Memorandum submitted by the Department
for Transport
DECISION
The Government announced on 10 October 2005
that it had decided not to accept the Civil Aviation Authority's
recommendation for a £1 levy on all UK-originating international
air passengers, to finance the homeward journeys of passengers
whose airline went bankrupt while they were abroad, and refunds
of the money they had lost. After weighing up the arguments for
and against, the Government had concluded that, as in most other
circumstances, people should be free to choose whether to pay
for insurance or not. The announcement included plans to improve
consumer information and to reduce the burdens on tour operators.
BACKGROUND
1. The Civil Aviation Authority (CAA) administers
the Air Travel Organisers' Licensing (ATOL) scheme, which provides
protection for consumers of air-based package holidays in accordance
with the Package Travel Directive (Council Directive 90/314/EEC)
and the Package Travel, Package Holidays and Package Tours Regulations
1992.
2. In July 2004 the CAA published advice
to the Government on the future of financial protection for air
travellers. Its main recommendation was to increase the scope
of protection from package holidays only to all UK-originating
international flights, and to fund this by a levy on each passenger.
3. In its July 2004 report the Committee
endorsed such an extension of financial protection. In September
2004 the Aviation Minister responded saying that the Government
would need to carry out a thorough analysis of the proposal.
PROCESS
4. On 27 October 2004 the Department for
Transport (DfT) announced that the Government had asked CAA to
undertake further work on the issue, which was expected to be
completed early in 2005. DfT officials participated in a working
group of industry representatives led by CAA. Economic analysis
was carried out by Ernst and Young, to a brief agreed by CAA and
DfT.
5. CAA delivered a draft report to DfT on
12 April 2005. The General Election had been called on 5 April
for 5 May, so the emerging conclusions could not be considered
by Ministers immediately. Discussions continued at official level
between CAA, DfT and other Government departments with an interest
in the issue. The draft report was amended in the light of these
discussions.
6. The CAA's final advice to the Government
was published on 22 September 2005, the same day as a seminar
which CAA held to brief members of the industry and other interested
parties. The CAA recommended that all passengers on UK-originating
international flights should have financial protection for both
repatriation and refunds in the event that their tour operator
or airline became insolvent. Protection would come from a reserve
fund of around £250 million, paid for through a £1 levy
per UK-originating international flight passenger, which would
generate the required amount in 3-5 years.
7. The Government announced on 10 October
2005 that it had decided not to implement the levy. The DfT press
release and the Minister's written statement to Parliament explain
the Government's decision and are attached.
GOVERNMENT CONSIDERATION
OF THE
CAA RECOMMENDATION
8. Although the CAA's advice to the Government
was not published till September 2005, the emerging recommendation
was known earlier by stakeholders because of industry participation
in the project. After the General Election Ministers received
numerous representations from stakeholders, both written and in
person, about the CAA's recommendation for a levy of £1.
Some stakeholders wanted the Government to include provision for
implementing the recommendation in its Civil Aviation Bill. At
Second Reading of the Bill on 27 June 2005 the Aviation Minister
said the Government found the pros and cons of the proposal finely
balanced and would consider further before the Bill's remaining
stages. Over the summer there were continuing discussions with
the CAA and other stakeholders about the all-flights levy and
about alternatives. The Government also took account of the wider
policy context for assessing potential legislation and the events
surrounding the failure of the Irish airline EUjet in July 2005.
WIDER POLICY
CONTEXT
9. In launching the Better Regulation Action
Plan on 24 May the Chancellor said:
"Instead of routine regulation attempting
to cover all, we adopt a risk based approach which targets only
the necessary few.
A risk based approach helps move us a million
miles away from the old assumption—the assumption since
the first legislation of Victorian times—that business,
unregulated, will invariably act irresponsibly. The better view
is that businesses want to act responsibly. Reputation with customers
and investors is more important to behaviour than regulation,
and transparency—backed up by the light touch—can
be more effective than the heavy hand.
So a new trust between business and government
is possible, founded on the responsible company, the engaged employee,
the educated consumer—and government concentrating its energies
on dealing not with every trader but with the rogue trader, the
bad trader who should not be allowed to undercut the good."
10. The Prime Minister, in a speech to the
IPPR on 26 May, said:
"There needs to be a proper and
proportionate way of assessing risk and the response to it . .
.
We cannot respond to every accident by trying
to guarantee ever more tiny margins of safety. We cannot eliminate
risk. We have to live with it, manage it."
EUJET
11. The Government is sympathetic to anyone
who had their holiday disrupted or who suffered anxiety or extra
expense when EUjet failed. We recognise that there is a gap between
the protection which was available to them this summer and the
protection which the CAA's recommendation would have guaranteed.
Other airlines did however offer flights home for £25, and
we believe it is possible to narrow the gap through encouraging
improved voluntary measures. This is a case where it would require
undue intervention in the market to eliminate the risk entirely.
EUjet had 12,000 passengers abroad, mainly in France and Spain.
Based on 2004 data, the £1 levy would be compulsory for over
20 million air passengers departing the UK each year for three
to five years (in addition to 28 million on package holidays who
already pay for financial protection indirectly through tour operator
bonding).
CONCLUSION
12. In reaching its decision the Government
weighed up the CAA's advice, the views of stakeholders, the nature
of the risk faced by travellers and the different means of reducing
those risks.
13. The CAA's advice states that for most
individual companies, the chance of failing is roughly between
2% and 3%. These figures are based on historical data: the average
failure rate of UK and European airlines over 8-10 years from
the mid 1990s. The information deficiencies which leave some passengers
unprotected can however be remedied so as to reduce the impact
of future failures, and an all-flights levy would introduce new
market distortions. The budget traveller to Europe would have
to pay a relatively higher percentage of his outlay towards a
fund big enough to reimburse to the long-haul passenger should
his holiday be affected by insolvency.
14. The Government was encouraged by the
willingness expressed by airlines to ensure travellers have better
information about insurance options, and by airlines' assurances
that they would continue to take voluntary action on repatriation.
The Aviation Minister is talking further to airlines to ensure
that effective voluntary measures are in place as quickly as possible.
15. The Government is however keen to reduce
costs and burdens on tour operators, which they see as an unfair
competitive advantage for scheduled airlines. Hence we have asked
the CAA to review whether the system of ATOL bonds could be replaced
with a less burdensome means of meeting tour operators' obligations
to package holiday-makers under the Package Travel Directive.
The provision on replenishing the Air Travel Trust Fund (ATTF)
in the Civil Aviation Bill gives scope for a single fund collected
from tour operators instead of a two-part approach of bonds plus
the ATTF.
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