Another day, another regulated business goes under

Yesterday we were reminded that all the regulation of the air transport industry does not stop airlines and travel companies going bust, and does not even get all their passengers home in an orderly way.

I appreciate the CAA does not have the same duties on solvency and liquidity for airlines that the Chancellor and his regulators have for banks. Nor am I advocating more regulation.

I do think, however, we should ask why such an expensive system with substantial bonds from the regulated airlines still cannot get everyone back in an orderly way? Why did the Administrator have to ground all the planes and pilots of the affected airline rather than using them to sort out the mess as the first claim on the bonded money?

I understand that the Directors of the company are to blame for getting into the financial mess in the first place. From the moment they admit they have failed, we should look to the Adminstrator and Regulator to run things better. That they failed to do as far as many passengers are concerned. Regulation just isn’t what it’s cracked up to be these days.

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  1. Posted September 13, 2008 at 11:37 am | Permalink

    And the taxpayer is going to have to bail out the compensation fund to the tune of £2m, as it is already in deficit

  2. Posted September 13, 2008 at 12:29 pm | Permalink

    It's quite a ridiculous situation when you have the liquidator placing itself before the needs of people.
    The CAA if anything, should have been able to step in, see to all the stranded people to get them home and then once it had satisfied itself the public need was sorted FIRST, it could hand things over to the liquidator.

    The liquidator incidentally will certainly take its "cut" first before any other bills are paid and way way way before people's immediate needs are sorted because their needs aren't even in the reckoning.

    It's a classic example of money and corporative investors and businesses coming before people yet again, even when the most extreme hardship is being faced by tens of thousands.

  3. Acorn
    Posted September 13, 2008 at 1:04 pm | Permalink

    I notice the Straumur Bank – XL's banker – was quick off the mark. It took over the assets of the French and German subsidiaries in the blink of an eye. "… which Straumur considers to be financially viable and sustainable businesses …". No cross subsidy there then.

    I understand at one airport, cop cars chased the plane down the taxiway. I expect the polot did not have enough room on his credit card to pay the fuel and airport charges. Or the leaser wanted its plane back pronto.

  4. APL
    Posted September 13, 2008 at 1:40 pm | Permalink

    JR: "From the moment they admit they have failed, we should look to the Adminstrator and Regulator to run things better."

    Two words, 'holiday insurance'.

  5. Posted September 13, 2008 at 2:42 pm | Permalink

    This is a case where I think the straight free market rules of bankruptcy should be modified. The administrator should have the right to get government to pay, for a short time, the expenses of fulfilling time dependent contracts with the public. In this case that would have meant keeping the aircraft fueled & flying for 2 weeks & trying to place others on later flights. The cost to government would be so very much less than the costs to the 90,000 people abroad, among others, that it is justified. This would also apply to the Fairpack debacle. Government already takes on paying redundancy payments which a bankrupt company cannot live up to.

    I admit, in the present instance, this is a matter of locking the stable door after the horse has bolted. Still there will be more horses in future & the cost of this is nothing compared to bailing out banks we "cannot allow" to fail.

  6. Will Rees
    Posted September 13, 2008 at 6:14 pm | Permalink

    As we now have adopted an open skys policy and American airlines are free to ply for trade on inter EU routes, would it not be a good time to introduce Chapter11 style bancrupcy. As it stands with the whole industry looking shaky certainly gives the US carriers a USP

  7. mikestallard
    Posted September 13, 2008 at 9:09 pm | Permalink

    I am so glad that I managed to sell my Spanish house and move back home! without cheap reliable flights, living in Spain would have been a nightmare.

  8. Bazman
    Posted September 13, 2008 at 11:47 pm | Permalink

    I must be cynical or clever as I paid the excess five quid on the credit card for the flight tickets this year.

  9. Bayesian
    Posted September 14, 2008 at 7:24 pm | Permalink

    You know perfectly well why the administrator acts as he does—he is charged with protecting the interests of the creditors as far as he can, not the customers. That is the law that parliament enacted, and which you seem to feign ignorance of. And in most cases it is the appropriate response.

    Even in this case it is. A customer makes a purchase which is for delivery in the future. He knows that fuel prices are volatile. He sees that many companies are having difficulties. He does not take out appropriate insurance: "surely the government will sort this out for me!". And now we find that wet Tory MPs (you, Mr Redwood) think this is what should happen, in one guise or another. The key phrase is "caveat emptor".

    Again, the key phrase is: "caveat emptor". Once Tories start thinking, and stating, that this is not the right approach, we are doomed. Or do Tories think that these peole are too thick to take precautions with their money, so we'd better mollycoddle them with taxpayers money? I appreciate that you think that the industry should insure itself, but why would they: they are profit making firms first, not a social backstop.

    Reply: No, you are missing my point. The idnustry already has to take out compulsory insurance through the Bong system. I am talking about how the CAA/Administrator spends the bonded cash to get people home. Of course the creditors need protecting to the extent that they can be.

  10. Bayesian
    Posted September 14, 2008 at 9:14 pm | Permalink

    Again, it is not the Administrator's job to be concerned about customers; if he did this he would be open to lawsuits from major creditors.

    The CAA, however, might be considered to have more flexibility in its responses: I suspect that it too, is circumscribed by its remit. Perhaps an offer to the Administrators to say pay them £15 million (£20m is being touted as the ultimate cost of repatriations), cash that they might welcome on behalf of the creditors, for the use of the planes and crew for a period to provide the needed capacity might have been worthwhile, but this probably requires government approval: not much chance of a swift response on that from this dithering bunch!

    Reply: Not so. The bond was I believe £42 million and had been paid so the Regulator can get people home and sort out the customer problems. Why wasn't it better used?

  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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