March 27, 2020

COVID-19 Aviation: Pro-passenger interpretation of EU Regulations would push airlines to bankruptcy

Airlines are offering the reimbursement of tickets that cannot be used due to COVID19 in the form of future travel vouchers. However, passengers, who will continue to fly after this pandemic, want the airlines to provide them with the refund in money, unaware that this will bankrupt the airlines, that they will not receive anything, and that flying will consequently be more expensive in the future.

Two days ago Eamonn Brennan (Director General of Eurocontrol) published a tweet comparing the air traffic of Tuesday, March 26, 2019 with that one of Tuesday, March 24, 2020. The image, available here, is shocking, and it probably represents the most explicit graphic of the freezing of the economy in the Eurozone suffered as a result of the interruption created by COVID19.

In Spain, one of the countries most affected by this crisis, we are witnessing a collapse that, on an economic level, will cause a more severe recession than the one in 2007, according to experts. While we trust that these forecasts are wrong, we must have faith that our Government, like all of the other members of the European Union, will react to protect our economy and help our society move forward.

It is worth remembering some data before continuing. First, the aeronautical sector contributes 113,100 million dollars to Spain’s GDP with (9.2% of the GDP), and employs  1.7 million people (directly and indirectly). Second, at the European level, the  contribution is 823,000 million dollars and then employment figure is 12.2 million people 1. Finally, we must also refer to the reports published by Standard & Poor's and Moody's, who warn us that the sector most affected by the coronavirus will be the aviation sector, due to travel restrictions and the low passenger demand  expected in the future.

Indeed, it is evident that the airline industry is one of the sectors that has suffered the most from the confinement imposed by this virus. Without income, their expenses are still countless, and dealing with them is especially hard at a time when margins have been greatly reduced due to the brutal market conditions—something that the 14 airlines that have gone bankrupt since January 2019 know very well.

As a result of the global spread of the COVID19, airlines are being forced to cancel thousands of flights every day, so there are millions of passengers who are not flying as they had planned. In these circumstances, returning money to passengers for unused tickets would be a “stress test” that many airlines could not pass, as they drown financially along the way—which negative cashflow also translates into a massive layoff of employees and, consequently, an even further paralysis of the economy.

So the questions to ask here are, what does the Regulation (EC) No. 261/2004 2('the Regulation') say about reimburse passengers for flight tickets that are not used? Is it really necessary to compel airlines to return the money?

The Regulation establishes in its article 8 the obligation to reimburse passengers for the price of their tickets within 7 days and in the manner indicated in its article 7.3, namely: by cash, bank transfer, check or, if the passenger agrees, with travel vouchers or other services. Therefore, a priori, the obligation is to reimburse –as preamble (13) of the norm generically orders-, and the way to do so may vary between the mentioned formulas, with reimbursement in the form of a voucher only being possible if the passenger wants it.

However, preamble (14) of Regulation (EC) No 261/2004 itself states that "As under the Montreal Convention, obligations on operating air carriers should be limited or excluded in cases where an event has been caused by extraordinary circumstances which could not have been avoided even if all reasonable measures had been taken."

In relation to the above, we must highlight that on March 18, 2020, the European Commission published the "Guidelines for the Interpretation of passenger rights in the context of the situation that is developing with COVID19, 3" where it was established by such European institution that COVID19 should be interpreted as an "extraordinary circumstance."

Therefore, it seems reasonable to ask whether this "limited" interpretation proposed in preamble (14) of the Regulation should be applicable to the refund policy imposed by article 7.3. In our opinion, and for the foregoing reasons, there is no doubt that the answer must be in the affirmative —despite the fact that the European Commission did not indicate so in the guidelines provided last week (and let's admit that the guidelines were basically a copy-paste of the text’s Regulation).

Firstly, it is evident that, as indicated by AESA 4 on its website, article 7.3. of the Regulation  was not conceived as an instrument intended to deal with a situation such as the one unleashed by COVID19. In fact, neither article 7.3 nor any norm has probably ever been designed by any legislator in anticipation  of a situation like the one we are currently facing, and this is for a very simple reason: this is the greatest pandemic of Humanity in the era of Globalization.

Secondly, airlines should not exclusively bear the damage unleashed by COVID19 because a transport contract is, by definition, a legal act in which two parties accept reciprocal conditions that grant them a series of obligations and rights, and there is no reason why the airline should be the only party that must carry the burden of the immense damage caused by an extraordinary circumstance such as COVID19— especially when the passenger does not suffer any consequential impairment a priori. It is worth highlighting at this time the good faith and social work that airlines have showcased since the beginning of the crisis. They have played a fundamental role in the repatriation of individuals to their countries of origin on flights dedicated to that purpose, have accepted greater risks than other industries, and are keeping up, and in many cases increasing, their transport of cargo so that vital global  supply chains do not stop.

Thirdly, it would not make sense from a transactional point of view because passengers will continue to travel once this pandemic is overcome, and they will be indifferent as to the payment method used to purchase new tickets. Indeed, the financial patrimony of passengers will be the same once they spend the money (or the voucher) in purchasing new tickets and, in the same way, the transaction would be neutral for the airlines because the money (or the voucher) would end up returning to its financial hands anyway. Therefore, from a financial point of view, it does not make sense to force airlines to reimburse in money, since the operation in both cases will be neutral for both parties within a reasonably short period of time.

Fourthly, the European Commission is not part of the Judicial Power of the Member States and, therefore, its interpretative guidelines can and must be corrected by the governments of the member States when its technical deficiencies could have devastating effects on the economy of the countries that make up the European Union.

Finally, causing the bankruptcy of the airlines would harm passengers themselves as many of them would then end up not receiving their money - in vouchers nor in any other way. Additionally, in an already foreseeable and difficult aviation market for the short-medium term (IATA predicts a 46% reduction), competition would decrease, which will make prices go up, and less profitable routes would be likely to be eliminated.

For the stated reasons, we understand that given the lack of clarity from the European Commission, the national governments of the European Union should use the “open door” contemplated in preamble (14) to solve the complex situation that is affecting the aviation industry when it comes to passengers’ requests for reimbursement of ticket payments in money.

Indeed, this is a golden opportunity for European governments to demonstrate to their citizens — especially in countries where the aviation industry is most important— that they are proactive in anticipating the problems that await us all around the corner if we take the path of passivity. Apart from any legal analysis, this is because governments must find solutions that protect the rights and interests of passengers and consumers without causing the disappearance of companies and jobs; especially when the solution is in the Law itself.

 1 Data published by Air Transport Action Group (ATAG), corresponding to 2018.

2 Regulation (EC) No. 261/2004 of the European Parliament and of the Council, of February 11, 2004, which establishes common rules on compensation and assistance to air passengers in the event of denied boarding and cancellation or long delay of flights, and derogates Regulation (EEC) No. 295/91 (hereinafter Regulation (EC) No. 261/2004).

3 Interpretative Guidelines on EU passenger rights regulations in the context of the developing situation with Covid-19. Available here: https://ec.europa.eu/transport/sites/transport/files/legislation/c20201830.pdf

4 "The European Regulation that protects the rights of civil aviation passengers (Reg. 261/2004) does not contemplate situations like the one we are living, with massive prohibitions and cancellations of flights, measures restricting the free movement of citizens between geographical areas and an infinite number of recommendations not to travel, all based on public health reasons aimed at containing the COVID-19 pandemic." Passenger rights in the face of the Coronavirus emergency situation, available at http://www.aesa.es