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Claims against failing airlines

19 November, 2018

Cobalt has become the latest European budget airline to stop trading, following Danish carrier Primera Air which ceased trading earlier this year.  Both carried a fraction of the passengers of British holiday airline Monarch, which collapsed last year.  Earlier examples in Cyprus include Cyprus Airways and Eurocypria, both of which entered into liquidation and left a vast number of unpaid creditors that have no real prospect of recouping their losses.  The European Regional Airline Association expects that airline bankruptcies around the world are set to double over 2019 with at least 70 failures expected for the full year. Similarly to airlines, owners of corporate aircrafts are not immune from economic hardships.  In the current economic environment it is more important than ever for those providing aviation services or products - such as aircraft management companies, aviation fuel providers, and parts and labor providers - to recognise that even seemingly stable, long-standing customers may face financial burdens that create insolvency or necessitate their filing for bankruptcy.

Simple protection techniques against airline bankruptcies

While there may be nothing that one can do to prevent a customer’s reorganization or liquidation, there are important steps that a business can take to minimise the risk of significant financial losses as a result of such an insolvency.  One obvious concern is when the airline fails to pay its bills. 

The simplest way to avoid becoming a creditor in a bankruptcy action is not to provide goods or services to a customer without having been paid in advance or without having a pre-funded retainer in place. Of course, in many instances, this may be an impractical way to do business and may create a non competitive disadvantage. Nonetheless, more and more companies are opting to take this route. By doing so, there will be no outstanding claims in the event the owner of an aircraft to whom you have provided goods or services files for bankruptcy. If payment is made at the time of or before providing the goods or services at issue, no creditor relationship exists and the payments are not made on account of a pre-existing debt owed before the payment was made. Thus, advance payments also should be immune from attempts by debtors or liquidation adminstrators to recover payments made prior to liquidation.

Elaborate protection solutions against airline bankruptcies

More commonly, goods or services are provided on credit or advance retainers are insufficient to reimburse for the aviation services or products provided. In the event of bankruptcy filing, general unsecured creditors often recover only a small percentage of the amount owed by the debtor. Accordingly, steps should be taken to attempt to “secure” your claim so as to provide priority over the claims of other creditors. 

Such solutions may include:

(a) a contractual lien on goods delivered;

(b) a charge over property of the airline or owner;

(c) financial due diligence in regular intervals;

(d) corporate guarantees;

(e)  policies involving a right to deny to further supply in the event of non payment by the airline or aircraft;

How we can help

Businesses that are vulnerable to the impact of airline failures need to obtain legal advice in order to be well prepared to address and manage any such contingency. 

Our firm maintains substantial experience on Cyprus aviation laws and regulations as well as ancillary legislation which come into play when an airline fails, such as regulatory and competition law issues.  

If you wish to find out more as to how we can help or for any inquiry, please contact Michael Kyriakides or Maria Afxentiou.