Flight Compensation Will Be Standard Procedure

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The failing of the European airlines Alitalia, Monarch, and Air Berlin was just the start of a troubling trend that is plaguing the European market.

Financial instability and the inability to gain traction in the European airline market led these airlines into bankruptcy. And now, more airlines are following suit. The most recent casualties in this low margin game are the Cyprus based Cobalt Air and the Nordic carrier Primera Air. 

October seems to mark the beginning of airline bankruptcy season as Primera Air announced its closure on October 2nd, 2018, the one-year anniversary of the Monarch bankruptcy. Winter is a hard season for airlines, so there are likely more collapses on the horizon. 

Failing airlines are not the only thing posing a problem for passengers; even airlines that are profitable are creating headaches for passengers in the form of delays and unnecessary cancellations. Statistically, more than 1% of flights in the EU are delayed by more than 3 hours.

Due to European regulations, there is an annual amount of about 4 billion EUR owed to passengers as a form of compensation.

Among airlines, there is a widespread problem of ignoring compensation requests which has led to a growing compensation recovery market. This market ultimately led to the creation of Skycop.com – a small claims assistance service to help passengers receive their owed compensation. What was once a relatively unknown service industry continues to experience positive year-over-year growth.

In 2014, the annual recovery market was made up of only 10% of eligible passengers while in 2015 this same market grew to 20%. Some regional markets, like Germany, have up to 90% engagement from qualified passengers. This boom in increased compensation is due, in part, to boosted efforts in educating passengers about their rights and attracting more customers who have experienced flight delays. 

Companies providing compensation services are fairly new, and the majority of them were formed in the 2015-2017 period.

The financial growth of these companies indicates business is picking up at a fast rate and, consequently, more delinquent airlines are being held accountable.

Since EU borders are not a limiting factor, a company established in Lithuania, for example, can compete across the entire continent.

“If there is a regulation or a law – you know that it needs to be respected. So, focus your production. If you know that there will be a problem – have a spare aircraft,” comments Gediminas Ziemelis on the failures of airline companies. He points out that audit companies do not require any reserve for compensation, so different companies allocate different amounts to them.

“Companies that do not set aside reserves are trying to negotiate, trying to “sweep” the costs. I predict, by 2020-2021, compensation insurance will be required, and all companies will be required to have reserves for the compensation of ticket costs.

Now, airlines are in a gray zone. Airline auditors require aviation maintenance insurance but do not understand or require compensation insurance even though they also carry out financial supervision and see that small airlines are abusing this oversight,” explains Mr. Ziemelis.

While some airlines have formed a reserve, many airlines continue to operate without a solid compensation plan. When taking into account the average number of passengers carried on delayed or canceled flights the average amount of compensation is 350-400 EUR per passenger.

Currently, there is ambiguity in financial planning and accounting – most auditors do not demand airlines to set aside provisions for compensations (at least not according to the average compensation received by passengers), and, in turn, finances do not necessarily reflect reality, as reserves reduce profit margins.

The lack of clear regulations means not all airlines are currently being treated equally in terms of required compensation reserves, so the carriers abusing this regulation are relying on passengers who do not claim their owed compensation.

Even when passengers do submit claims, some airlines let them pend for extreme amounts of time before either rejecting them or ignoring them with zero accountability for their actions.

For example, the Lithuanian Small Planet Airlines (SPA) carried 3.6 million passengers in 2017. On average 1% of their flights are delayed. The passengers affected by those delays are entitled to compensation. With the average compensation being 325 euros, SPA should have set aside 11.7 M EUR for provisions. As a consequence, SPA engaged in disputes with passengers, did not pay the compensations, and finally ended up in financial trouble. 

Some airlines, like Ryanair, take a more aggressive approach of protecting their profits by having an underwriting statement which states passengers agree to not call a third party in the event of a flight disruption, even though regulations afford passengers the right to defend themselves through a representative. When passengers do manage to successfully navigate through Ryanair’s abusive practices the claimant only receives 20% of the owed compensation whereas airlines like SAS or Lufthansa pay all compensation in a disciplinary manner.

The disparity between companies does not create an equal playing field, and airlines that are financially unstable are likely not keeping adequate reserves to reimburse passengers when flights are canceled. Companies like Skycop are changing this.

Despite the gloomy present encompassing passenger compensation, the industry is moving to a bright and broad future. The current process of reviewing complaints and claims usually passes through a number of hands in the airline before a decision is made. This process, however, has begun transitioning to recovery agencies. This shift represents a timelier and more satisfactory result for passengers while holding airlines accountable for their required compensation payouts.

When insurance is introduced as a standard aspect of the booking process, and every passenger is aware of the compensation that is owed to them; the problem of passengers losing money will cease to exist.

Companies such as Skycop will be fundamental to the processes involved in compensation payouts, and in the future will likely transition into a position of working directly with the airlines to secure both an accurate balance sheet for the airlines while compensating the full amount owed to passengers. As a third party, companies such as Skycop are in an excellent position to secure a win-win for airlines and passengers.

Source: Gediminas Ziemelis, Avia Solutions Group’s Chairman of the Board