Anyone who has been involved in the aviation industry for some time – or even just travelling widely – will have seen plenty of airlines shut down. This could be planned or sudden. Once an airline ceases operation, though, several things start to take place to deal with passengers, employees, and the airline’s assets.
Closing down an airline
The years before the pandemic saw several major airlines cease operations (Thomas Cook and Flybe in the UK are just a few of the big names lost). With government support and severe cutbacks, surprisingly few airlines shut down during the pandemic.
Reasons for closure are usually financial. The airline industry is widely regarded as low margin, with many companies operating close to the edge. Costs and risks are high, though (just look at the cost of new aircraft, the fluctuations in oil prices, and the massive government restriction on travel seen during the pandemic to appreciate this). Small changes, or wrong decisions, can lead to catastrophic results quickly.
Sometimes, an airline shutdown is pre-emptive. Entering voluntary administration can give the airline time to restructure its operation, finance, and debt. The aim, of course, is to get the airline into a position where it can restart services. The restructuring of Norwegian in 2020 and 2021 is a good example of this. It ceased operations, reduced its fleet, cancelled aircraft orders, closed bases, ended long-haul operations, reduced headcount, and then successfully restarted operations.
Other closures can be more sudden and complete, with no attempt to recover. The sudden bankruptcy of Thomas Cook in 2019 (after failing to secure funding from the UK government) is a good case here.
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Stopping flight operations
Under voluntary administration (or Chapter 11 bankruptcy), it is possible that some flight operations will continue. The aim of this type of bankruptcy is to work with creditors and stakeholders to recover the company.
This will not be the case with full bankruptcy. In this instance, flights (and other company operations) will generally cease operations immediately. The airline’s assets will be frozen while recovery and legal proceedings begin, and this means the airline couldn’t fly its aircraft even if it wanted to. It also usually means the airline cannot be involved in any passenger repatriation needed.
Dealing with stranded passengers
Of course, an important aspect of airline shutdowns are the obligations to passengers. There are two main groups here – passengers left stranded due to sudden flight cancellations and passengers with future tickets.
In general, once an airline declares bankruptcy, the ticket (as a right to travel) is meaningless, and there is no obligation to provide flights to passengers, no matter where they are.
There are several routes for protection. Some countries (such as the UK with ATOL protection) have mandatory insurance cover for holiday sales – this will usually cover charter or package booking, but not flight-only airline bookings.
Travellers could also have insurance that covers airline failure, and this will pay for new flights with another carrier. Governments often get involved in major failures, providing repatriation flights (at reduced cost) to affected travellers. This happened after the Thomas Cook bankruptcy, for example, with the UK government launching its largest ever peacetime repatriation program to bring home over 140,000 people.
Refunds for passengers holding tickets
You might think that passengers who have not yet travelled would just get their flights cancelled and refunded. Unfortunately, it is not as simple as this. Passengers with unused tickets become a creditor, owed money by the airline. They join a list, along with many other companies, and are usually not very high up it! Depending on the final assets of the airline, they may or may not see refunds.
There are other courses of action as well for passengers. It is good practice to take out travel insurance as soon as travel is booked (not just to cover travel dates). This will often cover in the event of airline failure. Paying with a credit card in many countries also offers additional protection and refund on advance fares paid.
Dealing with airline assets
While the stranded passengers and disruption may grab initial headlines, work will begin immediately to deal with the airlines’ assets. Just as with any company that enters bankruptcy, an auditor will be appointed. In general, attempts will be made to sell the assets, and then repay creditors as much as possible.
If the airline leases aircraft, these will usually return immediately to the leasing company. Of course, if aircraft are owned by the airline, these are likely to be the most significant assets and hopefully will be sold to another airline or leasing company. Unless the aircraft are particularly old or well out of production/support, there is usually a buoyant second-hand market for serviceable aircraft.
Other assets that are often valuable include airport slots that the airline holds, loyalty programs, and even the airline brand. In the case of Thomas Cook, the brand (and website) were bought by the Chinese company Fosun, and relaunched later as a new company in 2020.
Airline staff
Unfortunately, staff often come off worst in a bankruptcy. In some cases, there may be limited compensation offered; in others, none. With a sudden bankruptcy, work and pay can stop immediately.
There are some cases where crew, especially pilots, may be able to transfer to a company that takes on any aircraft. This will not help the majority of airline staff, though, who often struggle to find similar work quickly as the market Is flooded with job seekers.
Final Thoughts
We have seen many airlines cease operations over the past decades, and there will be more. There are well-defined bankruptcy processes in place that will ultimately deal with assets and creditors. There will be winners and losers here. People – both passengers and employees – usually bear the brunt of the disruption through, with sudden impacts and unexpected difficulties.
