Supplementary memorandum submitted by
the Civil Aviation Authority
BRIEFINGS ON EUJET OPS LTD
SECTION 1—INTRODUCTION
At its session on 2 November, the Transport
Committee requested additional briefing on the failure of EUjet
in July 2005.
The Committee specifically asked whether EUjet's
parent company had changed its name twice and had been suspended
from the London Stock Exchange:
— The company was first registered
as the Southend Sand & Gravel Company in 1945, changing its
name to Wiggins Group plc in 1981 and then to PlaneStation Group
plc in 2004.
— Before it invested in EUjet, Wiggins
Group's shares were briefly suspended at its request in July 2003.
The rest of this paper gives additional information
on the company and its failure.
SECTION 2—EUJET
HISTORY, OWNERSHIP
AND FAILURE
EUjet
From its establishment in 2003, EUjet was based
at Shannon Airport and licensed and regulated by the Irish Commission
for Aviation Regulation. A schedule outlining significant
events in the company's history is at Annex 1. EUjet was initially
established to provide wet lease[3]
services for other airlines, but in early 2004 started undertaking
charter passenger services in its own right, and in September
2004 began scheduled passenger services between Shannon and Manston.
At the time of its collapse in July 2005, the company operated
23[4]
routes from Manston to various points in Europe, with the UK representing
some 87% of the company's passenger carryings, and six routes
from Shannon.
EUjet was founded by Patrick J McGoldrick, who
also became its CEO. A number of members of his family held senior
management positions. In 2004 he was appointed to the board of
PlaneStation, which had by then become EUjet's parent company.
Mr McGoldrick is an Irish national with a long
background in the aviation industry as a pilot and senior manager.
Between 1986 and 1991 he was the CEO of Ryanair. Subsequently,
Mr McGoldrick was CEO and founder of TransAer (previously known
as TransLift, a cargo and wet lease specialist carrier that moved
into passenger services), which failed in 2000 with a loss of
450 jobs and debts in excess of £30 million.
PlaneStation
PlaneStation Group plc, EUjet's parent company
at the time of its collapse, was a publicly quoted UK property
group listed on the London Stock Exchange that owned and managed
a number of small European airports. The company was first registered
in 1945 as the Southend Sand & Gravel Company, becoming Wiggins
Group plc in 1981 and PlaneStation Group plc in January 2004.
The Group has always been involved in either land management or
property development. Indeed its investment in EUjet was primarily
seen as a means of developing the Group's airport property portfolio.
In March 2001, as Wiggins Group plc, it received
censure from the Financial Reporting Review Panel and the Financial
Services Authority for overestimating its results between 1995-2000,
which on their restatement resulted in significant losses. It
was agreed with the Financial Reporting Review Panel that the
Group's treatment of certain costs and assets would be reclassified
and a number of new non-executive directors would be appointed
to its audit committee. A number of directors left the Group following
completion of this enquiry. In July 2003 the Group's shares were
briefly suspended at its own request while it was in discussions
on a possible takeover. These events occurred, however, well in
advance of its investment in EUjet.
PlaneStation investment in EUjet
EUjet was initially funded by private equity.
In May 2004 it was refinanced by PlaneStation, the owner of Manston
Airport (which became Kent International). PlaneStation also owned,
and developed, a business park around Manston Airport. It sought
to develop Manston from a small cargo airport into a major passenger
hub that could eventually compete with Luton and Stansted airports.
PlaneStation invested in EUjet as a strategic development towards
that goal.
Initially, PlaneStation invested £2 million
in EUjet in return for a 30% shareholding. At the same time Kent
County Council took a 1.5% shareholding in EUjet in order to assist
in the regeneration and development of east Kent. The County Council
did however acknowledge, in a statement published in September
2005, that EUjet represented "a high risk investment".
EUjet was again refinanced in September 2004 when it commenced
scheduled operations. PlaneStation stated that EUjet had insufficient
funds to support the commencement of scheduled operations in the
summer of 2004 as originally intended and provided it with additional
working capital of £5 million, funded through a placing of
PlaneStation shares. In return for this additional investment
PlaneStation took an option to purchase 100% of EUjet, with the
interests of the existing EUjet shareholders being translated
into warrants in PlaneStation. PlaneStation exercised this purchase
option in December 2004, having at that point raised an additional
£30 million equity from the City to support EUjet and to
fund its own development. It is unclear what proportion of this
additional funding was required to support EUjet. At this point
PlaneStation also began a process of disposing of a number of
property assets with the stated intention of raising additional
capital to support EUjet's development.
It appears that, in the event, EUjet's passenger
numbers were lower than expected. On 28 June 2005 PlaneStation
announced the sale of 75% of the business park adjacent to Manston
Airport and that the funds from that transaction would be used
to support EUjet. However, this sale later broke down and evidently
led to an eventual cash crisis. On 25 July 2005 PlaneStation announced
the suspension of its public listing, stating that negotiations
on extending its finance facilities with its bankers, whose position
would seem to have been secured on property assets, had been unsuccessful.
An Administrator was subsequently appointed to PlaneStation in
the UK, with the Irish equivalent, an Examiner, being appointed
to EUjet in the Republic of Ireland.
SECTION 3—REGULATORY
ASPECTS AND
ROLE OF
THE CAA
Regulatory environment
EC Regulation 2407/92 governs the licensing
of airlines within the European Economic Area (EEA)[5],
of which the UK and Ireland are member states. It sets out the
framework within which Member States have to consider the granting
of an Operating Licence permitting public transport flights.
Subject to an applicant satisfying the relevant
licensing authority that it can meet the above criteria, both
on initial grant of the Operating Licence and on an ongoing basis,
then, under the terms of the Market Access Regulation[6],
it is permitted to operate anywhere within the EEA without the
need to hold further licences. Therefore the CAA must allow carriers
licensed in other Member States to operate within its territory.
Such carriers continue to be regulated by the Member State that
granted the initial Operating Licence. The CAA has no legal powers
or regulatory authority to act (except on evident safety grounds)
on the operations of non-UK EEA carriers, such as EUjet. The Irish
Commission for Aviation Regulation monitored EUjet under
the terms of EC Regulation 2407/92.
The CAA
The CAA does, however, maintain a watching brief
on the UK aviation industry as a whole. Press reports and the
CAA's own industry sources suggested that EUjet and its parent
PlaneStation were encountering financial difficulties earlier
this year. However the Regulatory Announcements that PlaneStation
had issued to the City indicated that these problems were being
comprehensively addressed. The CAA requires regular financial
information to be provided by UK licensed airlines for monitoring
purposes, but does not receive, nor is able to require, information
from non-UK airlines such as EUjet. The CAA was therefore unaware
of the actual financial position of that carrier and, in any case,
had no legal powers to take action against it. Under the terms
of the Market Access Regulation, the CAA would not have been able
to prevent EUjet either operating from the UK or from selling
tickets to UK passengers.
Furthermore, the CAA could not have taken any
action to warn passengers not to either book or travel with EUjet.
First, the EC Market Access Regulation is undertaken on a mutually
reciprocal basis. If the CAA publicly stated that it was concerned
with the regulatory methods employed by any other Member States,
it would be exposed to censure by the European Commission and
the possibility of UK carriers being discriminated against by
other Member States in return. Second, the CAA does not act on
the basis of unsubstantiated rumour. It has to act lawfully within
its powers on the basis of proper evidence; otherwise it would
be open to action in the courts. The CAA did carry out an analysis
of the impact of the failure on passengers because the majority
of EUjet's passenger carryings were from the UK.
Principal place of business
Although the EC Licensing Regulation (2407/92)
gave the CAA no legal role in regulating EUjet, the CAA was concerned
with the possible consequences that might arise from the failure
of it and similar carriers. The concern was that the CAA and other
UK authorities would be wrongly perceived as being responsible
for the regulation of such carriers. The CAA is looking at this
issue with the Department for Transport.
EC Regulation 2407/92 requires that the principal
place of business of a licence holder has to be in the Member
State that grants the company's Operating Licence. The CAA has
always considered there to be a possible risk where a company
is ostensibly registered, licensed and regulated in one Member
State but its operations are predominantly undertaken in another.
The CAA wrote to the European Commission on the interpretation
of this requirement in 1995. It was advised that an operator's
principal place of business should be determined on a wider basis
than just where a company is registered. This decision would include
an evaluation of where its administrative and operational base
is situated, where management and board decisions are taken and
where "a carrier . . . operated principally in a particular
Member State [it] should normally be licensed by that Member State".
In its original guise, as a wet lease provider
and charter operator, EUjet was clearly an Irish carrier; but
following its evolution into a scheduled operator its operations
primarily centred on the UK. CAA research of January 2005 indicated
that at that time some 87% of EUjet's then 81 flights per week
were departing from the UK. The company was also, by that point,
owned by a UK plc and the CAA's view was that it was unlikely
that the majority of board decisions would be made in Ireland.
The CAA approached the Irish Commission for
Aviation Regulation explaining that it believed that EUjet's
principal place of business was now in the UK and it should therefore
be regulated here. The Irish authorities rejected this.
SECTION 4—LESSONS
FROM EUJET
EXPERIENCE
The Committee will already have had a copy of
the CAA's paper The Failure of EUjet—An Analysis of Customer
Experiences (copy attached for ease of reference). Following
EUjet's failure, some EUjet customers contacted the CAA, which
gave out what information and advice was available, but was unable
to do more than that. The CAA has no role in repatriating or refunding
the passengers of failed scheduled airlines, even if they are
regulated in the UK. ATOL financial protection only covers air
packages (and seat-only tickets not sold directly by airlines
and agents).
EUjet operated a fleet of four Fokker F100 aircraft,
which could carry up to 104 passengers. In UK terms it was a small
airline and, therefore, as the Ernst and Young analysis for the
CAA forecast, there was sufficient capacity available for people
to repatriate themselves.
In the light of the EUjet experience the CAA
has considered the implications for voluntary repatriation schemes
by airlines. The CAA considers that a voluntary scheme would not
be as effective, or as cheap, as a managed scheme. To be effective
all UK airlines would need to participate and the scheme would
require a set of basic principles, which the airlines would have
to abide by. These would include:
— appointing a coordinator to provide
support and assistance to customers, and manage capacity;
— offering bookable flights (that are
easy to purchase and not standby) at a flat rate for a sufficient
period of time;
— communicating the information to
airports, airline staff, and the media;
— ensuring that all routes are covered.
24 November 2005
3 Wet lease-flights undertaken by an operator on behalf
of, and at the direction of, another operator who is provided
with an aircraft, the flight crew and usually cabin crew. Back
4
Source March 2005 OAG Airline Guide. Back
5
European Economic Area-the Member States of the European Union
plus Iceland, Norway, Lichtenstein and, for the purposes of aviation,
Switzerland. Back
6
EC Regulation 2408/92. Back
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