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Prepayment Practice for airline tickets challenged by German consumer protection agencies

In brief

German airlines recently defeated claims by a German consumer protection agency. The claims raised by the agency against the international practice of requiring airline tickets to be prepaid may also well be an issue in other jurisdictions.

The following describes the arguments made by the consumer protection agency and the airlines’ arguments made in defence, many of which were ultimately used by the German Federal Supreme Court (the Bundesgerichtshof) in its decision and could also be helpful in other jurisdictions.

Key arguments in the litigation

In 2013, a German consumer protection agency commenced proceedings against airlines. It argued that the practice of requiring full payment of airline tickets at the time of booking violates the principle that performance is only due upon counter-performance. 

The agency argued that the courts should prohibit the prepayment practice as a violation of consumer rights for the following reasons: 

  • Requesting prepayment of a ticket booked long before a flight violates the principle that performance is only due upon counter-performance
  • Requesting prepayment circumvents the consumer’s right of retention should the airline fail to perform its side of the bargain
  • Prepayment results in the consumer effectively granting the airline a “free loan”
  • The consumer bears the risk that the airline goes insolvent
  • Airlines should be treated in the same way as tour operators, who are not entitled to demand full payment long before the actual journey 

The arguments made by the airlines in defence of the prepayment practice included: 

  • Prepayment is a worldwide practice used by almost every airline and embodied as the international standard in the IATA Rules
  • Prohibiting prepayment in Germany put German airlines at a significant disadvantage and would constitute discriminatory treatment as foreign airlines would still be able to demand prepayment
  • Prepayment is the only security available to the airlines against the potential insolvency or unwillingness to pay of the passenger, in particular as airlines have an obligation to transport passengers under German law
  • Airlines are under an obligation (pursuant to Section 21 of the German Air Traffic Act) to enter into a contract and thus cannot choose their customers in the same way as tour operators
  • Significant costs associated with a flight are incurred long before the actual flight, and airlines therefore depend on prepayments made by passengers to enable them to fulfil their own prepayment obligations
  • Passengers have significant advantages from an early booking (eg a lower ticket price) which far outweigh potential advantages of later payment (eg receiving interest on the funds used to pay for the ticket)
  • Passenger rights are already fully protected by European law (eg Regulation (EC) No. 261/2004)
  • The potential insolvency of airlines should not prohibit prepayment, as airlines’ liquidity is constantly reviewed by the regulator (see Regulation (EC) No. 1008/2008) and the European Commission expressly stated in March 2013 that this is sufficient protection against insolvency 

For tactical reasons, the agency brought its claims against each individual airline in separate proceedings all over Germany. Several of the first instance and appeal courts found in favour of the agency. 

On 16 February 2016 the case was finally decided by the German Federal Supreme Court (Bundesgerichtshof). The Federal Supreme Court found emphatically that the prepayment practice does not violate German law, thereby ending this dispute in Germany with a finding in favour of the airlines. In its recently published landmark decision, the Federal Supreme Court emphasised the following arguments under German law: 

  • The prepayment practice in the airline industry does not put passengers at an unreasonable disadvantage and does not contradict essential principles of passenger transport law
  • Airlines require prepayment because they do not have any other means of ensuring that payment will be made upon performance
  • Without prepayment, airlines would risk a significant shortfall in payment
  • Allowing passengers to pay after the flight would be impracticable and not a fair and equitable solution
  • The potential disadvantages for passengers do not outweigh the advantages, and so do not justify a change of the prepayment practice that is the standard around the globe and recommended by the International Air Transport Association (IATA)
  • Passengers’ loss of their theoretical right to refuse payment is of little relevance before the actual flight as, in practice, it would rarely be possible to exercise this right before the day of the flight anyway
  • Passenger rights are already sufficiently protected by European law (eg Regulation (EC) No. 261/2004)
  • The Potential risk of insolvency of an airline is minimal due to the constant supervision by the regulator
  • Any loss of liquidity or interest suffered by passengers is compensated by the lower ticket price available to them upon early booking 

A full copy of the judgment of the German Federal Supreme Court can be found here.