Tuesday 26 April 2016

The Disruptive Nature of Regulation EC261

Can responsibility for passenger compensation be more equally shared among those responsible for flight delays?
Interview with Sean Gates, CEO Gates Aviation

It's been eleven years since introduction of controversial regulation EC261 which holds airlines solely responsible for compensating passengers for delays caused not only by reasons within their control, but also for errors made by airports and service providers. And indirectly, they are paying for oversights of decision makers at industry level (including regulators and politicians), who failed to synchronise growing traffic with infrastructural resources thus causing continuous increase in airport congestion and consequently flight disruptions.

To make things even worse for airlines, interim rulings ratified by the Supreme Court are further increasing airlines responsibility for delays. A 2014 ruling says that airlines can no longer claim technical faults as extraordinary circumstances. They now must pay out compensation for flight delays caused by technical reasons even when aircraft becomes unserviceable due to a damage caused by a third party.

Some of the rules are determined by the laws in respective EU countries so that in the UK, for example, passengers can now back-claim their delay compensation within the period of six years. According to CAPA, this decision opens the door to more than two million compensation claims every year in the UK alone, worth an estimated £876 million. Historic claims dating back six years could potentially add another £4 billion.

The issue is getting hotter as a new breed of airline losses starts to accumulate.
Who else can better explain the regulatory side of this problem than Sean Gates, recognised as one of the best aviation lawyers worldwide and a professional with exceptional understanding of wider industry issues (Sean's Bio).

It was my pleasure to meet Sean and talk to him about this topic that, as he said, has been close to his heart for a long time.

JR: There are so many undeniable facts about short-sightedness of EC261. What is it that keeps airline complaints ignored by regulators for such a long time?

SG: The pernicious growth of EC261 continues unabated – fuelled by successive decisions of the European Court of Justice constructed on the illogical premise that airlines can continue to pay ever-increasing compensation for matters over which they have no control, all at no cost to the consumer. Knowing this to be untrue, various representatives of the Commission have, nevertheless, responded that a fundamental reversal of EC261 is impossible given the mind-set of the politicians in the European Parliament. For the politicians, the regulation can be portrayed as a nil cost consumer benefit to enhance their reputations, regardless of the impact on consumer costs and benefits; and ignoring the potential safety implications.

JR:  What is the role of IATA in protecting their airline members from cost burdens caused by third parties?

SG: A significant proportion of aircraft delays are attributable to the actions of third parties operating at the airport including ground handlers and others. With the increasing cost of EC261 claims, airlines are understandably reviewing, yet again, their rights to recover the amounts they are obliged to pay. If the damage is caused by third parties with whom the airline is not in contract that should cause little difficulty, but where the damage is caused by a ground handler with whom the airline is in contract – as is usually the case – the claims are abandoned and shoulders are shrugged at the prospect of the application of Article 8 of the ubiquitous IATA Ground Handling Agreement. There are various iterations of this agreement in existence; but in broad terms the agreement seeks to limit an airline’s right to compensation for its losses to direct repair costs capped at a limited figure with an exclusion of what are described as consequential losses, except where the damage was caused by recklessness with knowledge that damage would probably result.

JR: It seems that ambiguities of IATA Article 8/SGHA and new recommendations in Chapter 660/AHM regarding consequential losses (opposed by handlers) only add additional burden to airlines?

SG: To many, these provisions seem an insuperable bar to recovering losses sustained by an airline as a consequence of the operation of EC261 since it is assumed such losses are to be regarded as consequential. And since it is also believed that proving recklessness, let alone knowledge of the probability of damage, represents an excessively onerous burden; the costs would probably exceed the recovery.

JR: Why is the agreement so harsh on carriers when it is supposedly the result of measured deliberation between airlines and ground handlers within the auspices of IATA?

SG: The answer is, largely, ignorance and misrepresentation. Ground handlers (and even some airlines who also handle) pedal the view that if ground handlers were responsible for consequential damages, handling costs would skyrocket because of the concomitant increase in their insurance costs and, therefore, their charges to the airlines. Those propositions are untenable – if no damage is done, insurance costs do not increase. If an inferior handler repeatedly causes damage then its cost of insurance may increase compared to those of efficient handlers. All this means is that competition would weed out incompetence. In today’s insurance market it is, in any event, highly unlikely that premiums would increases a consequence of a few losses. They would certainly not increase until loss experience justified it.

JR: Ironically, it seems that the consequence of the current regime is effectively that airlines are the insurers of ground handlers with regard to consequential losses?

SG: Yes, as those losses are not recoverable from the airline’s own insurers (other than in a modest way with regard to business interruption) so the subsidiary argument of handlers that the agreement reduces industry costs by eliminating double insurance is also palpably untrue.

JR: How do other European countries deal with recovery of compensation paid to passengers in regard to EU261?

SG: The laws of many European countries will not permit an exclusion of liability for gross negligence, regardless of the provisions of any contract. Therefore, acts of serious negligence which fall short of recklessness will not be excluded, regardless of the exclusion clauses in the agreement. The definition of consequential losses is by no means as all-encompassing as ground handlers would have airlines believe in other European countries, so that some losses commonly regarded as being excluded are, in fact, recoverable. Furthermore, egregious conduct of the employees of ground handlers can often be shown to be reckless by reference to the laws applicable in the country where the damage was done; and the test of whether the misconduct was done with knowledge is, in some countries, not subjective – evidence of the state of mind of the person concerned – but objective – being what the person should have been thinking if he or she was a reasonable person acting in the role of the employee concerned.

JR: From what ground handlers say, airlines are not able to provide credible evidence about disruption losses essential for their claim recovery. What is your experience with this issue?

SG: Airlines have routinely had difficulties in providing supporting information for this type of incident. Unless they have the practice of making recovery claims, the information is not separately identified and is then lost in the broad mass of data and becomes impossible to retrieve. Sometimes an engineering department can produce records relating to repair costs.  Occasionally the cost attributable to flights cancelled immediately after an incident can be reconstructed. However, unless an airline sets up a dedicated system to track these costs, and preserves documentary evidence, claims can become very hard to make.

JR: Isn't this the high time for introduction of a recognised system for monitoring authentic costs of disruptions linked with their true root causes and information about delayed passengers - the system that would help airlines not only with loss recovery but also put them in a more powerful position while justifying the need for regulatory changes? 

SG: I completely agree the proposition. The losses are substantial.  Not making claims for them not only means that the airline is acting as the insurer of the ground handler but also means that handlers avoid having to pay for the consequences of the actions of their employees with the result that safety lessons go unlearned. This also has the effect of reducing competition between handlers since it would be reasonable to suppose that handlers with a better safety record and which did not have the protection of indemnity would have lower costs and, therefore, be able to quote lower charges as compared to handlers with a poor safety record.

JR: Is there any hope that the regulatory issues we talked about could be resolved in the foreseeable future?

SG: Given the increasing burden of liability for compensation under the European Regulation, there is every reason to re-evaluate the responsibility of ground handlers and others under the law governing the contract; and every reason to evaluate whether the iniquities of the special ground handling agreement have to be accepted in every relationship between handler and carrier. There is hope after EU261