Too much pressure for low-cost airlines?

It may seem like Déjà vu for many in the airline industry when the news broke that another low-cost carrier had suspended flights and operations.

Harriet EdwardsIt may seem like Déjà vu for many in the airline industry when the news broke that another low-cost carrier had suspended flights and operations. Why is this happening and how can we help?

Cypriot airline Cobalt has suspended operations and cancelled all its flights after apparently failing to agree a deal with a new investor. This comes less than three weeks after Danish airline Primera announced their collapse, leaving thousands stranded in Continental Europe and North America.

Cobalt, which flew to 23 destinations in 13 countries, all in Europe, Russia and the Middle East was a relatively small operation with a fleet of two Airbus A319 and four Airbus A320. However, its steady expansion from inception in 2016, saw it become the second largest airline at its base at Larnaca International Airport by October 2018 with predictions to become the largest airline by Summer 2019.

Cobalt’s temporary suspension by the licencing authority comes amid financial difficulties, thought to have stemmed from the €65million that Cobalt were ordered to return to the European Commission after it was ruled their state aid package, following the collapse of Cyprus Airways, was deemed anti-competitive.

Primera meanwhile , had announced its financial woes on the one-year anniversary of Monarch’s collapse .Their over-ambitious expansion plans, the delayed delivery of their fleet of Airbus’ and increasing fuel charges, having rendered their low-cost business model cash poor. Despite operating since 2009 and flying to 97 destinations, Primera had insufficient capital to support the £17.78m spent maintaining and leasing older aircraft from National Airlines whilst awaiting their brand new fleet, set to fly for less than £100 per ticket, to North America and Canada.

Of the 3,000 airlines in operation, 500 are classed as low-cost carriers. Collectively they have transformed air-travel from an expensive luxury to an everyday affordable experience. However, everyday outlays such as fuel, direct operating costs, ground-handling fees and airport taxes have eroded airlines’ lean profit margin model meaning they cannot ride out short term ,unexpected costs.

A key unforeseen business overhead has been the swathes of EC Regulation 261/2004 claims, originally introduced to compensate passengers for cancelled or delayed flights. Unrelated to the original ticket price, passengers are compensated either €250, €400 or €600, determined only by the great-circle distance of the flight and will potentially be awarded to a claimant after three hours of delay. The total value of these claims currently being pursued is estimated to be in the region of $5 - $16billion, which many regard as penal bearing in mind that many delays are caused by situations beyond the carriers control and/or related to the aircraft safety.

There was not one sole reason why Monarch went into administration but rather multiple factors combining together into a perfect storm many of which were beyond the control of the airline, its staff, senior leadership team, CEO or shareholders. These included fuel costs, the constant fluctuation in exchange rates, the impact and uncertainty of Brexit, terrorist attacks in Turkey and Sharm el Shiekh leading to reduced passenger demand (Turkey) and a complete withdrawal on the advice of the government of its main winter route (Sharm el Sheikh). This created over capacity in other markets driving Monarch fares down in an attempt to remain competitive. All of these factors when combined with compensation claims for flight delays and cancellations disproportionate to the airfare paid, and unprecedented rise in gastric illness compensation claims within the Tour operating sector of the group of companies (Monarch Holidays), meant Monarch was no longer a commercially viable business and had to sadly declare administration.

The challenge currently faced by airlines is almost unique. No one can doubt the importance of global connectivity and the role that airlines serve as part of that. In addition to passenger-facing contingency funds, perhaps it is time for the Government and Regulators to cut airlines some slack and to intervene to alleviate some of the pressures that can be predicted, including revisiting what was intended and what is reasonable under EC Regulation 261/2004.

Harriet Edwards is a solicitor and Hayley Kiely is a legal assistant in the Aviation team.

For more information contact Andrew Krausz, Harriet Edwards or Hayley Kiely – andrew.krausz@weightmans.com, harriet.edwards@weightmans.com or hayley.kiely@weightmans.com

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