COVID-19 and the travel industry: the battle between cash flow and consumer rights

By Lucy England, Scott McInnes, Simon Phippard, Rachel Welch-Phillips, Trystan Tether

04-2020

It will not have escaped anyone's attention that the travel industry has been devastated by the COVID-19 pandemic. It has featured heavily in the media this month for many reasons - the inability to operate flights, the lack of demand for flights, and the layoffs, furloughs and salary cuts that have taken place in the tens of thousands globally. Further cuts are likely to come as the crisis is prolonged.

Travel businesses - especially airlines - have also made the headlines for the stance some of them are taking on offering refunds to customers for cancelled holidays and flights or offering alternatives such as vouchers or postponements.

The importance of these headlines cannot be overestimated as the tourism industry makes up approximately 10% of global GDP. The World Travel and Tourism Council (WTTC) predicts that up to 50 million jobs could be lost due to the pandemic with the industry shrinking by 25% in 2020. Management teams are stating openly that the choice facing them is between making job cuts, giving refunds - or facing administration. None of this is helped by the razor thin margins under which many companies within the travel industry operate. If the current situation is difficult for even the largest, most well-known airlines and tour operators, many small and medium size companies who may not have the cash reserves to sustain them during this crisis and will find it more difficult to borrow or raise capital, are unlikely to survive without assistance.

Here we look at the current regulatory regime surrounding passenger refunds and what changes are being sought to try and ensure we have a travel industry coming out of the other side of this pandemic.

What does the law say?

Flights and EU Regulation 261/2004

There are two relevant elements of EU Regulation 261/2004 (Regulation 261) to consider here: the first is a compensation element and the second concerns refunds.

Ordinarily, airlines must pay compensation to passengers affected by cancellations unless travellers have been notified of the cancellation at least 14 days before departure. Compensation is, however, not payable if a cancellation is due to 'extraordinary circumstances'. After much lobbying, the European Commission (EC) has issued guidance to the effect that some consequences of the pandemic do amount to extraordinary circumstances so the obligation on airlines to compensate passengers for flight cancellations does not apply. The guidelines make it clear that they are not comprehensive and that some consequences of COVID-19 would not be "extraordinary". Nevertheless this guidance has provided some welcome relief for airlines.

The second relevant element – a passenger's right to a refund of their original payment for their cancelled flight – is the source of much discussion. Regulation 261 provides passengers with the right to either i) a refund within 7 days, or ii) rerouting (i.e. another flight) either at the "earliest opportunity" or a later date to suit the passenger. There is also an obligation on airlines to provide assistance in the form of refreshments, communication and accommodation as appropriate where flights are cancelled or face extended delay.

Holidays and the Package Travel Directive

The Package Travel Directive (PTD2) is a separate piece of consumer protection legislation which applies to package holidays.

Ordinarily, under PTD2, a traveller has the right to a full refund of any payments made for the package within 14 days of a package travel contract being cancelled. The obligation to give the refund is on the travel agent who organised the package holiday; travel agents will need to question whether they are the 'organiser' but this refund obligation applies regardless of whether the travel agent has received respective refunds from the airlines, accommodation providers and tour operators for each of their package elements.

Competing interests

In the current climate, there are two main balancing factors on this refund issue:

  • Business cashflow and ensuring we still have a travel industry coming out of the other side of this crisis. If all airlines and travel businesses refund all passengers for all cancelled flights and holidays, they will soon run out of cash and many airlines and travel companies will simply go out of business. This assumes they have the cash to make such refunds in the first place – many travel agents, for example, will have paid the purchase prices of holidays over to the relevant airlines and hotels and are not sitting on the cash.

  • On the other hand there are consumer protection issues, and individuals, who may themselves be suffering financially, should be entitled to their money back if they have not been able to take a flight or holiday for reasons outside of their control such as the current border closures and flight restrictions.

And there is a fundamental difference between refunds due under Regulation 261 and those due under PTD2: under PTD2, travel agents/organisers must provide security for the refund of payments made if the travel agent's business fails and falls into insolvency. By contrast, the refund obligation under Regulation 261 is not insolvency-protected.

What does the industry want?

For flights only, the global airline industry, through IATA, is lobbying the EC to request temporary relief for airlines by allowing them to offer passengers a voucher or a credit refund - money to be used against a future flight - without the passenger's agreement. Currently an airline can offer this if a passenger agrees but the change sought is that airlines can give credit notes/vouchers unilaterally. This can only be done by changing Regulation 261 at the EU level; without such a change, airlines that provide vouchers or credit refunds without passenger agreement will be acting contrary to consumer legislation.

As for travel companies, the EC has offered an olive branch for PTD2, but more is being sought. The EC has issued guidance encouraging customers to accept that their package is postponed rather than cancelled, and, having regard to the strains on liquidity of tour operators, to consider accepting credit notes now while retaining their ability to ask for a full refund at a later date if they do not make use of the credit note by way of a new booking by a certain date. The EC emphasises that the credit note should be covered by appropriate insolvency protection in order for this system to be viable for consumers. As any change to PTD2 must be enacted into local legislation (since it's an EU directive rather than an EU regulation, such as Regulation 261, which has direct effect), any individual government wanting to follow the recommendation needs to amend their national implementing legislation accordingly.

As the PTD2 rules around 14-day refunds were never designed for the mass cancellation of holidays as we are seeing now, there is also lobbying to extend the 14-day payment window to, perhaps, 4 months. This would help support businesses' cash flow in the short term with the benefit that customers would not lose their right to a refund in the longer term.

A different position across the EU

Following the release of the updated guidance on PTD2, several EU member states including France, Belgium, Denmark and Italy, have relaxed the refund rules in their local legislation. In France, for example, package organisers must propose alternative holidays of an equivalent standard and a voucher valid for 18 months, which if not used in full by the end of that period is reimbursed for cash.

As for Regulation 261, the Dutch government has announced that it regards the temporary use of vouchers as an acceptable alternative to honouring the refund entitlement, while acknowledging that this does not meet the strict requirements of Regulation 261. This contrasts with the reaction to the industry's development of special “corona vouchers” that travel organisations can offer to consumers with package travel bookings, which have not been condoned.

The EC is looking for views from more Member States whilst it considers what to do in relation to refund rights under Regulation 261. It is very mindful of consumer protection concerns. It is also considering what the position would be if vouchers become regulated rather than an optional commercial offering: should there be commonality in terms of duration, refundability and insolvency protection? Should there be insolvency protection? Without it, each customer would be taking credit risk on the airline, unlike with package holidays – so would Governments need to agree to underwrite airlines who failed to deliver on the vouchers they issue? That's a whole other topic.

The danger of each Member State doing its own thing is that there will be no commonality across the EU, but governments feel the need to protect their national businesses – even if their guidance is potentially not binding because the underlying EU legislation hasn't been changed - while the EU deliberates.

An alternative for Regulation 261 might be to just extend the refund time from 7 days – atime frame which is not always adhered to in any event. This would provide some relief, but would be of limited value if the extension was too short.

In the UK, the Civil Aviation Authority has issued guidance on Regulation 261 rights, reflecting the EC's guidance. The Government takes the stance that it would rather see amendments to legislation at the EU level, and it has not issued guidance under PTD2 (or the UK's implementing legislation, the Package Travel Regulations) although it says that it supports the protected credit note concept. Many travel organisers in the UK have had no choice but to issue what they are calling 'refund credits' tied to cancelled ATOL bookings (the UK tour operator insolvency protection scheme) at least if they are to avoid being pushed into insolvency. Such refund credit should be protected under the existing rules if the travel organiser does fail in the meantime, but the legislation has not kept up.

As for airlines in the UK, they are doing a range of things – offering refunds but within a much longer period (some 90 days) and making it harder to get refunds and more attractive to take an alternative – all to retain the cash they need to stay afloat.

There is a lot to consider and many competing interests.

Card schemes/chargebacks

There is another important angle which should not be forgotten - those cancelled bookings that have been paid for with a card (e.g. a Mastercard or Visa card). All the major card schemes provide a mechanism that allows the card issuer (e.g. the cardholder's bank) to provide a refund to the cardholder (e.g. the passenger) for services purchased with their card which have not been delivered. The card issuer is then able to recover the refund amount from the relevant merchant's (i.e. the airline's or travel company's) "acquirer" (this being the payment services business which provides the merchant with access to payments through the relevant scheme). This is known as the card issuer creating a "chargeback" and the acquirer in turn can recover the amount which has been charged back (i.e. the amount it has had to pay out to the card issuer) from the merchant (the airline or the travel company).

In the UK, these scheme rules are supplemented by a special regime under Section 75 of the Consumer Credit Act 1974. This provides that a consumer who has paid with a credit card (but not a debit card or prepaid card) is entitled to the same rights against his/her card issuer as he/she has against the merchant (subject to some thresholds). Accordingly, a passenger with refund rights for a cancelled flight or holiday can exercise those rights against the card issuer, which will again be entitled to be reimbursed by the merchant's acquirer (and therefore indirectly by the merchant) through the chargeback mechanism.

Refunds being sought from cardholders for cancelled flights are already being processed by card issuers and passed through to merchants and more can be expected, particularly if airlines/travel companies make it difficult for refunds to be obtained from the directly.

Acquirers anticipating rising volumes of cancellation-related chargebacks, and expecting that they may then face difficulty getting reimbursed by the merchant (airline or other travel provider), may start requesting collateral or other guarantees from the merchants and may also seek to build up such collateral by holding back the proceeds of newly processed card sales which would otherwise have been paid on to the merchant and assisted with its cash flow.

What next?

Integral to the post-crisis survival and success of the travel industry is the resilience of its component parts - the travel agencies, airlines, hotels, and food & beverage companies. The future is particularly uncertain where there is interdependence between struggling players in a globalised market with geographical disparities: how will the hotel market bounce back in Spain if the aviation market in the UK shrinks? It would be a challenging task for governments to address such hypothetical eventualities now that are so riddled with uncertainties, but the priority must be to sustain the travel industry to a sufficient degree to ensure that there is enough left to rebuild upon once the pandemic comes to an end. However, it would not be surprising to see travel patterns change globally as the costs of reaching certain destinations in the post-pandemic travel market are altered by the decisions made by governments and companies today.

What is a certainty is that without cash travel businesses and airlines won't survive - but consumers are entitled to their money back. What's the right answer? There may not be one but without some help from government and compassion from consumers, our travel industry as we know it will be greatly weakened and fundamentally changed even when the current crisis ends.

Last reviewed: 08 April 2020