The great airline refund scam

At first 12, now 16 EU member states are looking to overturn rules requiring airlines to refund passengers with cash payments if their flight had been cancelled as a result of COVID-19 travel restrictions. The companies have been lobbying the European Council to disable Regulation (EC) No 261/2004 of the European Parliament and of the Council of 11 February 2004 establishing common rules on compensation and assistance to passengers in the event of denied boarding and of cancellation or long delay of flights.

This regulation generally provides for two guarantees. First, passengers can expect to reimbursements for cancelled flights within seven days. Second, passengers can expect compensation for their flight cancellation, between €250 and €600 depending on the length of their route. The latter has been the reason for significant disputes and has proven to make neither companies nor passengers happy.

This compensation scheme is a government-mandated insurance policy, which increases the price of the ticket, despite passenger not wanting generalised insurances. How can I say that with confidence? It suffices to take a look at how many people conclude voluntary travel insurances upon checkout. The result of the compensation scheme has been long court battles (I happen to be in one of those myself), in which passengers rightfully demand the funds that they were promised.

However, while compensation rules can be controversial (and do not apply in cases of natural disasters), it seems fair and just that passenger are reimbursed for flights they did not get to take. This is not an argument from a David vs. Goliath perspective of the big company vs. the small consumer, but rather from the principle of contract law. Consumers concluded their purchase with the security of cancellation refunds – which so far had been guaranteed by law – in mind.

If the Council were to decide to overturn Regulation (EC) No 261/2004 because of Coronavirus, then it would set an incredible precedent with lasting consequences. Why would consumers ever again seek out to believe the promises of “consumer protection,” if the simple assurance of a refund is not guaranteed? For decades, and on the back of the precautionary principle and consumer protection, the European Union has supported and advocated for paternalistic policies and high taxes on fatty foods, tobacco, sugar, or alcohol. Its same proneness to precaution has shown to be useless in the light of a global pandemic. Acting now in the interest of large companies as opposed to its citizens will only further, and rightfully, deepen the divide between political institutions and the public.

Just like with bailouts (as this is a form of bailout), companies will be incentivised to re-commit their mistakes during the next crisis and will not choose to engage in sounder bookmaking. Yes, there is pressure from shareholders to outperform the previous quarter, which is achieved by keeping actual liquidities as low as possible. However, the policy of spending money you’re only projected to make maybe at some point is not one that should be incentivised by governments. In a free market, shareholders ought to know that their investments bear real and palpable risks, and that their choice of corporate leadership needs to reflect these risks.

Adding to that, the EU would contradict competition principles with such a decision. Some airlines have already chosen to reimburse their customers (RyanAir being one of them), which shows that it is entirely possible to guarantee refunds and run a successful airline. A company such as AirFrance, on the other hand, is now cashing in on €10 billion from French taxpayers – whether or not their passenger will get refunds remains a mystery.

If governments wanted to give the airline industry a break, and guarantee future growth in the aviation sector, it would opt to reduce or scrap taxes and fees that apply to them. Making direct cash payments to large corporations, and the expense of customers who already had their guarantees retrospectively dismantled, would be an incredible move by leaders in Brussels.

The question is: who had to be dined nicely in the European Council to consider the possibility of scrapping regulation (EC) No 261/2004?

This article was first published by the Austrian Economics Center.

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About Bill Wirtz

My name is Bill, I'm from Luxembourg and I write about the virtues of a free society. I favour individual and economic freedom and I believe in the capabilities people can develop when they have to take their own responsibilities.

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