The Silent Airline Killer? Just how bad is EU261 affecting the airline industry

European Commission (EC) 261/2004, otherwise known as EU261, is causing an immense amount of pain for airlines and whilst the general observer wouldn’t know it, things are getting dramatically worse year-on-year.

The law dictates the amount of compensation an airline must pay if a flight is cancelled or delayed. Passengers can claim €250, €400 or €600 depending on the length of the flight as well as costs for hotels, refreshments and additional transport.

For airlines, this has caused a serious administrative challenge to handle thousands of claims at short notice, often having to cross reference passenger and flight data to make sure that the passenger has a genuine claim and was on that flight.

No passenger likes waiting, and time taken to reply can have a detrimental impact on customer loyalty. Add to this the aggressive behaviour of compensation chasing companies, and an airline’s brand image can significantly suffer in a short amount of time.

Whilst the administrative and customer ramifications can be severe, the financial implications to an airline’s balance sheet are staggering.
To date, airlines have paid out 8-figure sums year-on-year and yet this is still in some cases only 15% of the total amount of outstanding compensation that could be claimed. With such a potential fiscal black hole, it is perhaps unsurprising that voices in the industry refer to EU261 as an airline killer…

 

Financial Impact
The regulation’s financial impact has been severe. The compensation bill for a delayed aircraft can range from €17,500 for a regional flight through to in excess of €150,000 for long haul trips. Worse still, for airlines whose average ticket price is under €100, the compensation can be far in excess of the ticket price. For a small carrier, the cost can be crippling, but for any airline having to pay-out more than the passenger paid for the ticket is burdensome.

The regulation allows customers to make a claim up to the statutory limitations period from the point of departure. As such, carriers have no idea when that passenger might make a claim; it could be in a month, year or even 6 years. For example, in the UK the prescription period is 6 years, meaning a passenger delayed today has until 2024 to submit a claim. When does an airline budget for that claim?

With such large amounts of compensation to be won, “compensation chasers” have begun aggressively chasing both past and present claims. It is now likely that a claimant for a past flight – whom an airline may not expect to claim – will make their request for compensation.

The problem in short is volatility and unpredictability. There is no safe way of estimating when a passenger might claim or how many will claim at any one time. All it takes is one high profile cancellation and airlines can find that overnight the number of passengers claiming compensation can increase by as much as 96%. It is not unfair to say that the cost of EU261 is now more volatile than oil.

 

Reputational Impact
The sheer volume of EU261 claims that airlines face has led to a significant administrative burden.
To respond to passengers in a timely manner, many airlines have had to allocate staff away from their usual duties to focus on EU261 as failure to respond to claimants has significant consequences on customer loyalty. Reputation in Europe is important. With so many options, customers can be fickle, and therefore negativity in the claims handling process could discourage customers from flying with the same airline again.

Once again, airlines have to contend with “claims chasers” who chase compensation on behalf of passengers. Increasingly, these companies are becoming aggressive in their pursuit of compensation, and failure to respond can often lead to not only negativity in the press, but also complaints to the regulator.
There is regrettably no one size fits all approach to EU261. Claims have to be eligible, but fighting a claim can lead to much unwanted attention. Often, there is a direct correlation between bad publicity and increased compensation amounts.

So, what to do? How do you manage claims and retain customer loyalty? What delays and cancellations are worth defending? How do you limit the cost of EU261?
Over the last couple of years there have been a number of different strategies to tackle these questions. In September JLT Specialty’s Aerospace team will be lending their industry leading data led approach to tackle these questions, and better understand how to best manage EU261 at the London Aviation Festival.

 

NB1: JLT Specialty will take part in the Aviation Festival on 5-7 September 2018 in London. You can visit them at the exhibition on stand 145. For more information about the services JLT Specialty will showcase, please click here. For your free expo pass to visit them at the show, please click here.
NB2: This blog is compiled for the benefit of clients and prospective clients of companies of the JLT Specialty Limited (“JLT”). It is not legal advice and is intended only to highlight general issues relating to its subject matter; it does not necessarily deal with every aspect of the topic. Views and opinions expressed in this document are those of JLT unless specifically stated otherwise. Whilst every effort has been made to ensure the accuracy of the content of this document, no JLT entity accepts any responsibility for any error, or omission or deficiency. If you intend to take any action or make any decision on the basis of the content of this document, you should first seek specific professional advice. The information contained within this document may not be reproduced and nothing herein shall be construed as conferring to you by implication or otherwise any licence or right to use any JLT intellectual property.