Relieving passenger pain when airlines go bust

Reported by: |Updated: May 2, 2019

The shutdown of Jet Airways flights has resulted in several passengers not only being stranded, but their money being blocked as well. Approx Rs 3.6 billion of customer funds are locked up with the airline. This raises an important question – how can such problems be averted in the future? The question is particularly important because airlines take full advance payment for their services, and for a large number of customers, the money is taken weeks and months in advance.

One solution can emerge from the regulation of the banking system. Banks are supposed to keep a certain percentage of their deposits with the regulator, for use in unexpected withdrawals by customers. This is called Cash Reserve Ratio (CRR). In India, the CRR is 4%. The same solution can be applied to airlines, and a certain portion of their advance payments can be kept with some regulator or a trusted body. When an airline goes bust, this amount can be used to repay back customers who have made advance payments.

Another solution can come from the automotive sector. Vehicle owners are required to have 3rd party insurance for any damage they may cause to others. This is a mandatory insurance, without which the vehicle can be seized and the owner penalized. Likewise, an airline can be required to purchase insurance in proportion to the amount of advance payments that it collects.

A third option could be a combination of the above two solutions. Both these solutions will work well for domestic flights, since the customer and the regulator are in the same jurisdiction. The problem arises when you consider international flights. Here each airline will face multiple jurisdictions and customers, creating a web of confusion. Perhaps we need a global aviation regulator to handle problems at such levels. Given the precarious financial state of most of the airlines, a solution for this problem is urgently needed.

Manoj Agrawal, [email protected]

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