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Special report: why no airline bonding?

Published: 27/02/2012 - Filed under: News »

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In light of recent airline failures a number of readers have contacted us to see where they stand. Because, as surprising as it may seem, there is no official bonding scheme to cover passengers should their airline cease trading.  

Holders of FFPs (frequent flyer programmes) also lose out because their ‘miles’ become void – see later – although a “status match” may soften the blow.

The present economic situation and rising fuel prices mean that airline finances will be under pressure in the months ahead. 

The cost of fuel is a particular concern. Speaking to The Guardian last summer (when Brent Crude cost US$115 per barrel), Willy Walsh, CEO of British Airways and Iberia parent International Airlines Group said he fully expected some carriers to go under.

“I think the oil price is something that poses a real challenge to the industry. There are a lot of airlines that will struggle in a high oil price environment.”

Trade body IATA says that fuel represents 30 per cent of an airline’s operating cost. That statement was made last year and based on oil at US$110 a barrel. Today’s price for Brent Crude is US$124 a barrel although that remains below its 2008 peak of US$147.

So what about bonding? As far as the UK is concerned, if you book a ticket directly with the airline and pay by cash or debit card then you are not covered against airline failure.

In the past our CAA (Civil Aviation Authority) has investigated the possibility of organising some form of bonding similar to the ATOL (Air Travel Organisers’ Licensing) scheme which covers holidays sold as a package.

The CAA’s idea would be to add a fee of £1 or so to each airline ticket purchased in the UK. The airlines would then pass on the money to the government to cover any future airline default.

But the problem has been two-fold:

  • Financially sound carriers have previously told the CAA they would resent having to collect money on behalf of other, perhaps less financially responsible, airlines.
  • It is unclear whether the UK government would be able to compel every airline, especially some foreign carriers, to participate.

So in the meantime, the simplest way to ensure you are covered is to:

  • Pay by UK-issued credit card. Under section 75 of the 1974 Consumer Credit Act passengers are covered for amounts of over £100.  I must stress that the UK’s Consumer Credit Act of 1974 does not apply to cards issued elsewhere.  Overseas readers  must check with their bank or card issuer to determine where they stand.
  • If you book through a travel agent, check to see it is bonded against airline default.
  • Take out insurance. But note that most policies will not cover airline failure should the carrier in question be trading under  Chapter 11 bankruptcy protection,  such as American Airlines.

What about FFPs? There is no consumer protection for loyalty schemes. Passengers will lose their accrued ‘miles.’

But to retain customer goodwill, an alliance may offer status match which means you retain the same status within another carrier’s programme. 

That is what happened to one Business Traveller reader who held Gold membership with Spanair which had ceased flying on January 27 (see online news February 27).

In an email dated February 22, the reader was offered the same status in one of nine Star Alliance schemes:

Miles and Bonus (Aegean Air), Aeroplan (Air Canada), Phoenix Miles (Air China), Air Points (Air New Zealand), SAS Euro Bonus, TAP Victoria, Royal Orchid Plus (Thai), Mileage Plus (United) and Dividend Miles (US Airways).

The reader opted for Gold status with Thai.

Now Hungarian carrier Malev is offering Status Match to passengers who were previously members of its Duna Club. So far two Oneworld carriers have offered to honour a member’s status: Air Berlin (which joins Oneworld officially on March 20) and Finnair.

One point to note is that major European carriers like British Airways and Lufthansa are noticeable by their absence so the offer may not be convenient. For example, a UK-based executive visiting Budapest is unlikely to fly there via Helsinki.

But better some form of compensation rather than none at all.

Report by Alex McWhirter

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COMMENTS » 

Ian_from_HKG - 02/03/2012 06:26

If airlines are unwilling to collect the money, there is one obvious alternative solution - set aside GBP1 from the APD for this purpose instead

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