Is EU261 Responsible For European Airline Bankruptcies?

The last 18 months have seen a flurry of airline bankruptcies in Europe. From small regionals like the UK’s Flybmi and Cobalt to major players like Thomas Cook and WOW, airlines have been dropping like the proverbial flies. Analysts and observers have laid the blame at the feet of fuel price rises, oversupply, Brexit, competition and even just the natural process of consolidation. But there’s another factor at play here too; could an EU directive be part of the reason so many airlines are going bankrupt?

flight compensation airline bankruptcies
Is flight compensation to blame for airline bankruptcies? Photo: Unsplash

What is EU261?

The European Commission ruling EC 261/2004, generally known as EU261, was put in place to protect passengers. The legislation was intended to take care of travelers who were affected by lengthy delays, denied boarding or cancellation of their flights.

As well as protecting passengers, it was intended to serve as a deterrent to airlines, to discourage them from cancelling under booked flights or deliberately overbooking, only to deny boarding to some passengers.

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flight compensation airline bankruptcies
EU261 was designed to protect passengers. Photo: Unsplash

Put in place in 2004, it initially worked very well, at least from the passengers’ point of view. Passengers could claim between €250 and €600 depending on the length of the flight, and as a result, fewer passengers were bumped and airlines initiated a renewed focus towards on time performance.

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However, over the 14 years that the legislation has been in place, it has undergone a raft of changes. The European Court of Justice has broadened the scope of EU261, which has meant that, in the case of almost any delay of three hours or more, airlines are being forced to pay out.

Why is it a problem for airlines?

EU261 can mean a single flight suddenly becomes a major financial burden for the airline. A delayed short-haul flight could cost around €17,500, increasing to €150,000 or more for a long haul trip. At times when airlines are surviving on the slimmest of profit margins, these costs can really serve to break their balance sheet.

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For large, legacy airlines operating full service routes with various cabin classes, these sorts of costs can be absorbed to some extent. However, for smaller airlines with low ticket prices, the cost of paying out under EU261 can far exceed the revenue of the flight. But that’s not the worst part.

More difficult than this is the fact that passengers have up to six years to make a claim. This means that a delayed flight today could be claimed for in 2025; how are airlines supposed to budget for that? With the proliferation of claims management companies helping passengers chase down years old compensation, this is a real risk for airlines.

flight compensation airline bankruptcies
Claims under EU261 are difficult for small airlines to absorb. Photo: Jonathan Palombo via Wikimedia

According to Jardine Lloyd Thompson Group, airlines pay out eight figure sums year on year. Despite this, in many cases this only represents some 15% of the potentially eligible compensation. That’s a massive financial ax hanging over any airline’s head.

Added to this is the sheer administrative burden of dealing with the compensation claims of a planeload of passengers. Hundreds of claims could need to be checked, verified and settled, preferably in good time to avoid reputational damage, meaning many airlines have huge teams of people working just on EU261 admin.

The end result is a financial pit just waiting for any airline to fall into. While large airlines can sometimes shoulder the burden of these payouts, for smaller airlines, it can make the difference between posting a profit or a loss that month

What’s the answer?

The European Regions Airline Association (ERA), a body that represents 51 European airlines, recently published a study on the negative impact of EU261. Their analysis highlights how much worst the impact of this regulation is on small and medium carriers than it is on large airlines.

In partnership with legal firm Clyde & Co, ERA noted that a number of aspects of EU261 had been subject to modification. These modifications served to make it more difficult for airlines to invoke Extraordinary Circumstances Defense, even in legitimate situations where events were beyond the operator’s control.

flight compensation airline bankruptcies
Issues such as those with ATC should be ‘extraordinary circumstances, but that’s becoming harder for airlines to argue. Photo: Pxhere

The study also notes that the amount spent on passenger claims in 2019 is triple what it was in 2016. On average, payouts are some 296% more than the cost of the original ticket. ERA Director General, Montserrat Barriga, commented on the findings, saying,

“EU261 is putting an unbearable financial burden on small to medium-sized airlines that operate on very low margins, have lower average ticket prices, tighter schedules and smaller teams to deal with claims and legal and administrative procedures and costs; they are therefore disproportionately affected by the regulation. Recent airline failures are sadly reducing competition and choice in Europe. Some ERA members are already abandoning routes that are not profitable, including PSO-subsidised routes. Additionally, an airline should never be financially penalised for taking all the necessary time to carry out safety-related procedures.”

The body has made a set of recommendation to the European Commission, including reducing compensation levels for smaller airlines by 50%, capping compensation to a proportion of the ticket cost and excluding PSO routes from the scheme altogether. It also raises questions about safety, saying that airlines are not being given long enough to perform the necessary checks in the event of a safety concern.

The new European Commission started work on the 1st December. Clearly, the new Commission has a lot to discuss, but hopefully, EU261 will feature somewhere on the agenda. Implementing these changes could level the playing field for smaller, regional airlines, and help prevent more airline collapses being spurred on by compensation payouts.

Until then, EU261 will still be known in some circles as the ‘airline killer’.

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Anonymous

Can we stop defending the airline industry as if they were innocent children! They are just running their business poorly and deserve to disappear if they have poor management! The day they will stop telling you that your flight is late because the previous one was late they might become adults! Furthermore remember these are the people that treat their passengers like cattle (remember United)… oh and I have flown over 5000 commercial flights in my life, so I do know what I am talking about!

Bryce

Speaking of adults: if passengers were adult enough, they’d have travel insurance…instead of trying to rely on utopian EU legislation to remove all risk from life…

Adam

I agree with you 100%. Airlines have their T&C constructed in a way to disadvantage a passenger. EU261 gives some leverage to passengers, who otherwise would be treated like in the US – multiple-hour delays, loss in compensation, vacation or other plans, with nothing.

Konrad

I have mixed feelings after reading this article. As a lawyer I still believe EU261 is a great achievement of EU legislation and give fair rights for affected passengers. There are so many countries outside EU lacking similar regulations and passengers can only go to courts to fight for their rights (who would go?). I understand the financial burden for the airlines. But hey, it is a specific and risky business, so once you (airlines) decide to sell flights (earn money), deal with it and focus more on better management, flight scheduling, etc. in order to minimize delays and cancellations.… Read more »

Bryce

What about cancellations caused by circumstances beyond the airlines’ control, such as strikes and adverse weather? Left-wing judges regularly allow such instances to fall under EU261…after all, the “evil multinationals” (airlines) have to be penalized in every conceivable way…right?

adam

In those circumstances, EU261 does not apply. There’s no compensation in adverse weather or circumstances beyond the airlines’ control

Bryce

That’s the theory: take it to court and a left-wing judge will rule otherwise.

adam

negative. it is specifically spelled out that adverse weather, strikes, etc. do not qualify for compensation

Konrad

I believe you are referring to few exceptions where local courts ruled in favor of passengers. EU261 regulation is applicable directly in EU countries thus I would not say there were various changes in the legislation. EU261 provisions so as the ECJ judgments are quite clear when it comes to determining when to compensate or not.

Other EU regulations establish compensation obligations in case of train delays/cancellation as well – in this case I would call it however rather a refund than a compensation.

Tom

The problem is not in the directive it self, but how you make your business. Many passengers would be stranded on Airports due Airlines. The Airlines could cancel flight anytime without acceptable reasons and without a risk to pay refund to passenger. The losses the passenger would made are high for example destroyed vacation , business trip. The directive also improves reliability of aviation traffic. Similar directives are in US and it was implemented after a heavy snowstorms 2009, when several 100000s passengers where stranded on airports. The reason why so many airlines gone out of business. Its quite simple… Read more »

Bryce

Aviation in Europe ran like clockwork before EU261 was introduced.
You seem to be suffering from some sort of conspiracy theory psychosis…

Bryce

Agreed that EU 261 is a disaster for airlines.
A real problem is the lack of uniform jurisprudence in various EU countries…some of which, for example, consider flight disruptions due to strikes as falling under EU261 while others do not.
Another problem is the number of claims being handled by vulture-like claims agencies, who see a opportunity to make a quick and easy profit at the expense of fairness.
EU261 would hardly be necessary at all if passengers had travel insurance!

Zburătorul

Aaaaah, tomorrow is Election Day, boris is hiding in the fridge so let’s say something about that mean EU …. for f** sake

WR2

What if a train is delayed? Are passengers compensated the same way? This is typical nonsense EU pandering legislation, making people think they are getting free stuff, but really they are just paying even more. Enjoy your bureaucracy, you’re paying for it.

Victor

Article is clearly written after having gotten a press release from an airline lobbying group. The suggestions made by that lobbying group are appalling. Linking the compensation to the size of the airline and ticket price means an unfair competitive advantage. Let those airlines focus on proper operational efficiency and proper pricing that takes potential EU261 payouts in consideration in stead of changing the EU261 rule.

adam

Agreed. This is a disappointing article.

Etoile

Should be capped at price of ticket. Last Christmas flew Arlanda to Bristol (1510 km). Flight was delayed 3+ hours – inconvenient (not tragic) . Received EUR 2400 from EasyJet for leg that cost me EUR 300. Drinks all round – but in the long term it will kill EU carriers

Anonymous

I work in EU261 claims and can tell you it’s collapsed flybmi, Flybe and others. One hour short-hop prop planes with cheap £30 flyers running 5 or 6 rotations a day can be a disaster with a 3 hour delay as it’ll throw the entire day in to 500 EU261 claims of €250 each plus all expenses. Ryanair simply refuses to pay. They will survive but the rest are about gone. Enjoy the train like Victorian times. NCL-BRS anyone? Doesn’t exist.

Foo Bar

If this is such a burden, why is it so much cheaper to flight in Europe then in the US?

This rule was made to increase efficiency. And it seems to work.

Douh

I salute The European Commission ruling EC 261/2004, generally known as EU261 which was put in place to protect passengers right and i do travel lot and sometime it did happen to me that i lost my flight due to the fact i reached the Airport late and less than 1 hour before the flight and in this case either i got some refund of my ticket price or i got nothing depending on airlines policy so it make a lot of sense that in case there is any flight delay or misconnecting flight that the airlines have to pay… Read more »

Eamon

Ever heard of punctuation?

Bryce

Joanna, I think your article was innovative and very much needed! Thank you for broaching this subject 🙂 But you can see from various comments how out-of-touch many people are with regard to the reality of how EU261 works in practice. It’s clear that none of these commentators have ever tried to successfully run a business: they just look at the problem from the point of view of “let’s milk some cash out of this”. They’re also very unaware of how national jurisprudence plays a role in this, since much of the language of EU261 is vague, and open to… Read more »