3 CAA PROPOSALS: MODERNISING
PROTECTION
8. The CAA had proposed in March 2004 that the "law
should be changed so that UK originating flights and air packages
are protected if people pay for them in advance, whether they
are bought from an airline or not."[14]
The CAA was aware of UK national and European policy on protection
for air passengers: "The UK Government and the European Council
have legislated to provide financial protection for holidays"
because of the considerable costs to the "average family"
of such a holiday and the risk of people being stranded if an
operator fails.[15]
9. The CAA expressed concern that this settled policy
was being undermined: "the way holidays are increasingly
sold, many of the public are not now getting the protection we
believe was originally intended."[16]
Airlines were selling more tickets to the public directly, and
the enhanced ability of those with internet access to package
their own holidays. This meant that an increasingly large number
of UK international leisure travellers were being left out of
the current financial protection arrangements.[17]
10. The requirements of the EU Package Travel Directive
mean that travellers who book through tour operators must continue
to receive protection. As the CAA points out, it is not possible
to remove all protection, even if that were desirable.[18]
Because progressively fewer people are buying package holidays,
the current protection afforded by ATOL extends to a diminishing
number of UK international leisure travellers.
CAA's view of the current regulations and proposals
11. Three months after our predecessor committee
reported in July 2004, the Government made an announcement stating
that the CAA and a wide range of industry representatives had
been asked to carry out "further work in connection with
financial protection for air travellers." [19]
The Department was represented on this working group. Ernst &
Young was engaged to undertake relevant economic modelling.[20]
The overall objective was "to produce objective, weighty
and robust analysis of the economics."[21]
12. The CAA's proposal in 2004 was designed to provide
a remedy for 'shrinking protection' by bringing the arrangements
for financial protection for air passengers up to date.[22]
The CAA's final recommendation which was published on 22 September
2005 embodied the same approach and came to the same conclusions
as were contained in its previous advice:
"The current regulations are no longer effective
because:
an increasing proportion of passengers now buy
unprotected flights directly from airlines
over half of unprotected passengers wrongly believe
they are protected the current system based on bonding is inefficient,
expensive and imposes significant regulatory costs on tour operators
existing tour operators are beginning to reorganise
their businesses outside of the protection provided by ATOL, partly
because of the market distortion with scheduled air travel created
by the costs of bonding.
Consumers cannot rely on other forms of protection.
90% of travel insurance policies do not cover air carrier insolvency.
Those that do cover insolvency would not, unlike the ATOL scheme,
help stranded passengers make the necessary alternative practical
arrangements to get home. Also, increasing use of debit cards
to avoid air carriers' credit card surcharges means consumers
lose the refund protection which credit card purchases can provide.
EU law means that the UK has to ensure that,
at least, customers of tour operators are guaranteed a refund
and/or repatriation if the operator becomes insolvent. In the
UK this requirement is met by the ATOL scheme, which requires
tour operators who sell packages to hold a bond to provide financial
protection.
The analytical model created by E&Y found
that the "All Flights" option is the most economically
attractive. It has the highest ratio of benefits to costs and
delivers the greatest benefits at the lowest cost."[23]
The CAA was clear what action is required:
The CAA recommendation is, therefore, to implement
the All Flights option: all passengers on UK-originating international
flights would enjoy financial protection for both repatriation
and refunds in the event that their tour operator or airline became
insolvent.
The CAA proposes that the All Flights option
is backed by a reserve fund of around £250 million. It proposes
paying for this fund through a £1 levy per passenger per
UK-originating international flight, which should take 3 - 5 years
to generate the required amount.
There would also be a reduction in the regulatory
burden on tour operators, which the industry estimates could be
worth up to £80 -100 million - primarily because they would
no longer provide bonds, but also because it would allow other
regulatory requirements on them to be relaxed. There would be
no material regulatory burden, in terms of implementation, imposed
on airlines. The CAA considers that it is therefore consistent
with the Hampton review on regulatory inspections and enforcement,
carried out for HM Treasury, and the "One in-One out"
approach to regulation proposed in the Better Regulation Task
Force's "Regulation - Less is More" report." [24]
The CAA concluded that these proposals were:
"The simplest and most economically rational
option, as shown by the model, is protection for all flights.
All passengers on UK-originating international flights would enjoy
financial protection in respect of both repatriation and refunds.
The CAA proposes implementing this option through
a £1 levy per passenger per UK-originating international
flight. Over 3 - 5 years this should build up a reserve fund of
around £250 million.
The CAA recognises that there are counter arguments
and proposals, but considers that these should be subjected to
the same level of detailed analysis as its proposal.
The CAA considers that its proposal is consistent
with the current objective of better regulation (the Hampton review
and the Better Regulation Task Force's "Regulation - Less
is More" report). It would have no material impact on airlines
and would bring deregulatory benefits to tour operators.
The CAA's recommendation would restore financial
protection to consumers who think they already have it."[25]
Implications of the proposal and industry responses
13. The evidence we have is that the CAA's proposal
has been welcomed in important sectors of the industry and by
commentators.
14. The CAA proposal would place no extra financial
burden on the airlines as the levy would be paid by the passengers.
Unlike the ATOL bond, the levy would not tie up the working capital
of the companies involved. [26]
15. The burden on the industry of collecting the
levy is likely to be light: "It is anticipated that a simple
fundraising mechanism such as a flat-rate levy on all UK-originating
passengers, could use firms' existing systems so that the additional
costs would be minimal." [27]
16. The CAA estimate that failures could be "managed"
to occur in the low season which would minimise the fund required
which would be capped at £250 million, the estimated cost
of a low season failure, at which point contributions to the levy
would be suspended.[28]
More expensive or unavoidable high season failures would be supported
additionally by the Air Travel Trust Fund (ATTF),[29]
the statutory successor fund to the Air Travel Reserve Fund established
in 1975 to supplement ATOL bonds. [30]
17. The proposed level of the charge per passenger
per UK originating international flight, £1, appears reasonable
given the likely risk and the benefits conferred, as the experience
of some EUjet passengers who paid considerable amounts to return
home confirms.[31] The
CAA conducted a survey of EUjet customers after the airline's
collapse. Although the CAA did not ask any questions relating
to a levy or increasing financial protection, a significant proportion
of EUjet customers told the CAA that there was need for "a
better and more extended protection system." [32]
Sir Roy McNulty referred to an ABTA survey in 2004 which found
that "four in five people agreed that a levy of up to £2
to help people in the event of an airline collapse would be acceptable."[33]
The CAA's proposed levy is in fact £1, approximately half
the per capita charge tour operators are paying for ATOL.[34]
Sir Roy McNulty placed this level of charge in perspective:
"…we are talking about a £1 levy,
and when you are looking at the surcharges that all of these airlines
are loading onto customers- even Ryanair who are adamantly against
the £1 levy, charge their customers £6.96 for insurance
and wheelchair charges….To me, £1 levy against, say
British Airways with total taxes and, fees and charges of £50
on a flight to Amsterdam, we have got to keep these things in
proportion…." [35]
18. Which, the Consumers' Association,
calls for the Government to take action to untangle the confusion
of the present arrangements and instances the difficulties passengers
can face:
"passengers on a MyTravel charter flight
will be protected by the ATOL scheme, but those booking on its
no-frills sister company MyTravel Lite are likely to be left without
any compensation should the company become insolvent." [36]
The Air Travel Insolvency Protection Advisory Committee
(ATIPAC) points out that although "much effort has been expended
on consumer education, the level of awareness has remained virtually
static";[37] and
stresses the advantage of professional repatriation and compensation
arrangements: "In the past year, 11,500 [ATOL protected]
passengers have been repatriated, after completing their holidays,
and 22,000 people have received compensation".[38]
19. The Association of British Travel Agents and
Federation of Tour Operators not unexpectedly focus on the "competitive
disadvantages" for tour operators who are required to fund
ATOL bonds in contrast with the no-frills airlines.[39]
The Association of Independent Tour Operators (AITO) estimated
that replacing ATOL with a levy as proposed by the CAA would save
its members approximately £15 million annually.[40]
20. We are sympathetic to the AITO approach not only
because the present arrangements discriminate against tour operators,
but also because tour operators' competitive disadvantage also
works against growing numbers of UK leisure travellers using no-frills
airlines. Many of these passengers believe that they are covered
but in reality are not. It is a disadvantage which is growing
starker as the number of passengers carried by the no-frills increases
inexorably.[41]
21. The competitive market distortion introduced
by the £1 "all flights" levy would be less, in
the CAA's view, than that represented by the current cost to passengers
of the ATOL bond estimated by the CAA at "£2 a head".[42]
The Government, astonishingly, appears not to have conducted an
independent quantitative assessment of the relative merits
of the two approaches.[43]
This is particularly regrettable as it has rejected the option
which appears to reduces market distortion significantly.
22. The proposal for a levy is of course not universally
welcomed. But the argument, advanced by British Airways and bmi,
[44] - though rejected
vigorously by Virgin Atlantic which supports the CAA's levy proposal
-[45] that blanket protection
offered by such a levy is not appropriate in the case of larger
and currently stable airlines, is weak. The CAA's view is that
"one should not legislate on the basis of particular airlines'
financial positions today. Well established airlines do get into
financial difficulty from time to time." [46]
We agree. The collapse of Swissair and Sabena is eloquent testimony
that the danger of collapse is not confined to the smaller carriers.
23. The CAA has produced a well researched and
reasonably priced proposal which allows the present UK and European
policy of financial protection for air passengers to continue
in circumstances where the number of UK international leisure
passengers protected by ATOL is falling and is likely to continue
to shrink further in future. No one relishes paying more to travel.
But there is little practical alternative if millions of passengers
are to have peace of mind. The CAA's proposal appears cost effective
and to place no excessive burden on airlines, the industry generally,
or the taxpayer. It involves less market distortion that the present
arrangements which discriminate against tour operators. The proposal
is in line with the CAA's previous view, and that of our predecessor
committee. It has our support also.
14 Financial Protection for Air Travellers, para 43 Back
15
Transport Select Committee, Financial Protection for Air Travellers,
Oral Evidence, HC 806-I, Q210 Back
16
Ibid, Q 210 Back
17
See footnote 8 Back
18
Ev 6 Back
19
Department for Transport press notice of 27 October 2004; Letter
Charlotte Atkins to Gwyneth Dunwoody, 27 October 2004. The members
of the working group were: Department of Trade and Industry, British
Airways, Easyjet, Virgin Atlantic, TUI, Cosmos, First Choice,
Board of Airline Representatives in the UK (BARUK), European Low
Fares Airline Association (ELFAA), Association of Independent
Travel Organisers (AITO), Association of British Travel Agents
(ABTA), Air Transport Users Council (AUC), and the Federation
of Tour Operators (FTO), Ev 5 Back
20
Ev 5 Back
21
Ev 5 Back
22
Financial Protection for Air Travellers, para 43 Back
23
Ev 7 Back
24
Ev 6. The CAA's full advice to the Government, including the relevant
economic modelling, Financial Protection for Air Travellers and
Package Holidaymakers in the Future: CAA Advice to Government,
September 2005, CAP 759, ISBN 0 11790 477 5, can be consulted
on-line on the CAA's website at www.caa.co.uk Back
25
Ev 9 Back
26
Ev7 Back
27
CAA, Financial Protection for Air Travellers and Package Holidaymakers
in the Future, pp 20,21; Ev 7 Back
28
Ibid, pp 19,20 Back
29
CAA, Financial Protection for Air Travellers and package Holidaymakers
in the Future, p 19 Back
30
Financial Protection for Air Travellers, HC 806-l, para 11 Back
31
See Chapter 4 Back
32
"9% of EUjet customers commented on the need for a better
and more extended consumer protection system. Some considered
that 'protection for all customers should be in place' and wanted
"a small levy to cover such costs', or said that 'I would
have paid a few extra pounds for financial protection had it been
offered.'" Ev 24 Back
33
Q 42 Back
34
Q 69 Back
35
Q 69 Back
36
Ev 32 Back
37
Ev 34 Back
38
Ev 36 Back
39
Ev 44 Back
40
Ev 48 Back
41
For example, "figures at yesterday showed that the boom in
low-cost air travel was continuing. Of the 113,000 flights in
and out of the UK last month, almost a third were operated by
the low cost carriers, OAG, a flight information company said.
The number of low-cost flights was 24% higher than the same time
last year." The Times, 11 October 2005 Back
42
Q 69 Back
43
Ev 4 Back
44
Ev 42, Ev 40 Back
45
Ev 47 Back
46
Ev 8 Back
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