Tuesday, August 23, 2005

The lawyers' delight

The Financial Times is running today with a story about the "denied boarding" regulations, headlining: "EU airlines count cost of compensation confusion".

When we first dealt with this issue in February last, we noted that the terms under which compensation would be payable specified "certain circumstances" which were by no means clearly stated.

Predictably, therefore, the airlines financed a reference to the ECJ, arguing that the regulation denies air carriers any defence against claims for delays caused by extraordinary circumstances such as bad weather, or acts of third parties such as an Air Traffic Control strike.

Now, featured in the FT, Simon Evans, chief executive of the Air Transport Users Council is noting that the number of complaints and queries received on passenger compensation has increased fourfold. "These rules have certainly raised expectations among passengers about what they can get if they have had a bad travel experience," he says.

But, he adds, the EU legislation has also created an unprecedented legal quagmire. Some airlines are saying the rules have left them with an unsustainable financial risk. Low-cost carriers in particular insist they could be forced to reimburse many times the actual price of a ticket.

Ryanair, Europe's largest low-cost airline, is among airlines that have so far resisted paying the new compensation claims. Jim Callaghan, its head of regulatory affairs, says the new rules are "a complete mess". He cites how a family of five that paid a total of €168 ($204) for their flight but were asking for compensation of €1,980 following a cancellation due to weather. In another case a woman who paid €46 for her flight was asking for €400. "This is how insane the situation is," he says.

Early next month, the advocate general of the European Court of Justice, the EU's highest court, is expected to give an opinion on the rules, following challenges by the International Air Transport Association and the European Low Fares Airlines Association.

Iata estimates applying the rules will cost EU airlines €560m a year, over and above existing compensation. For a medium-sized European carrier that amounts to about €40m a year - about a fifth of its operating profit - according to Iata's calculations.

Mark Franklin, head of the aviation group at DLA Piper Rudnick Gray Cary, an Anglo-American law firm, says: "Airline legislation is supposed to be part of a uniform worldwide system and the EU has certainly changed a major part of it."

Needless to say, "Brussels" is unrepentant, hopeful that the rules will provide an incentive for airlines to reduce delays and cancellations except where there are "extraordinary circumstances", such as the wildcat strike that left thousands of British Airways passengers stranded earlier this month.

Jacques "Wheel" Barrot, the EU's transport commissioner, has also argued that airlines should take advantage of the "better-quality image" provided by the legislation at a time when European passengers are becoming more litigious.

In the short term, however, says the FT, lawyers stand to benefit. In the UK, the first court hearings on passenger claims relying on the new rules are expected by the end of the year. Several law firms, meanwhile, have been busy advising airlines on how to fend off hefty claims and turn the "extraordinary circumstances" exemption clause in the new rules to their advantage.

"We have had a steady flow of questions from airlines," says Franklin. And there have been several small cases where people have sued airlines. He insists it is the "uncertainty and obscurity in the law that is the main source of why people come to us".

Don't you just love it. Even when making its own laws the EU is incompetent and, as always, the main beneficiaries are the lawyers.


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