Examination of Witnesses (Questions 60
- 79)
WEDNESDAY 2 NOVEMBER 2005
MS KAREN
BUCK MP, MS
SANDRA WEBBER,
SIR ROY
MCNULTY
AND MR
RICHARD JACKSON
Q60 Mr Clelland: What would happen,
for instance, if the happy day comes and there are never any collapses
and we build up a huge, huge fund? Is there a danger that airlines
will start arguing for it to be used for damage and lost baggage
and that sort of thing?
Sir Roy McNulty: If the fund was
built up and the nirvana you describe actually came to pass, and
we all agreed that there would never be an airline going bust
again or a tour operator going bust, probably we would give the
money back.
Q61 Mr Clelland: Give the money back?
Sir Roy McNulty: Once the fund
had been built up the £1 levy would stop, unless there was
a need to replenish it.
Q62 Mr Clelland: So the £1 levy
is not a forever thing?
Sir Roy McNulty: Not necessarily
for ever and ever.
Q63 Mr Clelland: How long would the
£1 levy last?
Sir Roy McNulty: I doubt if the
nirvana you describe will ever happen. I suspect there will continue
to be tour operator collapses and periodic airline collapses,
but the £1 would probably reduce once the £250 million
fund had been achieved.
Q64 Chairman: It is a repetition
of the idea that was in the original ATOL scheme.
Sir Roy McNulty: Absolutely.
Q65 Chairman: The money taken off
people paying this levy would be built up into a fund and left
there as an insurance, so that the Government when faced with
a situation which the Foreign Office was faced with recently in
Mexico, when they had to charter a 'plane to get British citizens
not home but as far as America before they got themselves home
from there, would be dealt much more efficiently by the fund being
able to pay for those British citizens to be repatriated to the
United Kingdom. That was the intention.
Sir Roy McNulty: Absolutely.
Chairman: Not that you should build up
vast millions.
Q66 Mr Goodwill: Thank you, Madam
Chairman. I have a question for the Minister. I guess it is a
principle of insurance that the premium should reflect the risk.
If we had a flat rate motor insurance system then I think, quite
justifiably, the Ford Fiesta drivers would feel that they were
subsidising the Ferrari drivers. Do you think that the established
flag carriers are justified in feeling that maybe they would be
in the position of the Fiestas in that they would be, in effect,
subsidising the more risky low-cost airlines who are much more
likely to go bankrupt, despite the fact that the premiums would
be the same on all flights?
Ms Buck: I think that was certainly
one of the arguments. I think it reflects one of the points made
in the Select Committee report last year, that the healthy carriers
should not necessarily be required to effectively carry a cost
or burden or be drawn into a scheme which was about protecting
the less healthy.
Q67 Mr Stringer: You used the argument
in the written statement about market distortion of the £1
levy. How did you compare the market distortion of the £1
levy with the continuation of the ATOL system, which has to be
continued under European legislation?
Ms Buck: Let me just reply in
a line and then I will ask Sir Roy. We recognised that not going
ahead with the comprehensive levy meant that part of the industry,
the tour industry, felt that they were continuing to carry a regulatory
burden that was disproportionate. That is why one of the outcomes
of this decision has been for us to ask the CAA to have a review
of the bonding system and see if progress can be made towards
reducing that.
Q68 Mr Stringer: That is very interesting,
about what will happen in the future, but I was really asking
a question about an analysis of current market distortion. You
say in your evidence that the £1 levy would introduce a new
market distortion. That is part of the logic for rejecting it.
You are left with a market distortion because the charter carriers
will still have to cover their passengers. I would have thought,
if you say the logic is that this introduces a new market distortion,
you would have found out whether that was bigger or smaller than
the market distortion that was already there.
Ms Buck: We recognise that it
is there and we want to do something about it, and that is exactly
why we asked the CAA to proceed. I think, if you look at the total
numbers (that may be part of the question) and the way things
stand at the moment, on my figures there were 42 million leisure
travellers in the last year, of whom slightly over half were ATOL
and slightly under half were not. Obviously, there are projections
as to how that might go—again, always speculative, depending
on what happens to the industry.
Q69 Mr Stringer: Before Sir Roy comes
in, because I am interested in the basis of the decision, let
me ask the question in a slightly more brutal way: why should
the charter market continue to be at a disadvantage compared to
the rest of the market by not introducing the £1 levy?
Ms Buck: Because we felt that
going ahead with 100% cover through a compulsory scheme, effectively,
was the wrong way. Basically, it is asking you to take two different
approaches: you could either say "Okay, we recognise that
there is an imbalance so let's go for the 100% coverage"
(with certain disadvantages inherent in that) "or let's say
that there is an imbalance in the scheme; we won't go further
down that regulatory road with the levy but what we will do is,
in recognition of that imbalance, see if there is something we
can do to tackle that"—where we are back to the CAA.
Sir Roy McNulty: We would accept
that the £1 levy has inherent in it some distortions. I accept
that. It is less of a distortion, in our opinion, than what exists
at the moment because the tour operators are certainly paying
about £2 a head to provide ATOL cover for the cost of bonding,
and so on. I think before people get too carried away with the
philosophical pros and cons of inequities, we are talking about
a £1 levy, and when you look at the surcharges that all of
these airlines are loading on to customers—even Ryanair
who are adamantly against the £1 levy, charge their customers
£6.96 for insurance and wheelchair charges. Who is subsidising
whom? To me, with the £1 levy against, say, British Airways
with total taxes, fees and charges of £50 on a flight to
Amsterdam, we have got to keep these things in proportion and
not get too carried away with some of the philosophical niceties,
in my opinion, and I have had this debate with the airlines many
times. They have a different view of course.
Q70 Graham Stringer: Can I ask one
more philosophical question. Minister, you have made the case
that you have changed the basis of the decision-making to a risk
basis, and I understand that, and risk is estimated at 2 or 3%
now on a historical case. At what percentage would your analysis
fall down? Did you think about that? If airlines started failing
at 5 to 10%, would you then change the basis of your decision
to 11?
Ms Buck: One never says never.
I think what you have to do is take a decision at the time on
the basis of the information that you have to hand and your understanding
of the current situation, but clearly if the world changes, one
changes with it.
Q71 Chairman: You would not, however,
have any money, would you? You would not have a fund on which
you could call to repatriate British citizens?
Ms Buck: No, we—
Q72 Chairman: You would then have
to set up the same kind of fund that the CAA not only did a lot
of work on, but did a lot of research on. You have told us in
reply to Mr Efford that no research had been done about whether
underwriters would be willing to offer the scheduled airlines
the kind of cover you want people to rely on, so you do not know
that even the insurance market would be interested in providing
this kind of cover.
Ms Buck: We do know that the trend
is upwards on—
Q73 Chairman: Trends can go up and
down, but on what research did you base your assessment? Forgive
me, I do not want to be unkind, but you ignored the work which
had been done. I would be very interested to know how much Ernest
& Young actually cost because they did a whole lot of additional
analysis at the request of the Government. What did they cost?
Sir Roy McNulty: I do not have
the figure for Ernst & Young's—
Q74 Chairman: Well, can you give
us what is called a "ballpark"?
Sir Roy McNulty: I think the whole
exercise, including Ernst & Young plus our own staff time
costed in, was around £400,000.
Q75 Chairman: So £400,000 worth
of research and information and we are told, "No, no, we
ignore all that because we are convinced the underwriters are
going to give everybody such a fantastic deal they will all want
to buy it before they go on holiday". There was no research.
Ms Buck: We took the decision
on the basis of the information the CAA gave us, our understanding
of the level of risk and our understanding of the range of options
for cover, which includes what might happen with scheduled airlines'
failure insurance, and, as I said, there are entrants into the
insurance market who are increasing their level of cover in this,
but also the capacity to be covered through your credit card booking
and so forth and there are a number of different options people
can have in order to seek to protect themselves. We felt that,
on balance, that voluntary approach, that approach which encourages
people to make their own decision, take their own risk analysis
about what kind of cover they want to have is the right way to
go forward.
Q76 Chairman: Although you knew that
only 16% of the airlines' voluntary repatriation schemes brought
back EU passengers.
Ms Buck: One of the things we
discussed at the meeting of 24 October was some lessons from EUjet
and I think that is something that the airlines themselves recognised
and in the statement I have circulated some of the further steps
they are going to take to address that, such as, for example,
the fact that the offer for the lowest-cost deal of repatriation
was only available for too short a period and that is something
that is recognised and something which will be addressed.
Q77 Chairman: If you rely on insurance
or voluntary arrangements, it means that anybody who is affected
by an airline collapse pays out the extra money first and gets
it back later. Now, are you confident that that is quite fair?
Is it adequate protection for most of your vulnerable passengers
because presumably the bulk of people buying cheap flights for
a holiday are people who have not got the money to buy the reasonably
covered flights?
Ms Buck: Well, I am not sure that
that actually stands up to the closest scrutiny. People are bargain-hunters
these days and they use the Internet to—
Q78 Chairman: But, for whatever reason
they buy, can you be quite sure that people who have not got any
money who have been on these cheap flights will have enough money
to get themselves home? If they have taken cheap flights for a
family of four, you are saying in effect that there is not a problem
because they will be able to get themselves back.
Ms Buck: I think people need to
take that decision when they choose what arrangements they are
going to make for their holiday and, as the EUjet experience shows,
a third of people who actually travelled on that knew that they
were not covered and still decided that they would continue with
that trip. Therefore, the approach is about saying to people in
this environment in which people are making their independent
travel decisions and are wanting to go down that route and can
choose whether or not to go for a package with some of the security
that that package offers, "It is for you to make that decision".
Q79 Chairman: The FCO did some work
on it, did they not, and that indicated that the UK holiday-makers
from social groups D and E or between 16 and 24 are less likely
to take out travel insurance?
Ms Buck: Is that an argument for
saying that one should introduce a compulsory levy on everybody,
given also that some of those people and people sometimes in the
poorer categories are paying sometimes two or three times? I am
not sure that it is.
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