Are we entitled to compensation for this knock on delay? And are there any rules governing redirections?
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For the purposes of compensation following Regulation 261/2004, the delay is always measured on arrival to your final destination. The length of a delay on departure only affect the duty of the carrier to take care of accomodation, refreshments etc.
There's no law saying where you should get diverted, that's purely a operational/safety decision of the ATC/pilot/airline/etc. It's fairly likely that other airports were too congested or otherwise operationally inconvenient.
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