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Passenger compensation - just claims or major costs for airlines?

Once the airline industry has recovered from the COVID-19 situation, the number of passengers should be growing again in the long run. Digitization shortcomings will then have an even bigger impact in the future.

Do passenger claims provoke negligible costs for an airline or is it worth taking a closer look at those costs and the cost saving potential?

Unquestionably, the EU Passenger Rights Regulation has a lasting impact on the airline industry. One delayed medium-haul flight with 200 passengers on board may trigger compensation payments of up to EUR 80,000 under Regulation (EC) No 261/2004. A long-haul flight with 400 passengers on board could even provoke compensation payments of up to EUR 240,000 in case of delay or cancellation. As such, compensation payments have a considerable effect on an airline‘s economics.

However, compensation itself is not the only cost factor that has to be considered when dealing with passenger claims handling. There are numerous types of costs triggered by passenger claims – direct costs as well as hidden costs, which can easily multiply the original compensation costs.

As shown in the examples above the costs for compensation for one delayed flight can amount to several hundred thousand Euros. Additionally, the EU Regulation foresees that air carriers have to provide unlimited care to their passengers when an operating carrier reasonably expects a flight to be delayed beyond its scheduled time of departure by two hours, three hours or four hours for short, mid and long haul flights. The right to care includes meals and refreshments in a reasonable relation to the waiting time, hotel accommodation in cases where a stay of one or more nights becomes necessary, or where a stay additional to that intended by the passenger becomes necessary, as well as transport between the airport and place of accommodation (hotel or other). In addition, passengers shall be offered two free of charge telephone calls, telex or fax messages, or e-mails. In case such services cannot be offered the affected passengers are entitled to claim damages from the airline. Moreover, in case of a flight irregularity the passenger can choose between reimbursement and re-routing to the final destination under comparable transport conditions according to the EU Regulation. In case the air carrier cannot offer an alternative flight, the passenger can request reimbursement of the ticket price for the alternative flight.

The above outlined costs for compensation payments, care and re-routing might not be avoidable for an airline in case a flight irregularity occurred. However, other costs associated with these payments could be significantly reduced or even completely avoided.

Generally, passengers, lawyers and claim agencies set relatively short deadlines with regard to the desired payments, e.g. 7, 10 or 14 days. Often these deadlines cannot be met by the air carriers. Either the airlines’ customer service centers are snowed under with work and cannot respond in time or the payment process is too slow. Under German law as well as under most EU legal regimes late payments cause default interest – completely avoidable costs that come on top of compensation payments.

Similarly, if an airline cannot respond to a passenger’s claim in time, the customer can involve a lawyer in order to get his/her demand accepted. In such case, the air carrier has to pay for the passenger’s lawyer as well. In Germany for example, fees for representation by a lawyer are calculated based on the value of the claim in dispute. For an out-of-court advice, the passenger’s counsel can charge e.g. EUR 147.56 for a EUR 600 compensation claim of one passenger and EUR 201.71 for a EUR 1,200 compensation claim of two passengers. Other countries have similar fees in place. Thus, lawyers‘fees increase the compensation amount by approximately 20-25 per cent. These are often costs that arise due to the airline’s default and would thus be avoidable in many cases.

If the claim cannot be resolved in time, it may end up before the court. In Germany alone over 100,000 passenger right cases have been trialed in 2019. Usually, courts charge a court fee, calculated according to the value of the claim in dispute. Germany for example implemented the ‘losers-pay-principle’, i.e. if an air carrier loses a case, it will have to reimburse the passenger for all costs, in particular court fees and the costs for the passenger’s counsel. If court proceedings are initiated before the German courts, the court fees for a claim with a disputed amount of EUR 600 will be determined at EUR 159. Additionally, the passenger can claim legal fees for the representation in court in the amount of EUR 261.80. Furthermore, the opposing counsel may claim travel expenses etc. Depending on the specific case, translation costs, costs for witnesses and for expert opinions can arise. On top of that, airlines often have to engage external legal counsel themselves for their representation in court – costs continue to rise.

In case a decision, e.g. a default judgment, was handed down by a German court and the defendant does not pay the awarded amount to the plaintiff on time, the plaintiff may instruct a bailiff to enforce the decision. The enforcement costs incurred through this procedure will have to be borne by the defendant. Depending on the instructions given by the plaintiff to the bailiff, the costs for the enforcement will generally be in the vicinity of EUR 25 to EUR 100.

As if this was not enough, one has to take into account that hidden costs will occur for maintaining the appropriate claims handling infrastructure, e.g. labor costs for customer service agents, the legal and accounting departments, rent for office space, costs for external service providers such as call centers, implementation and maintenance for CRM systems etc.

The above-mentioned list of cost items shows that passenger claims produce significant costs for airlines. A fast reply to the customer is essential in order to avoid unnecessary legal fees, interest and court costs. The financial burden implied by a compensation payment itself can quickly multiply during the course of the claims handling process.

The number of passengers is growing and digitization shortcomings will have an even bigger impact in the future. Many default cases could be avoided through automation and digitization. Moreover, digitization and automation offer better cost spending control (also for legal spending), allow for an easy implementation of tactical considerations, make it easy to master peaks in the claims handling volume (e.g. ash cloud, COVID-19 etc.), enable centralization or outsourcing of the claims handling process and will promote customer satisfaction and loyalty.


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