As the airline industry continues to face a tough economic climate, falling passenger numbers and strict regulations, litigation levels have risen. But who’s getting the work?
Sir Stelios Haji-Ioannou could shake things up in the airline sector yet again. The 46-year-old founder of easyJet grabbed the world’s interest in September with rumours that he’s on the verge of launching a new long-haul budget airline likely to be called Fastjet.
But Sir Stelios has drawn more headlines of late for his legal disputes. In particular, a lengthy legal showdown with easyJet, which he founded in 1995 and in which his family still owns a 37.4% stake. It’s a dispute that has also seen him at odds with his former solicitors, Bird & Bird.
Bird & Bird, which has a notable aviation practice, sees its fair share of airport-related litigation. The City firm won a High Court dispute for client Jet2.com against Blackpool International airport over an alleged breach of contract by the airport when the airline wasn’t allowed to land two flights last October. Eversheds acted for the airport.
The court ruled in the airline’s favour in July, with Judge Mackie QC ruling that the airport’s decision was a breach of contract.
‘Quite often [the rise in aviation disputes] is a sign of the economic times,’ says Simon Chamberlain, who is a senior partner in Bird & Bird’s 14-lawyer aviation-focused group. ‘[The airlines] are keener to pursue their rights because the lack of financial tolerance means they cannot afford not to.’
This couldn’t be better illustrated than by the recent contentious movements made by easyJet’s founder.
Overhead compartment
Sir Stelios has had a litigious three years. October 2010 saw the end to a bloody battle between himself and easyJet over licensing and intellectual property agreements struck between the two parties at the time of the airline’s 2000 flotation.
The Cypriot businessman threatened to revoke the airline’s right to use the ‘easy’ brand, which he owns, if the airline didn’t improve its punctuality at Gatwick Airport.
Stelios instructed Bird & Bird, led by IP partner Jane Mutimear, while easyJet turned to Herbert Smith’s IP partner Mark Shillito for that dispute.
While the two parties finally settled their disagreement, things got more complicated as Bird & Bird in turn sued Stelios for unpaid fees at the end of 2010.
Stelios subsequently instructed Travers Smith litigation partner Andrew King to represent him, but eventually settled with Bird & Bird and handed over £400,000.
‘This work is not always the most lucrative,’ says Chamberlain. ‘But it is the most interesting.’
Airlines are always operating on the red line, which makes the aviation sector a high stakes industry. It is exposed to numerous factors that can impact on the top line and in the last two years alone, earthquakes, volcanoes and snowstorms have taken their toll on both passenger numbers and financials. Add in political unrest and striking staff members, and this makes for turbulent times.
‘When you’re acting for regulated entities, you get into all sorts of interesting angles of litigation.’ – Julian Copeman, Herbert Smith
In June this year, the International Air Transport Authority (IATA) slashed its profit outlook for the airline sector to $4bn, marking a 54% drop from March, when it projected profits of $8.6bn. The industry body based its projections on the increased unrest in the Middle East, the Japanese earthquake and high oil prices.
IATA says the cost of the fuel is the main cause of the lower projections. The average oil price for 2011 is expected to be 15% higher than it was forecasted in March, coming in at $110 per barrel. It has subsequently readjusted its forecast back up to $6.9bn, highlighting the volatility of the sector and by extension the inherent difficulties in predicting profits.
While there is no certainty about how the airline sector will continue to develop in the future or cope with the weak economy, the risk of work drying up for airline-focused lawyers is unlikely.
The industry will continue to evolve. And while some aviation lawyers doubt that Fastjet will ever become a reality, with some dubbing it a ‘publicity’ stunt, even the possibility of the new airline has people paying attention.
Chamberlain predicts that there will be more casualties among the airlines just after Christmas. While tragic for the sector, this is not so tragic for lawyers.
This is a sector continuously prone to courtroom battles and showdowns with regulators. Airlines, although fully equipped with strong in-house teams, are reliant on external counsel to successfully carry out their contentious matters, creating a lucrative practice for the handful of firms that dominate this type of work.
With economic uncertainty still looming and growing pressure from government bodies to ensure a fair playing field among the airlines, law firms look set to continue to benefit from this contentious sector, but who is getting all of the work?
Heathrow, Gatwick or Stansted?
Michael O’Leary, the flamboyant chief executive of easyJet’s fierce rival Ryanair, is no wallflower when it comes to the press. The airline has had its fair share of publicity recently, not only because O’Leary is one of the more outspoken businessmen in the UK, but because the airline has taken on the authorities legally and challenged everything from European passenger compensation regulations to airline surcharges at Stansted Airport.
On 7 October 2011, the Ireland-based carrier continued its role as intervener in the stand-off between BAA Airports, which was bought out by Spanish construction group Ferrovial in 2006 for £8bn, and the Competition Commission (CC).
At the heart of the dispute is a ruling by the merger watchdog in 2009 that attempted to force BAA to sell off three of its seven airports in the UK. The CC ruled that BAA’s airport ownership gave ‘rise to adverse effects on competition’ and is trying to force it to sell Stansted Airport after it has already sold Gatwick.
Herbert Smith has advised the airport operator through the entire dispute under the leadership of Julian Copeman and is set to face off with Ryanair in this latest dispute.
‘There is always a high and significant amount of money involved in any of these disputes,’ comments Copeman.
The Magic Circle firm, which has one of the highest-rated aviation practices in the UK, is said to have already generated over £1.5m in fees from its representation of BAA through the dispute.
‘When you’re acting for regulated entities, you get into all sorts of interesting angles of litigation,’ says Copeman.
Nabarro, which has a substantial disputes practice and acts for a number of commercial airlines, is representing Ryanair in its campaign to speed up the sale of Stansted Airport. The airline is claiming that BAA’s fees, which can include take off and landing taxes, fuel surcharges and airline passenger duty tax, are disproportionately high and have risen by 30% during the last year.
In a statement on it’s website, Ryanair said: ‘Ryanair again calls on the UK government to expedite the early sale of Stansted… so that competition can encourage lower charges and better user services, where the [Civil Aviation Authority’s (CAA)] “inadequate” regulatory regime has clearly failed.’
’The stakes are high because the industry is littered with failures.’ – George Maling, Nabarro
Litigation partner George Maling, who, along with fellow partner Peter Fitzpatrick, brought a deep-rooted Ryanair relationship to Nabarro after the pair left Howrey in 2007 for the City outfit, has led for the no-frills airline throughout its involvement.
The firm has represented Ryanair in a raft of different, and at times slightly odd, disputes. Last summer the firm acted for O’Leary in a libel claim brought against him by Sir Stelios, after he took out advertising slots in a number of national newspapers depicting Sir Stelios as Pinocchio. After a showdown between the two, Ryanair agreed to apologise for the ads. Schillings partner Rachel Atkins acted for Sir Stelios in that dispute.
In fact, Maling and Fitzpatrick take on every substantial piece of contentious work for Ryanair and since they joined Nabarro they have advised on over 100 separate matters for the airline, of which 80% is disputes related.
‘The aviation industry, and in particular the airline business, is extremely competitive,’ notes Maling. ‘It is also heavily regulated. So, those that are doing well are tough and tightly managed. But difficult market conditions, continuing high oil prices and fierce competition mean those that are not will fail.’
Maling and Fitzpatrick are also advising Ryanair in its dispute against Gatwick Airport over airport charges. The case was initially heard in front of the CAA, but a decision issued in early summer saw the matter move to the High Court.
The dispute is centred on a 2004 decision by Gatwick to introduce a ‘per passenger’ method for calculating charges it imposed on airlines, including the use of check-in desks and baggage handlers. The no-frills airline argued that the charge was disproportionately unfair because it didn’t use the facilities and was charged higher fees as a result.
In May 2011, the CAA ruled that ‘the check-in desk and baggage handling charges at Gatwick were discriminatory and non-transparent’ and the matter has now moved to the High Court. Herbert Smith’s Copeman is advising Gatwick.
Ryanair is just one of a number of airlines that Nabarro advises on contentious matters, which also includes Etihad Airways.
Flying the flag
Flag carrier British Airways (BA) is also no stranger to all things contentious. The airline regularly appears before judges and regulators for a number of reasons, which has most recently included cartel allegations, disputes with its union Unite and competition challenges for its acquisitive behaviour.
Rival Virgin Atlantic Airways maintains its position as a thorn in BA’s side by continually putting pressure on the Office of Fair Trading (OFT) to challenge corporate movements made by BA. It’s a high-stakes game and no quarter is given. Operating on the cusp of financial collapse, airlines are litigious because they have to be in order to survive.
‘Airlines are running close to the line,’ says Herbert Smith’s Copeman. ‘There is a huge amount of investment involved.’
Such is the case currently with BA. The airline has avoided paying a £121.5m fine to the OFT for allegedly colluding with Virgin Atlantic over ‘long-haul passenger fuel surcharges’. Virgin gained immunity from the OFT on any potential charges connected to the cartel after it blew the whistle on BA.
BA had originally agreed to pay the OFT in 2007 but chose not to when criminal proceedings brought by the watchdog involving four BA executives: sales and marketing director Andrew Crawley, former head of communications Iain Burns, UK and Ireland sales chief Alan Burnett and former commercial director Martin George were dropped.
Herbert Smith went to court for Virgin Atlantic in that case, while BA itself didn’t have a legal adviser, with each of the airline’s members having their own separate counsel.
Peters & Peters’ head of fraud Michael O’Kane represented both Burnett and Burns, Kingsley Napley’s Stephen Pollard acted for George and Irwin Mitchell’s Kevin Robinson acted for Crawley.
The criminal proceedings were eventually dropped because of the emergence of 70,000 documents connected to the cartel that had not been reviewed.
Meanwhile, the OFT has given BA until the end of the year to pay the fine and warned that it would issue a statement of objections in the coming months if BA still withholds payment.
Slaughter and May is advising the airline in its disagreement with the OFT. The Magic Circle outfit handles the majority of the airline’s commercial litigation, on top of taking on BA’s corporate and financial work. Litigation partner Bertrand Louveaux is one of the main contacts for BA at the firm and has advised the airline for a number of years.
Baker & McKenzie employment partner John Evason, however, is the airline’s main adviser on its rickety relations with Unite, the union that represents BA’s cabin crew. Evason, along with the airline’s in-house guru Maria da Cuhna, has been successful in securing a number of High Court injunctions for the airline to prevent a series of crippling strikes over the last 24 months.
‘This work is not always the most lucrative. But it is the most interesting.’ – Simon Chamberlain, Bird & Bird
BA is also no stranger to attention from national competition authorities and the European Commission over its joint ventures and deals with other airlines. It had a tough time convincing competition regulators in the UK and Europe to allow its merger with Spain’s Iberia to go ahead but, under the advice of Slaughters partners Louveaux and John Boyce, convinced the competition authorities that their merged company would not pose any competitive threat to other airlines operating the London to Madrid and Barcelona routes. The European Commission eventually ruled that the airlines would ‘continue to face sufficient competition from other carriers’ and essentially gave them the green light. The two airlines moved to set up International Consolidated Airline Group (IAG) as a result.
The British carrier was also successful in securing a joint venture with American Airlines (AA) in 2010, after another long and drawn-out battle that saw BA fail twice (once in 1997 and again in 2001) to secure a transatlantic deal with AA. Again, under the lead of Louveaux and Boyce, the firm teamed up with AA adviser Jones Day and Iberia adviser Clifford Chance to secure a victory for the three airlines, which would allow them to operate a joint venture. Slaughters was crowned Competition Team of the Year at the Legal Business Awards last year as a result of the win.
The airlines’ advisers encouraged the Commission to issue a formal statement of objections, allowing the legal team to focus on the most serious competition concerns. All this was achieved despite the fiercely voiced concerns of rival operators, most notably Virgin Atlantic.
Virgin Atlantic owner Sir Richard Branson is notorious for calling into question BA’s dominance of the market. He is currently criticising the sale of six take-off and landing slots at Heathrow to IAG from low-cost airline British Midland International (BMI). Herbert Smith is again involved, acting for Virgin Atlantic, while it is thought that BA has turned to Slaughters.
Branson, whose airline operates 10% of the London airport’s slots, is writing to the OFT and European Commission asking the regulators to investigate the disposal of BMI’s assets. The airline turns to Herbert Smith’s Copeman and competition partner Kim Dietzel for the majority of its litigation, particularly competition matters and infringement on rules and regulations.
And it is not just the main long-haul carriers that face tough competition battles. Ryanair has endured protracted competition headaches of its own and has had a particularly tough time trying to convince Irish authorities that it should be allowed to purchase the government’s quarter stake in Aer Lingus. The low-cost airline already owns a 29% stake in the Irish flag carrier, and would dominate the market if it bought out the government.
Ryanair has already attempted to buy out Aer Lingus twice: once in 2006, when the attempt was subsequently blocked by the European Commission. The second one came in December 2008 after making a Ä748m all-cash play for the airline. The offer was rejected by the Aer Lingus board and Ryanair withdrew its bid in January 2009.
A&L Goodbody handles the airline’s work in Ireland and most notably on its numerous takeover attempts of Aer Lingus. Covington & Burling and A&L Goodbody both advised the airline in its 2008 fight against the authorities with Georg Berrisch and David Hull at Covington and A&L Goodbody partners Vincent Power and Alan McCarthy leading. Former Linklaters partner Alec Burnside advised Aer Lingus.
‘The stakes are high because the industry is littered with failures,’ says Maling.
Throw Sir Stelios’ Fastjet into the mix, and the major airlines could face a seriously cheaper competitor. This will probably please the consumers but certainly not the airlines themselves. It is a headache that the airlines’ external counsel will no doubt need to find a remedy. LB