What just happened?
Major Airlines have called for a dramatic scaling back of operations. It is stated that by the end of May 2020, most airlines will become bankrupt.[1]
What does this mean?
This year, IATA has reported a projected hit of $113 billion for the whole industry. Consequently, most airlines have scaled-down their operations. The travel ban imposed in several countries has led to a dramatic decrease in revenue for these airlines.[2] In response, governments of various countries have announced bailout plans to prevent the problem from further escalation. Still, these plans might not be enough to save these airlines from liquidation.
How is it going to affect the legal industry?
Law firms with clients from the airline industry face several issues that arise from an insolvency and restructuring perspective. To begin with, an airline with a weak balance-sheet will be more vulnerable to insolvency. Such was the case in 2019, when Flybe, even after its rescue by the Connect Airways Consortium, the company was unable to survive the effects of the reduced travel demand and cash flow deficit.[3] At LawMiracle, it is suggested that law firms dealing with insolvency matters would focus on the larger picture and negotiate the arrangements of lending in such a scenario.
The second issue to be dealt with is the running cost of the airline. This includes staff liabilities and aircraft leases, among others. Airlines would focus on trying to preserve cash and give constant reassurance to their investors in-order to cap liabilities. In response to this outbreak, most airlines are either cutting jobs or forcing staff to take paid leave. For instance, it has been reported that 750,000 workers who are directly employed by the US airlines are at risk of losing their jobs. Major Airlines face potential employment disputes as most flight attendants had to risk working in unsafe conditions before the cuts and travel bans.[4]
It follows, aircraft leases are a crippling expense for a company that cannot gain revenue from the aircraft. In these circumstances, law firms would most likely look for force majeure clauses and check if these clauses include pandemics, as stated by the WHO. This would alter the airlines' obligation for payment depending upon the clause stated in the contract. However, such clauses are seldom found in the lease. Responding to this issue, law firms could renegotiate the terms with the lessor. It would be in the best interest of the lessor to avoid termination since there would not be a demand for re-leasing the aircraft.[5]
Lastly, cancelled, or delayed flights give passengers a right for compensation. However, it does not include extraordinary circumstances such as a pandemic according to the EU regulations. This defense, unfortunately, may not apply to all claims of all airlines. Hence airlines will have to find methods to delay repayment if they wish to be solvent by the end of the period. Some airlines may fail to provide refunds but provide an alternative way of compensation, such as giving the consumer the option of rebooking, vouchers, and credit notes to passengers.[6]
The airline industry has fallen headfirst into the catastrophe and is mainly disadvantaged. However, the pandemic will end, and the goal of any law firm is to keep the company afloat until it does. The legal industry can expect to see a multitude of claims and an airline that survives those, reassuring investors, and lenders with its ability to deal with those claims successfully would benefit from reduced competition and increased demand post-COVID landscape.
Written by Srinidhi Dhulipala
Assessing Firms:
#Clyde&Co #HWF #NortonRoseFulbright #AkinGumpStraussHauer&FeldLLP #Arnold&PorterKayeScholerLLP #White&CaseLLP
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References:
[1] 'COVID-19. By the End of May, Most World Airlines Will Be Bankrupt' (CAPA - Centre for Aviation, 17th March 2020)
[2] Rupert Neate, 'Airlines Make Dramatic Cuts to Services and Call for State Bailouts' (The Guardian, 16th March 2020)
[3] Rosie Perper and David Slotnick, 'UK Airline Flybe Declares Bankruptcy as Coronavirus Dooms the Already Struggling Carrier' (Business Insider, 5th March 2020)
[4] Michael Sainato, 'Existential Crisis': Airline Workers Fear Layoffs Amid Coronavirus Pandemic' (The Guardian, 23rd March 2020)
[5] Michael McLaren QC, 'COVID-19: The Airlines’ Battle for Survival | Fountain Court Chambers' (Fountain Court Chambers, 16th March 2020)
[6] Gwyn Topham, 'All Big UK Airlines and Travel Firms Denying Refunds, Which? Finds' (The Guardian, 22nd April 2020)
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.