2009 to €1.7 billion in 2025, mostly due to traffic growth.

The baseline scenario was calculated on the assumption that the disruption rates would remain on their average levels of 2007-2009. It follows that the number of disruptions remains in line with traffic growth. With respect to specific traffic categories, it was assumed that on the basis of recent trends, for intra-EU flights of less than 1,500km, only low cost carriers (LCCs) would experience growth. In addition, given the long-term trends towards passengers arranging their own travel itineraries, charter traffic was assumed not to grow on any category of route. For other market segments, future demand was estimated using Airbus’ Global Market Forecast (see annex 8b for a more detailed description of the underlying assumptions). The proportion of passengers claiming compensation for cancellations and delays ("claim rate") is assumed to slowly increase over time under the influence of information campaigns, the work of commercial claim services and, potentially in some Member States, introduction of provisions allowing collective action to claim compensation on the part of a group of consumers. Total cost therefore increases slowly as a share of airline revenue, from 0.6% over 2007-2009 to 0.7% in 2025.

Almost the entire compliance cost is carried by airlines, although the biggest part will ultimately be borne by the passengers through higher fares. Indeed, as the estimated cost variations would apply to all airlines operating in the EU, we need to refer to price elasticity of demand on a supra-national level; demand is estimated to be quite inelastic (estimates of -0.6 to -0.8 are reported[28]), therefore airlines should be able to transfer most of the cost variations via fare variations to their passengers.

Costs are also incurred by Member States, due to the requirement to establish and fund national enforcement bodies (NEBs). The cost for Member States is estimated to increase from approximately €27 million now to €46 million by 2025, which is in line with traffic growth (the underlying assumption is that the number of complaints increases in the same proportion as air traffic).

Extraordinary events of long duration

In 2010, delays and cancellations increased as a result of the volcanic ash crisis which led to a complete closure of airspace across northern Europe. A number of other events including particularly bad winter weather and strikes by air traffic controllers (the latter leading to the complete closure of Spanish airspace in December) added to this event in 2010. Whilst 2010 was a particularly bad year there may be exceptional events in the future.

As there has been no event comparable to volcanic ash before, we do not know the likelihood of such type of events. Note that even if such an ash cloud event were to be repeated, better understanding of the problem being reflected in changes to safety regulations mean that this would now be less likely to cause the complete closure of airspace. Therefore, the probability that the Regulation would generate an exceptional economic cost to a comparable extent to that it generated in 2010 is low but cannot be further quantified.

Third party responsibility

Although Article 13 of the Regulation states that carriers are not prevented from claiming the costs of compliance from responsible third parties, there are limited legal means for airlines to claim against the third parties most likely to be responsible for disruption (e.g. airports, ANSPs). Some airlines are nonetheless trying to do so through national courts; at the time of writing this report these cases had not been decided or were unsuccessful.

4.5. Should the EU act?

According to Article 4 of the TFEU, and without prejudice to Article 3(2) of the same treaty and to the Court of Justice of the European Union's case law, EU action regarding passenger rights, as part of the common air transport policy, has to be justified. In the present case, it is therefore necessary that the subsidiarity principle set out in Article 5(3) of the Treaty on the European Union is respected. This involves assessing two aspects.

Firstly, it has to be assessed if the objectives of the proposed action could not be achieved sufficiently by Member States in the framework of their national constitutional system, the so-called necessity test. In the present case, there is limited scope for Member States to act alone to protect consumers, as the Air Services Regulation 1008/2008[29] does not allow scope for them to place additional requirements (other than those specified in the Regulation) on Community air carriers seeking to operate intra-Community services.

Secondly, it has to be considered whether and how the objectives could be better achieved by action on the part of the EU, the so-called “test of European added value". Most of the problems identified above refer to divergences of application/enforcement of Regulation 261/2004 across Member States which weaken passengers' rights and the level-playing field between air carriers. The EU level appears to be the appropriate level to address these problems in order to ensure uniform passenger rights across all Member States (and across third countries effectively taking part in the single air transport market via international agreements).

Indeed, addressing regulatory gaps and inconsistencies in EU law in an uncoordinated manner generates more fragmentation and exacerbates the problem. Only coordinated EU intervention can contribute to the completion of the internal air transport market by solving these problems. Article 100(2) of the TFEU allows the European Parliament and the Council to lay down appropriate provisions for air transport.

5. Objectives

5.1. Policy objectives

5.1.1. General objectives

In light of the problems identified in section 4 above and pursuant to article 100(2) of the TFEU, the general objective of this initiative is to promote the interest of air passengers by ensuring that air carriers comply with a high level of air passenger protection during travel disruptions, while ensuring that air carriers operate under harmonised conditions in a liberalised market.

5.1.2. Specific objectives

Based on the root causes of the problem identified in section 4, the general objective above can be translated into more specific objectives:

1. To ensure effective and consistent enforcement of passenger rights across the EU by:

1.1. Clarifying definitions and key principles underlying passenger rights and simplifying the rights;

1.2. Ensuring effective and consistent sanctioning policy;

1.3. Ensuring effective complaint–handling processes and means of redress for passengers

2. To reduce the disincentivising effects on airlines of certain costs of the Regulation by:

2.1. Ensuring that airlines obligations with regard to passenger rights cover risks that are limited in time and/or in size (so as to allow for potential insurability);

2.2. Ensuring that financial compensation in certain situations does not translate into decisive disincentives for compliance;

2.3. Ensuring that third parties are incentivised to address the causes of the travel disruptions for which they are responsible.

Table 2: correspondence between the objectives and the above described problems

Identified problem || General objective

Insufficient compliance with passenger rights || Ensuring compliance of airlines with a high level of air passenger protection

Drivers || Specific objectives

Insufficiently effective and uniform enforcement across Europe || Difficulty to interpret key aspects of the Regulation (grey zones), regulatory complexity || Ensure effective and consistent enforcement || Clarify definitions and key principles, simplify rights

Inconsistent and insufficiently effective sanctioning policies || Ensure effective and consistent sanctioning policy

Inadequate complaint-handling process || Ensure effective complaint-handling

Disincentives for compliance with passenger rights || Strong disincentives from costs in specific situations (extraordinary events of long duration; small-scale operations) || Reduce disincentives for compliance || Ensure that airlines' obligations cover risks that are limited in time and/or size.

Certain aspects of financial compensation discourage compliance, especially for long delays || Make financial compensation less desincentivizing, especially for long delays

Lack of economic incentives for responsible third parties || Introduce economic incentives for responsible third parties to address disruptions

5.1.3. Operational objectives

The defined specific objectives can be translated into operational objectives which will be useful for future monitoring and evaluation (see section 8):

In relation with the objective of effective and consistent enforcement

1. Reduce the number of prejudicial questions;

2. Ensure that airlines can expect to be sanctioned for similar infringements across the EU;

3. Reduce the number of disputes between passengers and airlines.

In relation with the reduction of the disincentivizing effects on airlines of certain costs of the Regulation

4. Ensure the predictability of the cost of the Regulation's obligations;

5. Ensure that the total amount of compensations paid, especially for long delays, does not take a disproportionate share of the total cost of compliance;

6. Ensure that third parties share their part of responsibility.

5.2. Possible trade-offs between policy objectives

The two specific objectives correspond to the two main drivers for insufficient compliance with air passenger rights. As both, a stronger enforcement and a reduction of the disincentives flowing from certain costs, contribute to improving compliance, a trade-off between these policy objectives is possible, putting either more weight on the first or on the second, or finding a balance between both policy objectives. This trade-off will be translated into the selection of the policy options (see section 6.3).

Note that this also implies a trade-off between the general objective of protecting passenger rights and the specific objective of reducing the disincentivising effects of certain costs of the Regulation. Indeed, ensuring that the costs induced by the Regulation can be limited for airlines in specific situations (see objectives 2.1 and 2.2), where this is not the case now, may weaken in some cases certain passenger rights. It follows that passengers' rights may be limited in specific circumstances (e.g. in extraordinary events of long duration) while they are being reinforced in others (e.g. better enforcement; clarification of rights). The assessment of the options will pay special attention to these trade-offs.

5.3. Consistency with other EU policies

The Package Travel Directive 90/314[30] is currently under review. DG JUST, which is in charge of the Directive, and DG MOVE will ensure the consistency between both revisions.

On some issues, passengers that have acquired the air transport as part of a travel package enjoy the protection of both Regulation 261/2004 and Directive 90/314 on package travel. These rights do not conflict: appropriate clarifications already exist in Regulation 261/2004[31]. And as the Commission already clarified on several occasions (e.g. in informal guidelines), passengers cannot enjoy double compensation under both pieces of legislation; to ensure clarity, this could be explicitly mentioned in the text of a revised Regulation.

It must be stressed that consistency between both pieces of legislation does not necessarily imply that "flight only" travellers must enjoy exactly the same rights as "package travellers". It is rather the aim of EU law to better protect "package travellers" as package travel involves a very complex and atypical contractual relationship, involving several service providers, covering longer time spans, with significant costs often pre-paid in advance. Ensuring consistency between both pieces of legislation means avoiding any conflicts of law. The most important common issues where consistency must be ensured are the following:

· Advance rescheduling: the Regulation is not clear at present what rights and obligations apply with respect to schedule changes, which would generally be notified in advance to passengers. In contrast, for package travel, Article 4(5) of the Package Travel Directive is clear that the passenger has a right to an alternative or a refund if the organiser makes a significant change to the agreed package. A clarification of this right in Regulation 261/2004 (as recommended in the present report) would clarify that "package travellers" and "flight only" travellers have similar rights in this respect.

· Extraordinary events of long duration: the revisions of both pieces of legislation will be coordinated in order to ensure that any limits to liability of operators in such events would be consistent between the Package Travel Directive, Regulation 261/2004 and passenger right regulations for other transport modes.

· Insolvency: a notable difference between "flight only" travellers and package travellers is the protection provided to the latter in case of insolvency of one of the parties performing the contract. No such protection exists for "flight only" travellers. Such protection flows again from the underlying principle that a better protection of package travellers is necessary as purchasing a package holiday involves several service providers where usually the one providing transport is not the result of an informed choice by the traveller and where bigger amounts have to be advanced than when buying only the air ticket[32].

6. Policy options

6.1. Possible types of EU intervention

The Commission has envisaged three possible interventions at EU level to address the problems identified above, but which were discarded at an early stage of the assessment for the following reasons.

Some air carriers requested a repeal of the Regulation. Note that in such event, other applicable law, in particular the Montreal Convention and Directive 93/13 on unfair contract terms would remain in force (see annex 7, p. 78). A repeal of Regulation 261/2004 would lead to a substantial reduction in the level of protection of passengers' rights and would thus be inconsistent with the general objective of ensuring a high level of protection of passengers.

The second discarded policy option is the introduction of an industry fund that would take charge of all expenses linked to care and compensation. Although it would present the advantage of breaking the link between cost and application of passenger rights in individual cases and therefore of reducing the incentive not to comply, it also presents many disadvantages that appear to be outweighing its advantages:

- an industry fund would not be able to take charge of all types of passenger rights. For example, rerouting can be organised the most efficiently by the airline itself;

- although a fund could, theoretically, pay out compensation, the latter would lose its incentivizing effect on the air carriers to reduce disruptions;

- there may be difficulties in applying such fund to non-EU air carriers;

- the administrative cost linked to such a fund would increase the total compliance cost.

Note that in option 1 presented below, a similar idea in the form of optional insurance was taken up, but it was limited to care to avoid the mentioned lack of efficiency with regard to rerouting and compensation. As this type of insurance already exists, it was assumed that building on something already existing would be more promising than inventing a new industry fund, the setting up of which would cause additional costs. But the idea of an industry fund was partly taken up in options 3 and 4 to cover accommodation costs in extraordinary events of long duration, for which only limited insurance coverage exists.

The third discarded policy option is strict implementation of the existing, unchanged Regulation coupled with guidance material and voluntary commitments from industry and enforcement bodies. This policy option has been preferred by some stakeholders (e.g. some air carriers) over a revision of the Regulation. However, existing voluntary agreements with the air carriers and between the NEBs[33] and guidelines issued have not allowed lifting all the problems identified above and, coupled with the interpretation provided by the ECJ rulings, they do not leave much scope for further progress via non-regulatory measures.

A proposal of the European Commission to update the current EU regulatory framework is therefore the only form of EU intervention that could address all root causes of the identified problems.

6.2. Initial screening of the policy measures

The stakeholder consultations and interviews identified a broad set of individual measures having the potential to address the individual drivers mentioned above.

In a first stage, all the policy measures were submitted to a preliminary screening, thereby discarding those that did not bring sufficiently high benefits in comparison to their costs and disadvantages. The following criteria were used for this initial assessment:

· Stakeholder opinion

· Legal and practical compatibility (in particular, the compatibility with international law)

· Effectiveness of the measure to achieve its objective

· Complementarity with other policy measures

The policy measures have also been assessed in light of the subsidiarity and proportionality principles. Annex 10 (p.105) gives an overview of the initial screening of the policy measures; it also show the main positions expressed in the public consultation for each of the assessed measures.. The most important (retained and not retained) policy measures are analysed in detail in annex 11 (p.124).

The following table gives an overview of the retained policy measures. The last column also shows which measures are retained in which policy option. The construction of the policy options is explained in the next section.

Table 3: retained policy measures

Specific policy objectives || Main policy measures || Content of policy measures || || Options

1 || 2a || 2b || 3 || 4

Ensure effective and consistent enforcement of passenger rights across the EU

Clarify definitions and key principles, simplify rights || Clearly define extraordinary circumstances (2 alternatives retained) || 1. Clearly define extraordinary circumstances and provide a non-exhaustive list of such circumstances in line with the strict interpretation provided in the Wallentin judgement and hence excluding many technical defaults (if such list is included in the Regulation it can be amended by implementing/delegated act) || X || X || || X || X

2. Clearly define extraordinary circumstances and provide a non-exhaustive list of such circumstances but extend their scope such that most technical defaults would be covered by the definition (and therefore not give rise to compensation) – the definition would thus deviate from today's definition as interpreted by the Walletnin judgement in order to cover all events outside the direct control of the air carrier. || || || X || ||

Clarify the right of rerouting (2 alternatives retained) || 1. Clarification of today's notion of "comparable transport conditions". If the air carrier cannot reroute on its own services on the same day, it must consider other carriers or other transport modes in so far as seats are available at reasonable cost. || X || X || X || X ||

2 . Rerouting with other carriers or modes would have to be provided if not possible on own services within 5 hours[34], and even for delayed passengers (at present, rerouting is only offered for denied boarding and cancellation). || || || || || X

Simplify right to care (2 alternatives retained) || 1. Consistent time thresholds for assistance at delays: instead of different thresholds depending on flight distance (as today), meals and refreshments would have to be provided for delays of more than 2 hours for all flight distances and for all events (delays and for passengers awaiting rerouting in case of denied boarding or cancellation) || || X || X || || X

2. Replace current rights for meals/refreshments/accomodation by an obligation imposed on airlines to offer passengers optional insurance to cover such care || X || || || ||

Further clarification of rights || - Missed connecting flight: clarify right to care and right to compensation - Mobility equipment: inform PRM on the possibility – under Montreal – to make (without fee) a declaration of special interest to declare the actual value of mobility equipment - Rescheduling: clarification that rescheduling is similar to cancellation/delay if it is notified less than 2 weeks before the initially scheduled time. When the change in schedule is of more than x hours (x is equivalent to the delay triggering the right to compensation and depends on the option), than rerouting must be offered and compensation may be due. - Tarmac delays: clarification that Regulation applies also to delays on the tarmac: right to free drinking water after 1 hour, right to disembark after 5 hours[35] - "No show" policy: clarify – in line with the Directive on unfair contract terms - that passengers could use the return journey of a ticket even if they had not used the outward journey, but without a more general right with regard to the different segments within the inbound or outbound journeys. - Airports to provide basic information on passengers' rights (notices, posters) || X || X || X || X || X

Ensure effective and consistent sanctioning policy (3 alternatives) || 1. Better flow of information between NEBs and Commission || - NEBs to inform COM on their sanctioning policy - Clarification of the role of the NEBs (sanctioning versus complaint handling) - Proactive policy by checking manuals and ground handling agreements || X || || || ||

2. Formal coordination of NEBs by the Commission || - NEBs to inform COM on their sanctioning policy - Clarification of the role of the NEBs (sanctioning versus complaint handling) - Proactive policy by checking manuals and ground handling agreements - Use of implementing or delegated acts for decisions over common interpretations and common actions (comitology) - Right for COM to require investigation by one or several NEBs (especially for multi-country cases) || || X || X || X ||

3. Centralisation in an EU enforcement body || - Setting up of an EU enforcement body of which NEBs would be local branches - The EU enforcement body would have the right of investigating and of sanctioning infringements - Proactive policy by checking manuals and ground handling agreements || || || || || X

NEBs to check on compliance with Montreal on baggage issues || The NEBs (or the EU enforcement body) would also ensure the enforcement of the provisions of the Montreal Convention and Regulation 2027/97 with regard to mishandled baggage; this means that they would monitor the terms and conditions of the airlines and sanction where necessary (this measure only covers general enforcement, it does not include the handling or the mediation on individual complaints on baggage issues which is being taken care of by the EU proposal on ADR) || X || X || X || X || X

Ensure effective complaint-handling || Definition of minimum complaint handling procedures || - Air carriers to provide information on complaint handling procedures (e.g. contact addresses, e-mail) - Maximum time periods for airlines to respond to complaints - Compel air carriers to recognise Property Irregularity Report (PIR) as baggage complaint under the Montreal Convention || X || X || X || X || X

EU centralised body for complaint handling || The same EU body as mentioned above would centralize all passenger complaints || || || || || X

Clarify exchange of info between ADR and NEB taking into account the existing ADR proposal || - Building up on the new ADR Directive, the Regulation would clarify that mediation is the role of the ADR while NEBs concentrate on general enforcement, complaints should therefore primarily be addressed to ADR bodies (where NEBs and ADR are different bodies, the NEB will inform about the respective roles) - The NEBs would offer their expertise to the ADR and investigate complaints where necessary - ADR would provide NEBs with information on complaints useful for general enforcement || X || X || X || X || X

Reduce disincentives for compliance

Ensure that airlines' obligations cover risks that are limited in time and/or in size || Increase predictability of costs in exceptional events of long duration (3 alternatives) || 1. Obligation on airlines to offer optional insurance for care (as above) || X || || || ||

2. Time limit on accomodation in events of long duration (2 sub-options: 3 or 4 nights - with a maximum amount per day per passenger). PRM would not be impacted by this limitation. || || X || X || ||

3. No limit on care but where an extraordinary event lasts longer than a predetermined time limit (2 sub-options: 3 or 4 nights), an industry fund would reimburse airlines within the limits of its finances. Such an industry fuind would be organised on a national or EU level and would be financed via a levy on every airline ticket. || || || || X || X

Reduce compliance cost for small-scale operations (3 alternatives) || 1. Obligation on airlines to offer optional insurance for care (as above) || X || || || ||

2. Derogation for small-scale operations with regard to accomodation (small-scale operations would be defined as flights with aircraft with less than 80 seats over distances of less than 250 km[36]) || || X || X || ||

3. No change on care and assistance || || || || X || X

Make financial compensation less disincentivizing, especially for long delays || Increase time threshold for compensation for delay || Instead of 3 hours, the right to compensation would arise after a delay at destination of at least 5 hours[37] || X || X || || ||

Adjust lump-sum compensation, especially for short distances || Increase progressivity of compensation amounts from short to long distances (€75 for 0-750km, €150 for 750-1500 km, €300 for 1500-3500 km, €500 for more than 3500km)[38] || X || 0/X || 0/X || ||

Introduce economic incentives for third parties to address disruptions || Involve all players of the air transport chain in the provision of passenger rights || - Airports to set up contingency plans in cooperation with airlines and other airport users - Possible recourse against third parties: national and contractual provisions cannot stand in the way of claiming redress from third party responsible for disruption || X || X || X || X || X

6.3. Description of policy options

In a second stage, the retained policy measures were packaged into policy options that constitute viable policy alternatives for achieving the above defined policy objectives.

Four policy options are considered by combining the different policy measures retained after the initial screening. The four have in common a certain number of policy measures. What distinguishes them is the chosen trade-off between stronger enforcement and adjusted economic incentives for airlines. As shown above, a heavier cost is an incentive for airlines for minimising costs of compliance and trying not to grant passengers their rights. A stronger sanctioning policy is an incentive for compliance. Therefore, in light of the general objective of promoting the interest of air passengers, for options where the cost imposed by the obligations of the Regulation is higher, the enforcement policy must be stricter and better coordinated, and vice versa.

Such a selection is considered because a full focus on enforcement without addressing the economic disincentives would require very considerable resources to be devoted to the enforcement bodies. To avoid such public cost, different trade-offs are considered to mitigate the public resources needed while keeping a high level of protection for passengers.

(1) Focus on economic incentives (moderate change of enforcement): under option 1, enforcement is better coordinated, mainly via a better stream of information between the NEBs and the Commission. The option mainly focuses on the reduction of costs by replacing some of the obligations with regard to care (i.e. refreshments, meals, accommodation) by the obligation for airlines to propose optional insurance to passengers at the moment of booking. Other obligations such as rerouting are left under the responsibility of the airlines as an insurance company could not organise the rerouting as efficiently. Also compensation is left to the airlines as it plays an incentivizing role. This option is inspired by the opinions expressed by many airlines that a greater role should be given to the insurance market although this option goes not as far as proposing a complete replacement of the current passenger rights by insurance (which would be incompatible with the stated policy objectives).

(2) Balancing stronger enforcement policy with economic incentives: under option 2, enforcement policy is reinforced via a strong coordination of NEBs with a central and formal coordinating role for the Commission. The option mainly focuses on reinforcing care and assistance while additional costs flowing from this are compensated by adjustments in the global amount of financial compensation to be paid. Option 2 modifies this global amount by reducing the frequency of compensation payments via two variants:

(a) Either by increasing the time threshold after which the passenger has a right to compensation in case of delays from the current three hours to at least five[39];

(b) Or by extending the scope of "extraordinary circumstances" to include most technical defaults.

For both variants 2a and 2b, the report assesses whether an additional adjustment of the lump-sum compensation amounts would be useful to reduce the disincentives in specific situations and to further focus on the specific problems identified for small-scale operations (stronger progressivity of amounts in function of flight distance).

Moreover, option 2a implies an increase of the one-trigger delay threshold for compensation from the current three hours to at least 5 hours. A further subvariant of option 2a was assessed to determine whether a further fine-tuning of this option could add value. The subvariant implies multiple delay thresholds for compensation depending on the flight distance: 5 hrs for flights shorter than 1500km, 9 hrs for 1500-3500km and 12 hrs beyond 3500km[40]. This subvariant was tested in order to take into account the practical difficulties of long-haul flights to deal with delays (e.g. time needed to fly in spare parts or replacement aircraft). At the same time, there is a rationale of proportionality in linking the compensation to the duration/distance of the flight as long delays appear to be more frequent for long-haul flights than for short-haul flights.

Option 2 is a mix of policy measures including elements from various stakeholder groups. The stronger enforcement policy and the clarification of a certain number of rights is backed by consumer groups. Airlines are opposed to the compensation in case of long delay but it was included in this option to avoid a weakening of passenger rights contrary to the policy objectives; therefore it was rather considered how the parameters of compensation in case of long delay could be modified to take into account the financial concerns of the airlines. Finally, a time limit on the liability of airlines in cases of extraordinary events of long duration is clearly an airline request (we consider two sub-options: a limit of 3 days or 4 days), but its impact on passengers is being mitigated by accompanying measures such as a quicker rerouting or the introduction of contingency planning.

(3) Focus on enforcement: option 3 entirely focusses on stronger enforcement and clarifies existing passenger rights to render their application more effective. The compliance cost is not expected to decrease under this option, but it adds a measure where air carriers must designate a responsible for each airport that would have the power to take decisions with regard to care and compensation. Such an obligation of means would be easy to check by the enforcement bodies and is expected to ensure a better application of passenger rights "on the spot".

Option 3 is inspired from those elements of the EP resolution mentioned above (page 11) which refer to Regulation 261/2004 or to baggage issues. However, the EP resolution could not be translated directly into a policy option as its elements did not respond to all the policy objectives set in the present impact assessment. Therefore, a number of elements were added to ensure that the option would stand as a full policy alternative in view of the set objectives (e.g. the common elements mentioned in table 4, but also an industry fund to tackle the problem of unlimited liability in extraordinary events of long duration). Furthermore, while the EP resolution calls for an inclusion of compensation for long delays into the text of the Regulation, it remains vague with regard to the time threshold that would apply and only refers to the need to take into account that such compensation could trigger more cancellations. In option 3, the judgements of the Court in the cases Sturgeon (compensation for long delay) and Wallentin (technical defaults) are integrated as such into the Regulation. Note that a policy measure that would introduce a compensation for delayed baggage was discarded because of its likely incompatibility with the Montreal Convention (see annex 10, on p.122).

(4) Centralised enforcement: option 4 entirely focuses on a powerful and centralised enforcement policy which must counteract the negative incentives from the compliance cost: a central EU enforcement body is therefore part of this option. Like option 3, option 4 also introduces the principle of an industry fund to ensure continued care in cases of mass disruption[41].

Option 4 is inspired from the contributions of consumer groups to the public consultation: centralised enforcement and an obligation of rerouting in case of long delays were requests by some consumer groups and are therefore integrated into this option. Note, however, that an obligation to have airline representatives in every airport as in option 3 is not included in this option because, under this option, enforcement is directly ensured by a centralised and stringent sanctioning policy.

As a number of alternative policy measures were discarded already in the preliminary screening, the policy options have some common features such as:

· the clarification of a number of issues (e.g. rerouting obligations, care during tarmac delays, passenger rights for missed connections, etc.);

· better claim and complaint handling by both, the air carriers and the national bodies in charge of individual complaints (information to be provided on complaint-handling procedures; maximum time periods for airlines and such bodies to respond to claims and complaints; coordination and cooperation between NEBs and future ADR bodies under the new ADR Directive);

· involvement of other market players: enhanced possibility for recourse of airlines against third parties responsible for disruptions; setting up of contingency plans among airport users).

· Note that option 1 does not include a specific measure to address the problems of regional carriers as the replacement of care obligations by optional insurance would already tackle one of the main problems of regional carriers in this context (i.e. the provision of accommodation). Option 2 includes derogation from the accommodation obligation with regard to operations on short routes with small aircraft. Options 3 and 4 do not include a specific measure for this kind of operations as those options mainly focus on the enforcement of existing rights.

Table 4: overview of main differences between the policy options

|| Option 1 || Option 2a || Option 2b || Option 3 || Option 4

Improved enforcement || "Light" coordination || "Medium" coordination || "Medium" coordination + stronger enforcement via obligation of means || "Strong" coordination

How? || - Better flow of information between NEBs and Commission - clear distinction between general enforcement and complaint handling – NEBs to support ADR for the latter || Formal and centralised coordination via Commission: - Commission can take initiative to request investigations by NEBs or to coordinate common action of several NEBs - A formal committee can decide on common procedures (e.g. transfer of complaints, exchange of information, etc.) - clear distinction between general enforcement and complaint handling – NEBs to support ADR body for the latter || In addition to option 2: Obligation for airlines to have a representative in each airport competent for taking decisions with regard to care and compensation || EU enforcement body: - NEBs would be subsidiaries of the central body - clear distinction between general enforcement and complaint handling – EB to support ADR for the latter

Economic (dis)incentives || Low cost || Medium cost || High cost || High cost

Care || - Optional insurance for passengers || - Time limit on accommodation in extraordinary events of long duration[42] - Partial derogation for small-scale operations || - Industry fund for extraordinary events of long duration || - Industry fund for extraordinary events of long duration

Compensation payments || Right of compensation for delay of more than 5 hours || Right of compensation for delay of more than 5 hours (and a subvariant with longer delays depending on flight distance) || Right of compensation for delay of more than 3 hours || Right of compensation for delay of more than 3 hours || Right of compensation for delay of more than 3 hours

Definition of extraordinary circumstances in line with Wallentin judgement || Definition of extraordinary circumstances in line with Wallentin judgement || Larger scope for extraordinary circumstances || Definition of extraordinary circumstances in line with Wallentin judgement || Definition of extraordinary circumstances in line with Wallentin judgement

Reduced lump-sum amounts of compensation with focus on short distances || Two sub-variants: with or without reduced lump-sum amounts of compensation with focus on short distances || Two sub-variants: with or without reduced lump-sum amounts of compensation with focus on short distances || Unchanged lump-sum amounts for compensation || Unchanged lump-sum amounts for compensation

Common features || - Clarification of rights for missed connecting flights, advance rescheduling, mobility equipment, tarmac delays and "no show" policy - Enforcement body for existing rights in case of mishandled baggage - Minimum claim handling procedures for airlines - Sharing of the compliance cost with third parties

The full details of the policy options can be read from table 3 and from the table in annex 10 (p. 105).

7. Analysis of impacts

The analysis of the impacts has been divided into:

· Economic impacts;

· Social impacts;

· Environmental impacts.

The assessment of impacts is supported by quantitative data provided by the external study and/or by academic research where necessary. Annexes 8a and 8b provide a detailed description of the underlying assumptions of the external study. Given the strong focus on enforcement and more appropriate cost recovery mechanisms for airlines, the core impacts of this initiative are economic and social (consumer impact) while environmental impacts are mostly indirect and sometimes negligible. Summary tables of the assessment of impacts are presented throughout this section.

7.1. Economic impacts

7.1.1. Impact on enforcement

a. Enforcement policy

The options differ with regard to the level of coordination between national enforcement policies:

In option 1, a better stream of information from the NEBs to the Commission on their enforcement actions is very useful to fulfil its monitoring and coordinating role; reports by the NEBs give the Commission a direct insight into the activities of the NEBs and allows it to take action when NEBs fail to fulfil their obligations or when NEB actions need coordination.

In options 2 and 3, in addition to the above, consistency between the enforcement policies of the various Member States would be improved as the room for interpretation of the existing rules is reduced thanks to their clarification (see below) and thanks to a stronger coordination between NEBs via a formal coordinating role for the Commission and a formalisation of the existing network of NEBs which could then take binding decisions in the context of implementing acts ("comitology")[43]. Divergent interpretations between NEBs can more easily be prevented.

In addition, option 3 includes an obligation for airlines to designate a representative in every airport served by the airline, who would be entitled to take the necessary decisions with regard to care and assistance. The measure was strongly supported by consumer groups, airports and NEBs, but opposed by airlines. A major advantage is that compliance with this obligation would be relatively easy to check by the NEBs and the presence of such entitled person increases the chances that passengers receive the rights to which they are entitled (indeed, a frequent passenger complaint is that they cannot find an airline contact when stranded in an airport). However, the measure has some drawbacks:

- it is a rather costly measure (estimated at €340 million NPV); indeed, given the financial significance of the decisions they would be making, the staff would probably need to be better qualified and hence better paid and trained than standard passenger service staff. The relative cost of such staff would be higher at airports served at low frequencies by the air c