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The broken airline delay compensation scheme needs fixing to benefit airlines and passengers ǀ View

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Softly-softly and with no public announcement, United Airlines has stopped automatically compensating passengers for flight delays less under six hours. United had previously, like several other large US airlines, issued travel vouchers as a matter of course to plane-loads of passengers affected by delays over four hours when the delay was under the airline’s control.

In the US, how much airlines compensate passengers for delays tends to rise and fall based on competitive pressure and the occasional risk of regulation, especially when mishaps go viral, such as when a customer was videotaped being dragged off a United flight in 2017. After that incident, United took a number of steps to burnish its reputation, including providing compensation systematically to delayed passengers. United’s newest policy change may reflect a calculation that the airline’s customers have become more loyal, or it could be a genuine effort to empower employees with more discretion in the hope that flexibility on the front line will make workers and customers better off.

If United were a European airline, however, it would not have such flexibility. Next month will mark the 15th anniversary of a European regulation that requires airlines to compensate passengers between €250 and €600 in cash for delays over two hours that are under the airline’s control, depending on the flight distance and length of delay. For passengers, the guarantee sounds comforting. Even cost-minded airlines could see a benefit in having a clear policy that levels the competitive playing field.

A broken and unfair system

The problem is, the EU passenger compensation scheme is broken. Setting aside whether the compensation levels are fair, the mechanics of the program are not working today for airlines or passengers. That is because there is no uniform arbiter for when passengers are due compensation, and no streamlined process for either passengers or airlines to settle up.

In fact, the current system all but encourages airlines to reject claims in the first instance. For any one flight delay, each passenger’s claim is independent from that of every other passenger on the same flight. That means that if 200 passengers are all delayed together, the airline will only pay those individuals who successfully prosecute a claim. If a passenger fails to pursue the claim, or if the airline successfully denies a claim, it saves a pay-out. As a result, different passengers will be compensated — or not — differently from one another for the same incident.

By analysing aircraft position data from sources like FlightRadar 24, we can produce a definitive record, not only of when each flight departs and arrives, but also of how each airline performs compared to its peers.
Samuel Engel
Senior Vice President at ICF

While this may reduce the airline’s total financial exposure, in practice it is costly to manage. If there are 200 passengers on a flight that was delayed, the airline may have to administer or contest 200 separate cases, each requiring individual attention.

The current system does not work well for customers either. A recent claim of mine was rejected, for example, until I sent British Airways (BA) the text of a relevant European Court of Justice ruling (the decision clarifies that compensation is due based on delays to the passenger’s total journey time rather than delays to a single flight). It is hard to imagine that BA is unfamiliar with the relevant case law, or that every claimant has the tenacity to track it down the way I did.

No wonder that delay compensation has spawned an entire industry of private agencies eager to pursue your claim in exchange for up to half of the award. The claims industry, which only last year came under regulatory oversight in the UK, has sought to expand by teaming up directly with online travel giants, like Expedia, to target customers with heavy-handed marketing. When a regulation gives birth to a multi-billion-euro industry whose purpose is simply to get customers their dues, it begs the question who is really being served.

Some, including the European Regions Airline Association (ERA) in a recent white paper, argue that the European delay compensation law itself needs to be revised. They raise reasonable concerns about whether the compensation amounts are proportional to the fare (as they are for a similar scheme covering rail passengers), and whether it puts pressure on aircraft mechanics to sign off on repairs more quickly.

From the perspective of public policy, it is fair to debate whether it should be government or the market that makes the rules, but for now at least, it appears that the EU261 regulation is here to stay in Europe and the UK post-Brexit, so it’s time for a better way to manage it.

A plan to fix airline delay compensation

A new solution could solve three of the biggest problems with today’s system. First, the scheme must objectively determine whether compensation is due. This would reduce the administrative and legal burdens on airlines and customers alike. Second, it should streamline the process into a single electronic clearinghouse. And third, it should be transparent, so as to demonstrate fairness and encourage positive competition.

Recent advances in data analytics now make it possible to build such a system. By analysing aircraft position data from sources like FlightRadar 24, we can produce a definitive record, not only of when each flight departs and arrives, but also of how each airline performs compared to its peers. A system based on this type of analysis could objectively establish which delays are within an airline’s control by looking to competitors’ activity under the same circumstances. If competitors are operating similar flights, it should be in every airline’s control to operate as well.

With an objective standard for when compensation is due, airlines and regulators should be eager to subscribe to an online portal that gathers and processes claims for all customers, settles with the airlines and publishes anonymised statistics. Such a system could be operated by a neutral party and easily be funded by the administrative savings it generates. It could be governed by a combination of industry and government representatives, either pan-European or just the UK to start with.

With a simple web portal and a transparent system, airlines would be able to turn delayed customers into loyal advocates — and focus their resources on operations instead of compensation claims.
Samuel Engel
Senior Vice President at ICF

Of course, some of the details would be complex, and airlines might still wish to be in direct communication with their customers. Compared to the current hodgepodge and value lost through agents and disputes, a simple and transparent approach would be a win-win scenario. The system could even be tailored to provide personalised apologies, air miles or other non-cash benefits to an airline’s preferred customers, even if no cash compensation is due.

There is an adage among marketing professionals that a customer complaint resolved once makes for a more loyal customer forever — even more loyal than the customer who was never disappointed in the first place. In fact, in one recent study, airline customers whose Twitter complaints were addressed by the airline were subsequently willing to pay $9 (€8.27) more for a ticket on that airline, and were more likely to recommend the brand to others.

If ever an industry had the opportunity to profit from unhappy customers, it would be airlines, since delays happen to everybody. With a simple web portal and a transparent system, airlines would be able to turn delayed customers into loyal advocates — and focus their resources on operations instead of compensation claims.

ICF
Samuel EngelICF

Samuel Engel is a Senior Vice President and leads the global aviation practice at ICF, an international consultancy.

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