On Wednesday 12 October it was reported that Monarch secured an extension to its ATOL licence following in-depth negotiations with the CAA and a £165 million injection of capital from its major shareholder, Greybull Capital.
Airlines operate in some of the most dynamic market conditions of any industry. Due to the safety critical and consumer facing nature of the industry they are subjected to a complex and diverse regulatory regime. This week we saw this dynamic of market conditions and regulatory regimes tested publically with Monarch and the renewal of its ATOL licence. This article briefly touches on the recent events and summarises the ATOL regulatory regime, applicable to some airlines, which precipitated the challenges that Monarch was able to overcome.
After much speculation and having initially obtained a temporary 12 day extension, Monarch secured a £165 million investment from Greybull Capital and a renewal of its Air Travel Organiser’s Licence (ATOL) licence following protracted negotiations with the Civil Aviation Authority (CAA).
Although Monarch played down the threat to its future throughout the negotiations, saying that it was on the brink of announcing significant new investment that would lead to the CAA granting renewal, there were always concerns that the rumours could be self-fulfilling, if concerned passengers, agents and suppliers were tempted to withdraw support in anticipation of potential travel disruption. Monarch had acknowledged that this is a difficult period for the UK airline industry generally given economic uncertainty, the weakness of Sterling and recent terrorist incidents - incidents which Monarch may be more exposed to given its high market share on trunk routes from the UK into Egypt, Turkey and Tunisia.
The renewed ATOL licence will run for just under one year until 30 September 2017.
The ATOL Licensing Regime
Airlines which sell packaged air holidays and flights cannot operate in the UK without an ATOL licence or relevant exemption. Where a licence is revoked and no exemptions are available, in-scope airlines must cease trading. The scheme is designed to protect customers who had booked holidays with the firm, ensuring they do not get stranded abroad or lose money. Since April 2012 ATOL covers all overseas air holidays where a flight and accommodation have been booked together. It also covers some flights booked separately.
ATOL is administered by the CAA and funded by contributions from the travel companies, who must pay £2.50 into the scheme for each person they book on a holiday. The scheme is ultimately backed by government guarantee. Most notably, ATOL was utilised by consumers following the administration of FlyGlobespan in December 2009, with controversy at the time surrounding some 3,400 customers who found they were not covered under the scheme's previous rules having booked via the company's website.
What are the financial requirements?
The CAA specifies and publishes the requirements for applying for and/or varying ATOL licences. The parameters of those requirements depend on the type of ATOL licence held and respective ATOL limit. What are appropriate requirements for large airlines will not be appropriate for small travel agents.
In addition, certain ATOL holders are subject to an in-depth risk based financial analysis assessment.
What happens if problems arise?
In most cases, the CAA conduct ongoing monitoring of the licence holder, typically on a monthly or quarterly basis, focussing on financial performance, liquidity and material changes to the business model. Where the CAA consider the likelihood of an ATOL holder failing and the consequential detriment to the consumer, they will assesses the liquidity and financial resources available to the ATOL holder.
Revoking a licence
The CAA must revoke, suspend or vary the ATOL where they are no longer satisfied that the holder is a fit person. In contrast, the CAA may revoke, suspend or vary the licence if it is no longer satisfied that the resources of the holder and its financial arrangements are adequate to discharge its actual and potential obligations in respect of its activities or where the holder has failed to comply with any term or condition of its ATOL.
As a general rule, the CAA is reluctant to revoke ATOL licences for financial reasons, particularly those licences held by large airlines. Instead, the CAA will usually grant a temporary licence while conducting ongoing investigations into the airline's financial health. By comparison to the graduated approach taken on ATOL licences with airlines in financial difficulty, the CAA is more likely to immediately revoke operating licences where there are concerns around safety.
For example, Globespan did not have its licence revoked until it went into administration in December 2009, despite the CAA voicing concerns about its financial health throughout 2009. The CAA had refrained from taking action as it received assurances Globespan had been actively engaged in procuring investment.
For more information on any of the issues considered above, please contact the authors.