Aviation Update: English Court of Appeal Restores Insolvent Airline’s Valuable Slots
07 February 2018
Monarch Airlines recently won its appeal against a decision of the English High Court (EHC) which stripped the carrier of its valuable airport slots at Gatwick and Luton airports. The Court of Appeal (COA) decision entitles Monarch to be re-allocated the previously held slots, reportedly worth up to £60 million.
The decision permits Monarch’s administrators to trade the slots, which they viewed as the most valuable asset of the company, for the benefit of its creditors.
This is the first time an airline in administration has come before the English courts to compel the allocation of future slots to an airline where there was no clear prospect of resuming the operation of air services. While this issue has not yet presented itself before an Irish court, the COA decision would be of persuasive authority should similar facts be presented before an Irish court. This decision is of particular relevance to Irish airlines holding slots in co-ordinated airports in Ireland and the UK.
An ‘airport slot’ is a period of time within which permission is given by a co-ordinator to an airline to use an airport’s infrastructure for the operation of air services. An airport slot is like a license as it permits the airline to use air services during specific dates and times for the purposes of taking off and landing. In considering the nature of airport slots, the COA did not classify a slot as an ‘asset’ or a property right, in the normal use of these terms, however, the court acknowledged Monarch’s view that the slots were particularly valuable and that the allocation of the slots could make the airline more attractive to a potential acquirer.
The swapping of slots is encouraged by the Worldwide Slot Guidelines (WSG) as published by the International Air Transport Association (IATA). Secondary trading of slots is permitted by the English courts and, indeed, is facilitated by airport co-ordinators worldwide. Even though it is costly, the secondary trading of slots is particularly beneficial to airlines seeking to grow their presence and acquire slots in congested airports where slot allocation is already at capacity. It can also act as a lifeline to airlines in financial difficulty that are in possession of valuable slots but are unable to operate them.
Did Monarch cease to be an “air-carrier”?
The central issue in the EHC and COA decisions was whether Monarch ceased to be an ‘air carrier’ within the meaning of the Slots Regulation. In order for it to be re-allocated the Gatwick slots by the UK airport coordinator, Airport Coordination Limited (ACL) that it used in the previous season, Monarch would need to meet the criteria of an ‘air carrier’ to be entitled to avail of the allocated slots. At the time of the hearings, Monarch did not have use of any aircraft, it did not employ active pilots and it had its air operating certificate and operating licence revoked by the Civil Aviation Authority, although the revocations had not formally taken effect at such time.
The EHC was of the view that Monarch ceased to be an ‘air carrier’ within the meaning of the Slots Regulation. As a result, it was not entitled to be allocated slots because there was no more than a theoretical possibility of Monarch emerging as a going concern or resuming the operation of air services. However, the COA recognised that it is difficult to draw the line between an ‘air carrier’ that had ceased to operate air transport services and one which was temporarily unable to operate air transport services. In addition, it was noted that the Slots Regulation did not provide any guidance on where any line should be drawn. Where a company is in administration, part of the purpose of the procedure is to allow time for it to consider its viability and future prospects to resume operations whilst a moratorium is placed on any existing or future legal actions. The COA found that ACL does not have an investigatory and regulatory function to consider if an undertaking has a realistic prospect of resuming air services. It also determined that Monarch met the criteria to be an ‘air carrier’ for the purposes of the Slots Regulation and, therefore, was entitled to the slots claimed.
Impact of Decision
Despite the wide-scale secondary trading of slots, the COA decision has been criticised by industry bodies such as IATA. These bodies have reportedly stated that as slots are a permission to use scarce airport capacity, they should only be allocated to airlines with the intention and the ability to operate them.
In a slot allocation regulatory regime which promotes competitiveness and favours the allocation of pool slots to new entrants, the decision will be warmly welcomed by existing airlines that are keen to increase their presence at congested airports. For example, it has since been reported that IAG, BA’s parent company, has seen off competition from rival airlines and has acquired Monarch’s Gatwick slots for an undisclosed sum. It has also been reported that the slots will be utilised by BA to grow their presence, launch new destinations and add extra frequencies. The acquisition has been reported to have significantly increased IAG’s slot portfolio at Gatwick.
This decision is however unlikely to be greeted favourably by new market entrants that usually do not have the liquidity or operational recourses to participate in the secondary trading of slots and which instead rely on the allocation of pool or unallocated slots. In fact, it is interesting to note that had the COA dismissed the appeal, the slots would have been returned to the slot allocation pool for the re-distribution to new market entrants at no cost.
The essential take away from this case is that an airline has a right to be allocated slots to which it is entitled, even if in administration, provided it meets the necessary criteria as required under the Slots Regulation. Where slots represent a significant tradable commodity for failing airlines, they may be used by administrators as a valuable revenue generating resource to aid the company’s continuance or to pay its creditors and reduce the risk of entering insolvency procedures.
For more information on how the EHC and COA decisions may affect your business, contact a member of our Aviation, International Asset Finance team.