Articoli
19/01/2018
Restructuring & Turnaround

The management of air carrier slots in a financial crisis. The Monarch Airlines case

Two recent judgments in the UK (judgement of the Administrative Divisional Court dated 15/11/2017[1] and the appeal judgement dated 22/11/2017[2]) have contributed to the ongoing debate on the criteria and arrangements concerning the management of slots by an air carrier in the event of suspension or revocation of its operating licence, in accordance with Articles 9 and 10 of Regulation 1008/2008 where a financial crisis has put at risk the financial viability of the carrier itself.

The financial default of several Community carriers (namely: Alitalia-SAI, Air Berlin and Monarch Airlines) has raised a number of delicate legal issues, namely (i) whether it is legally possible to prevent the “freezing” of the slots held by these carriers until such time as the financial difficulties have been overcome (even if the slots are not being used in practice), anticipating, in other words, the effects of the Article 10, par. 5(c) of Regulation 95/93, or (ii) if, on the other hand, the non-use can only be justified a posteriori, that is at the end of the traffic season for which the slots in question have been assigned, pending financial reorganisation of the air carrier in accordance with Article 9, par. 1, Regulation 1008/2008.

It should be noted that the so-called “freezing” of slots – assumption not covered by the EU law – is a concept different from the revocation or the reallocation due to the non-use or the non-compliant use thereof, in accordance with the “use it or lose it” rule. This different concept cannot be considered to be triggered, if it is intended to link the “freezing” to the suspension or revocation of the operating license.

Regulation 95/93 was developed in a period of the strong expansion of the European air transport sector. The work of the EU institutions was more focused on promoting the development of routes rather than competitiveness and certainly not on the situation of companies affected by a (more or less transitory) financial crisis.

However, the ever-increasing difficulties of the air transport industry, exacerbated by the economic crisis that arose at the end of the last decade, have inevitably shifted the attention of the competent authorities to the need of protecting those carriers in financial difficulty, even if this implies the loss of an operating license, particularly where the difficulties are of a temporary nature and there is a reasonable prospect of recovery to normal business activities.

Despite the absence of specific laws addressing this issue, the EU institutions have published, with a specific Commission Communication on State aid for rescuing and restructuring non-financial companies in crisis[3], an act defining the conditions under which State aid for rescuing and restructuring of non-financial undertakings in difficulty may be considered compatible with the internal market, pursuant to Article 107(3)(c), of the Treaty on the functioning of the European Union, thereby implicitly endorsing the measures taken by the individual Member State to help companies in difficulty.

A first hint of the situation in question is given in the Worldwide Slot Guidelines of IATA, where a specific discipline of slot management belonging to air carriers that have lost their operating licence[4] has been included since 2008, in paragraph 8.16.

According to the IATA standard, in case of bankruptcy (or similar insolvency procedure), the representatives of the airline can start a dialogue with the competent authorities to discuss their future intentions regarding the allocation of the slots held and, in view of this peculiar contingency, the coordinator can “freeze” these slots, pending the restoration of the operating license of the airline or a formal acquisition of the company’s activities by third parties.

Another case of management of slots owned by carriers in crisis for which freezing is expected pending their financial restructuring, is given by the specific rule in force in Italy. Even if EU law on slots does not address this issue, in Italy it is regulated by an Italian Aviation Authority (ENAC) circular that, following the abovementioned IATA principles, establishes that the carrier can obtain the “freezing” of the slots, if within the period of thirty days from the suspension of the license it “initiates contact” with the Coordinator, in order to “inform him about the future use of the slots” [5].

Once the carrier has established such contact, the Coordinator “blocks the withdrawn slots, pending the restoration of the license or the legal assignment of the carrier’s activity, up to a maximum of two consecutive traffic season”.[6]

Furthermore, the ENAC circular provides that the situation of the carrier must be re-examined by the Coordinator within thirty days from the suspension of the operating license. In any case, if, within the same period (thirty days from suspension), “the carrier does not come into contact with the Coordinator and if the legal position of the carrier is not clear, the slots can return to the pool for the subsequent reassignment” [7],[8].

Turning to the judgements of the UK courts, what they address, in a nutshell, is the interpretation to be attributed to the definition of “air carrier” in accordance with the applicable law in terms of allocation and management of slots.

In the case at hand, Monarch Airlines Limited challenged the decision with which the coordinator (“Airport Coordination Limited – ACL”) denying them the allocation of slots related to the air traffic season IATA Summer 2018. Monarch entered in extraordinary administration on the 2nd of October 2017 and it was ordered by the competent aeronautical administrative authority (British Civil Aviation Authority – CAA) to cease any operational activity, with the provisional suspension of the Air Operator Certificate, pending the opening of the procedure for the suspension of the operating license.

The carrier asserted that it was authorised to get the assignment of slots for the 2018 IATA Summer season in certain UK airports, in accordance with Article 8 of Regulation 95/93, as it was still formally defined as an air carrier with a valid operating license, which used 80% of the slots assigned during the previous scheduled period, thus in substantial compliance of the use it or lose it rule.

Moreover, Monarch argued that it wanted to transfer those slots to other airlines, in exchange for less valuable slots, thus cashing-in on the value of the slots according to a practice existing already for some time in the British airports.

ACL argued that Monarch was not allowed to claim slots related to the 2018 IATA Summer season because the carrier was no longer an operational airline, with regards to the definition contained in Article 2(e) of Regulation 95/93, and that a decision on the allocation requested should be postponed until after the conclusion of the procedures initiated by the CAA to revoke the operating license to Monarch itself. ACL also claimed that, in any case, it was not obliged to allocate slots to other airlines in order to facilitate any agreement between them and Monarch for the exchange of slots.

Based on these assumptions, the Divisional Court dismissed Monarch’s appeal stating that ACL was not obliged to allocate the slots for the 2018 IATA Summer season to Monarch itself, as this obligation would not have been in compliance with the aims pursued by the Regulation 95/93, as well as by the UK regulation on the issue of licenses (Licensing Regulation), since Monarch could no longer be considered an airline under the Regulation 95/93, and, as a result, the slots related to the 2018 IATA Summer season owned by Monarch should have been re-introduced into the slot pool.

Essentially, the Divisional Court based its decision on the assumption that the definition of an “air carrier” under the Article 2 of Regulation 95/93 has two essential elements, namely: (i) a firm in real business and (ii) in possession of a valid operating license. If one of these two essential elements is missing, according to ACL, the carrier does not fall within the scope of the field of application of Regulation 95/93 and, as such, it is not entitled to ask for the application of the rules therein provided.

Therefore, the decision of the Divisional Court appears to be based on substantive judgments, since it placed at the basis of its decision the circumstances of fact alleged by ACL, that Monarch at the time of the petition (i) did not have aircraft or pilots, (ii) did not have concrete prospects for future progress in its institutional activity as an air carrier, and that, in such circumstances, the slots regulation would not require the ACL to allocate slots to that company.

The Divisional Court, in other words, based its decision on the assumption that the objectives of the slots regulation would be frustrated if the coordinator had agreed to assign slots to a “deceased” airline, formally insolvent and incapable of future operations as an air carrier and at a time when the competent national authority was, in compliance with the obligations under EU law, about to revoke or suspend the operating license.

On appeal the UK Court of Appeal reached a completely different conclusion. The Court of Appeal considered that it cannot be deemed acceptable that a firm ceases to be defined as an “air carrier” under the law on slots, just because the firm itself becomes incapable of operating air transport services.

In this sense, according to the Court of Appeal, the air carrier is not supposed to demonstrate that it will be able to perform air transport services during the relevant programming period.

Again, according to the Court of Appeal, it is not required that the coordinator should investigate, for the purposes of satisfying slots’ allocation or transfer requests made by carriers admitted to programmes or procedures of extraordinary administration provided for companies in financial crisis, whether or not there is a “realistic” possibility of resuming operations, given the extreme changeability of the framework in which they move in the search of new ways to continue their core business.

Essentially, the Court of Appeal concludes that an airline in bankruptcy, even one that has “no realistic prospect of resuming [air transport services]” can perfectly well be referred to as an “air transport undertaking”.

On the basis of these considerations, the Court of Appeal therefore decided to allow the exchange by Monarch of slots with compensation, thereby aligning the UK with current thinking which tends to reserve to the companies in crisis, including air carriers, special protections in view of their possible restructuring and rehabilitation. Among these protections, the maintenance (or freezing) of slots previously assigned becomes of clear relevance for obvious reasons related to functionality.

Beyond the specifity related to the practice of slots exchange with compensation common in the airports across the Channel, it is to be expected that this decision will constitute an important precedent and that can be widely accepted even outside of the UK, in similar judicial cases that will occur in the future.

 

 

 

This article is for information purposes only and is not intended as a professional opinion.
For further information, please contact Filippo Di Peio.

 

 

 

[1] High Court of Justice – Queen’s Bench Division – Administrative Court. Case No: CO/4934/2017 – Monarch Airlines Limited (in administration) vs. Airport Coordination Limited.

[2].Court of Appeal from the High Court of Justice – Queen’s Bench Division – Administrative Court. Case No: C1/2017/3101/PTA+A – Monarch Airlines Limited (in administration) vs. Airport Coordination Limited.

[3] In G.U.U.E. 31.7.2014 – C249/1.

[4] IATA Worldwide Slot Guidelines, 8a edition, § 8.16, where it is stipulated that:

8.16 SLOTS OF AN AIRLINE THAT LOSES ITS OPERATING LICENSE

8.16.1      Slots can only be held by an airline with a valid operating license. If an airline ceases to hold a valid operating license, its slots revert to the slot pool. 


8.16.2      In the case of bankruptcy (or similar proceedings), the representatives of the airline should enter into dialogue with the coordinators to discuss their future intentions for the slots and provide the contact details of the administrator. 


8.16.3      The slots may be reserved by the coordinator pending reinstatement of the airline’s operating license or a formal takeover of the airline’s activities. The airline, its legal representatives, or the responsible licensing authority should keep the coordinator informed of the airline’s status. 


8.16.4      If dialogue has not been initiated within a reasonable deadline set by the coordinator, and if there is no legal protection linked to bankruptcy under national law, then the coordinator should reallocate the slots“.

[5] ENAC, Circular of 24 August 2009, EAL-18, cit., point n. 14.

[6] ENAC, Circular of 24 August 2009, EAL-18, cit., point n. 14.

[7] ENAC, Circular of 24 August 2009, EAL-18, cit., point n. 14.

[8] Accordingly, the interest arises to investigate what is the degree of availability by the carrier in financial crisis (to which the operating license has been therefore suspended or revoked) of the slots owned by the same, pending the process of verification of the possibility that the carrier itself reacquires said license, being returned in a situation of effective operational capacity.

Besides the hypothesis of a total freezing of these slots, pending the possible re-establishment of the operating licence, the mentioned ENAC circular provides that these slots can be assigned temporarily (from the Coordinator himself) to another carrier that requests them, so that the slots “blocked” by the Coordinator don’t remain unused.

The result is that the Grandfather’s Rule is not applicable to those slots, and precisely because it is directly connected with the evolution of the situation concerning the carrier that owns them. In fact, it is explicitly stated that such slots “can be withdrawn by the Coordinator at any time”. This is the reason why the carrier requesting these slots “must be informed of the temporary nature of the allocation”.

The temporary nature of the allocation prevents these slots from being moved to another route or transferred from one carrier to another.

The rationale for this “extraordinary allocation” of slots is clear: to guarantee the full utilization of the scarce resource “slots” on certain routes to ensure an effective transportation service in periods characterized by a large number of travellers. (see: ENAC, Circular of 24 August 2009, EAL-18, point No 15).

A similar hypothesis to this provisional reallocation of slots could also be found in the IATA Guidelines, which provides that “to ensure that scarce capacity is not wasted, airlines must immediately return any slots they know they will not use” (IATA Worldwide Slot Guidelines, 8th edition, § 8.5). In this case, the carrier in question must immediately notify the Coordinator, who “even at short notice” will redeploy these slots “to other operators”.

The cases in question here must be kept separate from those in Article 14, § 2, of the consolidated version of Regulation No 95/93, where the Community legislator regulates the provisional allocation of slots to an air carrier in the process of its establishment.  Anyway, the Community legislator does not establish a regulation in positive of the case, since it deals with it in an incidental question, that is to say, with reference to the revocation of the slots allocated provisionally.

In any case, the three types of provisional slot allocation are quite dissimilar, since they have different objective field of application: the first two examined (provisional allocation following suspension of the operating license by ENAC; in case of non-temporary use of slots) concern carriers that are already holders of an operating license and to which slots have already been assigned that (although) for different reasons, are faced to certain events of a temporary nature, while the hypothesis of the Community legislation concerns a carrier in the process of being constituted that, during the provisional assignment, doesn’t have any operating license or equivalent title (Article 14, § 2, of Regulation (EEC) No 95/93).