c/o British Air Transport Association Artillery House 11-19 Artillery Row London SW1P 1RT 8 December 2009

Lord Adonis Secretary of State for Transport Department for Transport Great Minster House 76 Marsham Street Westminster London SW1P 4DR Dear Secretary of State, You will no doubt be aware of the decision in November by the European Court of Justice that widened the scope of Regulation 261/2004 (the Regulation) on the liability of airlines to pay compensation to passengers. Having reviewed the consequences of the decision, it is our collective view that this judgement calls into question the viability of the industry in its current form. The financial implications of the decision for the industry (to which the Court was clearly oblivious) are fundamental and the consequence is clear: passengers will suffer from significantly diminished levels of service as airlines try to mitigate the potentially ruinous consequences. In our view, it is paramount that policy-makers, regulators and airlines find a workable solution as soon as possible in the interest of all passengers and employees in the sector. On 19th November, the ECJ ruled that passengers on flights whose arrival at their final destination is delayed by three hours or more are entitled to statutory compensation, despite this not being provided for in the Regulation. In reaching this decision the Court has chosen to amend the legislation in a way that was considered and explicitly rejected by the European Commission, the European Parliament and the Council of Ministers when the legislation was first proposed. The decision is inconsistent with earlier statements made by both the Advocate General and by the Grand Chamber of the ECJ in a previous case referred to that Court (IATA and ELFAA [2006] ECR I-403). The decision also runs contrary to the opinion of the Advocate General issued in this present case. We continue to believe that the statements of the Grand Chamber of the ECJ in that previous case represent the correct interpretation of the Regulations and should therefore be followed by the UK courts and by the CAA in its role as the UK National Enforcement Body. The ruling has taken the whole industry by surprise and airlines are only beginning to comprehend its severity. Based on 2008 data, when delays of more than 3 hours affected on average 1-2% of Europes 600 million passengers across all airlines, and using a weighted average compensation of 400 (reflecting the different compensation bands of 250, 400 and 600 for short, medium and long haul) we estimate that the European airline industrys financial liability as a result of new compensation claims alone will amount

to an incremental 3-5bn per year based on the current average industry delay rates. The impact of these extra costs will seriously undermine the industrys economic and social contribution in Europe, currently valued at 8.8bn in the recent report by Oxera for the Airport Operators Association. These costs also come at a time when IATA expects airlines to lose a collective 8bn billion this year. To put it in context, the compensation liability for a single Airbus A380 flight, in a standard seat configuration, delayed by four hours will amount to over 300,000 for the airline involved. It is worth remembering that following the ECJs decision in the Wallentin Case, regarding the meaning of extraordinary circumstances, the starting point for courts and regulators in EU member states is to no longer accept technical delays as a force majeure event. The result is that as things stand in the vast majority (around 80%) of claims for compensation under the regulation, airlines do not have the benefit of the extraordinary circumstances defence available to them. The severity of the financial impact of this decision will lead to a range of clearly unintended consequences; consequences that are beginning to bite already. In particular: The number of cancellations will increase sharply as the ruling gives short haul carriers a powerful incentive not to operate the delayed flight at all but to cancel immediately so as to mitigate the financial losses that would accrue from carrying a rolling delay through the working day; The number of delayed passengers will increase as airlines will change the way their operations are run to avoid isolated delays of over three hours at the expense of overall punctuality; ie networks may be managed to allow for many more delays of less than 3 hours with a view to avoiding delays of more than 3 hours; Job losses and bankruptcies of weaker airlines will inevitably follow. Shocks to an airlines day to day operation resulting from significant numbers of delays that do not fall within the very narrow definition of exceptional circumstances which have been turned from operational crises into potentially crippling financial crises for airlines; In the long-run fares will inevitably have to increase as airlines have to recover their costs; and Marginal routes will be dropped . These unintended consequences will result in a weaker airline sector and are already causing a diminishing service for passengers the opposite of what the EU set out to achieve when it drafted the legislation. To further help you to understand the issue, a number of scenarios have been set out in the attached appendix. The decision of the ECJ significantly compounds the effects of what we already consider to be poor legislation. Airline customers already receive much higher levels of protection than customers using other forms of transport or any other customer service industry. Why is the compensation set at 250-400 when average short haul fares in Europe these days are 60-80 and even a transatlantic flight is often less than 300?

Legal advice has indicated that the ECJ operated outside of its remit in effectively creating new legislation by its decision rather than properly interpreting the words of the Regulation on its face. However, a reference back to the ECJ to correct the decision, and to remove the confusion and uncertainty caused by the inconsistency between this decision and the decision in the IATA/ELFAA case, is unlikely to be achieved in less than an 18-24 month time frame. As such, we are calling upon governments and policy-makers at a national and European level to take action to protect the airline industry from the implications of this decision outlined above. In particular: The ongoing review of the Regulation should be expedited and legislative time made by the relevant European institutions to ensure that the Regulation is amended as soon as practicable to alleviate the unintended consequences of the ECJ decision; To intervene in any case to prioritise the speedy hearing of a reference back to the ECJ in order that the subject be readdressed with the full facts and implications laid out before the Court. We recognise that this decision was intended to benefit consumers, but we do not believe this will be the outcome. In fact the decision carries real costs for consumers and airlines alike. We believe immediate action is necessary to rectify this situation. We therefore seek your support to achieve this objective, and would like to discuss this with you as soon as possible.

Yours sincerely,

Peter Long Chief Executive TUI Travel PLC

Peter Brown Chief Executive Monarch Travel Group

Mike Carrivick Chief Executive Board of Airline Representatives in the UK

Jim French Chief Executive & Chairman Flybe

Andy Harrison Chief Executive easyJet

Frank Pullman Managing Director Thomas Cook Airlines

Mark Tanzer Chief Executive ABTA

Willie Walsh Chief Executive British Airways

Roger Wiltshire Secretary General British Air Transport Association

Appendix ECJ Decision in Sturgeon/Boch Likely Consequences Scenario 1: A scheduled carrier in Europe operates an eight sector line of flying (eight flights with a single aircraft during a day) with an A321 (220 seats) between London and Paris. On the first sector of the day, the aircraft suffers a technical fault and is delayed for 3 hours. As it flies between large slot-constrained airports, the crew are unlikely to be able to make up time as the day progresses. (a) Response before 19 November 2009: The airline would have flown the scheduled programme carrying a 3 hour+ delay (and sought to make up time where possible). Passengers would have been given assistance as required by the Regulation in the form of free food and drink plus phone calls. All passengers would have arrived at their destination 3 hours+ late. The airline would have been liable for the extra cost of the assistance (circa 1,000-2,000). (b) Response after 19 November 2009: If the airline flew the 8 sector programme with a full aircraft carrying a 3 hour+ delay, it would be liable to pay compensation to passengers for that one days flying on one aircraft of 440,000. As a result, the airline may cancel the first flight and the return (in order to attempt to mitigate the extra cost of assistance); offering refunds and paying compensation to the 440 passengers who then may be unable to complete their journey. The priority will be to resurrect the schedule for the rest of the day with less than a 3 hour delay. Scenario 2: A large scheduled carrier in Europe operating A321s on a complex network suffers a morning weather delay in Madrid for all of its 12 aircraft based there. All first wave outbound flights in the morning are delayed by 4 hours. The aircraft typically fly 6 sectors per day across Europe. There is a knock on delay for the lines of flying for those aircraft for the remainder of the day. Compensation for the initial flight delays would be excluded on the grounds of extraordinary circumstances. However, most European courts would not allow the remainder of the flying programme for the day to be exempted on these grounds. (a) Response before 19 November 2009: The airline would have flown the scheduled programme carrying a 4 hour delay on 12 aircraft (and sought to make up time where possible). Passengers would have been given assistance as required by the Regulation in the form of free food and drink plus phone calls. All passengers would have arrived at their destination 4 hours+ late. The airline would have been liable for the extra cost of the assistance to passengers (circa 12,000-24,000). (b) Response after 19 November 2009:

If the airline flew the 12 sector programme with a full aircraft carrying a 3 hour+ delay, it would be liable to pay compensation to passengers for that one days flying on 12 aircraft of circa 4million. As a result, the airline may cancel the first flights of the day and offer refunds to at least mitigate the assistance cost and then the return flight. In order to resurrect the flying schedule, the carrier may consider using all of its spare aircraft and engage in a programme of tactical cancellations of flights with low passenger loads in order to fly the high passenger load flights with less than a 3 hour delay, causing significantly more cancellations and delays across the network than would otherwise have been the case.

Scenario 3: A charter airline in the UK operates daily long haul operation with a fleet of Airbus A330s with a seating configuration of 350 seats. The operating programme is managed with regular maintenance slots such that there is reasonable anticipation that any single aircraft will operate daily for 6 out of 7 days. The high utilisation, higher density operation drives lower prices to the consumer via their package holiday prices. Quite separately charter long haul operations are often undertaken to leisure destinations from regional departure points and at a lower frequency well beyond the scope of scheduled airlines. Thus the opportunity to offer alternative flights is extremely limited. (a) Response before 19 November 2009: If the delay was longer than four hours the impact might be such that the delay would roll onto successive days until recovered by swapping aircraft around from different UK bases and thus the airline/tour operator impact is multiplied until recovery takes place. All passengers involved would have received assistance in the form of free food, drinks and phone calls as provided for under the Regulation. The ability of charter airlines to cancel flights is non-existent due their operating on behalf of tour operators whose customers are covered by the Package Travel Directive which leads to different consequences for consumers, airlines and tour operators.

(b) Response after 19 November 2009 This is best illustrated as follows: On any day a single four hour delay on the outbound leg of a long haul round trip would mean an outbound compensation of 210,000 and a further 210,000 on the return flight. This means that for one single four hour delay on an outbound flight the aggregate compensation due to customers could be in the order of 420,000. Added to this would be the free food, drinks and phone calls already referred to.

This covers the immediate impact to the airline, but from a tour operators perspective the context is as follows: Distance of flight Average Summer 2009 holiday price (per person) 1,120 / 1,232 ECJ Compensation Level (per person) 600 Percentage of total holiday cost for one four hour delay 48%

Long-haul up to 5000km

Thus a tour operator through their charter airline would be refunding nearly half the purchase price of their average 10 day long haul holiday as a consequence of a four hour delay. The magnitude of the penalties, the potential of the multiplier effect across successive days and routes and the lack of ability to cancel would call into a question a significant number of routes at the margin of a charter airlines/tour operators operation. The ultimate position might be for a number of destinations not to be served at all or at much higher prices. Many of these flights offer the only effective access to tourism destinations and if withdrawn there would be both a reduction in consumer choice and a loss of tourism income in those resort regions, and the impact of these losses could be devastating in some Caribbean islands, tourism constitutes greater than 50% of GDP, and the some of the largest tourist arrivals are from the UK.