Airline insolvencies in India- Part II

Hitoishi Sarkar*

The COVID-19 pandemic has unarguably impacted the financial stability of the aviation industry immensely. The International Air Transport Association (IATA) predicted losses totaling $84 billion for the aviation industry in 2020. At its low point in April, air traffic ran at 95 per cent below 2019 levels. At the time of writing of this post, almost 23 airlines have collapsed due to COVID-19.

A pertinent issue which has engaged stakeholders across the spectrum is that of refund for flights cancelled due to the pandemic. The issue is incredibly complex from the standpoint of regulators as the rights bargain is challenging to rise up to. For instance, if regulators insist on airlines issuing traditional full refunds to passengers, while it may be a significant reiteration of the supremacy of passenger rights but will also irreparably damage the ability of the aviation industry to recover from the current financial stress.

Several airlines across the world have refused to offer refunds for cancelled tickets and have instead insisted on issuing vouchers to passengers of cancelled flights. As per reliable calculations, U.S airlines alone have issued vouchers to the tune of USD 10 billion to customers. The International Air Transport Associations (IATA) estimates that airlines across the world owe approximately $35 billion to passengers for cancelled flights.

Typically, regulations across jurisdictions often mandate refunds to passengers to customers in such situations with the customer having the discretion to decide whether or not the refund is to be retained in a credit shell. However, airlines have raised concerns about enforcing these regulations while the entire industry struggles to stay afloat. For instance, Airlines for Europe (A4E) and other airline associations in Europe are calling for an amendment to the European Commission’s EC 261 Air Passenger Rights Regulation, that would allow airlines to issue refundable vouchers or delayed reimbursements instead of traditional refunds.

Indian airlines have also resonated similar demands with almost all major airlines issuing credit shells instead of traditional refunds. The issue assumes much more significance for the financially stressed Indian aviation industry, which already operates on paper-thin margins and unreasonably high operating costs.

This post seeks to delineate the Indian regulatory framework with regard to refund of cancelled airline tickets and analyze the recent decision of the Supreme Court of India on this issue through the lens of airline insolvencies. The latter part of this post will also briefly touch upon how regulators elsewhere around the world have dealt with this issue.

The Indian Credit Shell Dilemma

In the wake of the COVID-19 pandemic, most Indian airlines have refused to refund the fare amount to customers for cancelled flights. The reason is comprehensible considering that most Indian airlines have not structured their business models to be able to withstand even regular shocks, such as elevated fuel prices or economic downturns, let alone once-in-a-century events such as the present pandemic. Even major players in the Indian aviation industry are known to have precarious liquidity levels. Thus, there is considerable apprehension that if Indian airlines are forced to offer traditional refunds in these extraordinary circumstances they will be pushed to the verge of bankruptcy as the quantum of funds used in providing refunds will far exceed the revenues from new bookings and thus push several airlines to the brink of insolvency.

The regulations governing refunds for cancelled flights is relatively unambiguous in India. The Directorate General of Civil Aviation (DGCA) which is the primary regulatory body in the field of Civil Aviation in India vide Civil Aviation Requirements (CAR) Section 3 Air Transport Series ‘M’ Part II Issue I mandated that the option of holding the refund amount in a credit shell by the airlines shall be the prerogative of the passenger, and not a default practice of the airline. Likewise, Civil Aviation Requirements Section 3 – Air Transport Series ‘M’ Part IV Issue I also obligates airlines to refund the airfare or to provide an alternative flight in the event of a flight cancellation.

Thus, it is evident that airlines’ present policy of creating credit shells by default instead of offering cash refunds fall foul of the Civil Aviation Requirements (CARs) and is thus unsustainable in law.

What is the catch?

The idea of mandating cash strapped airlines in a developing country to offer full cash refunds in the midst of a pandemic may look quite attractive from the standpoint of the supremacy of passenger rights. However, the wider impacts of such a measure will cause more harm than good.

Prior to the COVID-19 outbreak, India‘s aviation industry’s economic contribution was estimated at $35 billion, supporting 6.2 million jobs and contributing 1.5 per cent to the GDP in India. Even if conservative estimates are to be taken the disruptions in air travel from COVID-19 could reduce about 575,000 jobs and $3.2 billion in GDP supported by the air transport industry in India. Thus, an aggressively pro-passengers rights regulation in these times will only aggravate the already stressed financial situation in the Indian aviation sector. 

It is pertinent to note that if airlines are forced into bankruptcy through refund regulations which do not account for the present extraordinary circumstances, it may lead to cessation of their operations. As we have discussed in our forthcoming chapter, an airline insolvency is far complex than insolvency in other industries. This is for the reason that if an airline turns insolvent and ceases operations, there are several issues that would need the immediate attention of the state machinery. For instance, passengers booked through the airline who may be left stranded due to the cessation of operations would need to be repatriated. Likewise, the issue of providing refunds to passengers who had booked through the airline for travel at a future date will also need to be addressed. The issue of mobility of assets also adds significant complexity to airline insolvencies.

The Supreme Court’s ruling

In Pravasi Legal Cell v. Union of India, a three-judge bench of the Supreme Court of India was called upon to adjudicate on whether the refusal by airlines to offer traditional refunds was arbitrary and violative of the Civil Aviation Requirements.

The Court reiterated that in ordinary course modalities and timelines for a refund on cancellation of tickets are governed by the CARs. However, the Court ruled against strict enforcement of the CARs noting that it would further restrict/reduce their operations and may further jeopardize the possibilities of generation of cash by airlines which can further adversely affect/delay the refund cycle.

After consultation with relevant stakeholders, the Court issued an eight-point direction in its order, thereby effectively carving out a middle ground for all parties. The directions of the Court were as follows:

  1. For tickets booked during the lockdown for travel during that period, the airline shall refund the full amount collected without any cancellation charges.
  2. If tickets have been booked during the lockdown through travel agents, in all such cases full refund shall be given by airlines immediately. The agents shall immediately pass on the amount to the passengers.
  3. In all other cases, airlines will refund the amount to the passengers within 15 days. If due to financial distress that is not possible, then airlines shall provide credit shell to passengers for bookings done personally or through agents, and that shall be used for future bookings before March 31, 2021. Passengers will have the option to utilize the credit shell on any route of their choice or can transfer the credit shell to any person, including the travel agent through whom they have booked the ticket, and airlines shall honor such transfers.
  4. In all cases where credit shell is issued there shall be an incentive to compensate the passenger from the date of cancellation up to June 30, 2020, in which event the credit shell shall be enhanced by 0.5% per month of the fare collected till June 2020. Subsequently, the incentive shall be enhanced by 0.75% per month up to March 31, 2021.
  5. After the expiry of the March 31, 2021 deadline, the amount has to be refunded to the consumer.
  6. In cases where passengers have purchased the ticket through an agent, and credit shell is issued in the name of passenger, such credit shell is to be utilized only through the agent who has booked the ticket. In cases where tickets are booked through agent, credit shell as issued in the name of the passenger which is not utilized by 31st March, 2021, refund of the fare collected shall be made to the same account from which account amount was received by the airline.
  7. Even for international travel, when the tickets have been booked on an Indian carrier and the booking is ex-India[1], if the tickets have been booked during the lockdown period for travel within the lockdown period, immediate refund shall be made.
  8. If the tickets are booked for international travel on a foreign carrier and the booking is ex-India during the lockdown period for travel within the lockdown period, full refund shall be given by the airlines and said amount shall be passed on immediately by the agent to the passengers, wherever such tickets are booked through agents. In all other cases airline shall refund the collected amount to the passenger within a period of three weeks.

Following this, the  Directorate General of Civil Aviation vide circular dated October 7, 2020 issued guidelines mirroring the eight points provided by the Supreme Court. Thus, the Supreme Court’s ruling in Pravasi Legal Cell is a welcome development as it resonates the United Nations Conference on Trade and Development’s (UNCTAD) recommendation to “devise amicable solutions which are acceptable to both the customers and the industry itself.”

How have regulators elsewhere dealt with the issue of refunds?

Several countries have introduced regulatory policies to ensure that consumer rights are not sidelined under the garb of financial stability of airlines and have introduced regulatory measures to ensure that passengers right to refund are not adversely impacted.

For instance, China has established a free ticket exchange policy for all tickets purchased before January 2020. Likewise, the United States warned airlines of their obligation to refund cancelled tickets to consumers.  The European Union has also issued a recommendation to make travel vouchers an attractive alternative to cash reimbursement, allowing for vouchers to be issued with a validity of 12 months after which the reimbursement is actionable.

Conclusion

Covid-19 has highlighted the need to balance various stakeholder interests. However, balancing these interests is significantly more complex in a country such as India with low per capita incomes as not all consumers will be in a position to accept a voucher or a delayed refund. The Supreme Court’s ruling in Pravasi Legal Cell has laid to rest all speculations on how Indian airlines are to pay the estimated sum of Rs 6,000 crores which they owe to passengers as refund payments. The Court’s ruling also serves as a textbook example of how stakeholder interests can be effectively addressed in these extraordinary circumstances.

The pandemic has also brought to light the need for India to think about the position of airline customers in the event of an airline insolvency. As the Jet Airways episode has demonstrated, Indian regulations lack clarity on how repatriation is to be carried out if an airline turns insolvent and ceases operations thereby leaving passengers stranded. However, the scenario is not all gloomy. The Cape Town Convention Bill, 2018 is a welcome development in this regard as once enacted it will override several IBC (Insolvency and Bankruptcy Code, 2016) provisions and account for industry specific complexities associated with airline insolvencies. The enactment of the Bill will significantly ease aircraft financing and leasing in India. Recently, India also amended the Aircraft Act, 1934 which seeks to provide statutory status to the DGCA, the Bureau of Civil Aviation Security (BCAS), and the Aircraft Accidents Investigation Bureau (AAIB).  Thus, there is considerable hope that the Indian regulatory structure will address these concerns in the near future.

See Airline Insolvencies in India – Part I.


[1] “Ex” is a Latin prefix meaning “out of” or “from. “Ex-India” signifies that the flight originates out of/from India.

* Hitoishi Sarkar is an undergraduate student of Law and Arts- Year III, Gujarat National Law University, Gandhinagar.

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