A flawed policy
37. Nothing the Government has done since the
publication of the previous committee's report has caused us to
retreat from our colleagues' support for the CAA's argument that
a modest mandatory levy to guard against the consequences to passengers
of airline bankruptcy is cost effective and highly desirable.
Our reasons are set out in detail below.
Information
38. The Government wishes to promote greater clarity
about airline insurance and ATOL. This is laudable but we are
highly sceptical that this will succeed where other attempts have
failed. The National Audit Office has found that impact of recent
efforts to increase travellers' awareness of key information has
been relatively weak.[75]
Our predecessors gathered unambiguous evidence that air travellers
were unclear about the limits of cover. The subsequent evidence
of EUjet passengers suggests that widespread confusion persists.[76]
The Government has provided no shred of convincing evidence that
the policy of relying on passengers' "sophistication"
and techniques such as airlines posting messages on websites will
work when other attempts have failed.
39. In the absence of sound consumer information
about airlines' solvency the 'buyer beware' or caveat emptor approach
is unrealistic. Our predecessors said that it was "ridiculous
to suggest that this information can be made readily available,
or that all consumers would want to analyse it before every booking."[77]
We agree.
Repatriation
40. The Government is seeking a voluntary agreement
with airlines to repatriate stranded passengers in the event of
an air carrier collapsing. But reliance on voluntary repatriation
arrangements is inadequate. In the case of a relatively small
airline failure like EUjet such arrangements may appear to work.[78]
The Government evidently believes this case proves the viability
of voluntary repatriation arrangements. But the CAA figures demonstrated
that 16% of passengers only were able to take advantage of the
'no-frills' airlines' reduced fare offer of £25.[79]
Many paid much more: "60% paid between £50 and £200
per person for their return flight."[80]
This is hardly the success story claimed by the Department.
41. Our predecessor committee was clear that capacity
could not be guaranteed under voluntary arrangements in the event
of a major failure in the peak holiday season: "The CAA has
demonstrated that in the summer season, there are very few spare
seats available on flights to the UK from major holiday airports".[81]
The Air Transport Users Council, too, points to the real possibility
that spare seating capacity would be inadequate to cope with the
repatriation problem in the event that a large carrier collapses.[82]
42. Damningly, the Minister admitted to us on
2 November that there was "no guarantee" that if low
fare airlines were fully booked extra flights would be scheduled
to bring home stranded travellers under voluntary agreements.[83]
To argue, as the Government does, for a voluntary repatriation
agreement for stranded passengers on the basis of EUjet is to
build policy on sand. A voluntary agreement in this case is not
worth the paper it is written on. Worse, it gives the appearance
of a solution where in reality there is none. Passengers are lulled
into a false sense of security when they could still be stranded.
'Better regulation'
43. When the Minister gave evidence to us on the
reasons for the Government's decision to reject the CAA advice
for effective protection we were astonished to hear her praise
that work so highly:
"The decision was not made by looking at
the work of the CAA and basically criticising and deconstructing
it; it was very much a question of saying: 'Here is an excellent
piece of work, a very sound piece of work, setting out the arguments
for the levy'
But this excellence had no bearing apparently on
the Government's decision because:
"it was right to take effectively a different
approach; that it was really very much in the context of the Better
Regulation Framework….as the Better Regulation Taskforce
Outline suggested, it was more important for regulation to only
be very much focussed on specific risk. In this case the level
of risk-and there is a level of risk-did not warrant a 100% compulsory
levy."[84]
44. This seems to imply that in working up its proposal
the CAA had overlooked the Government's better regulation policy.
But this was not so. Indeed, the CAA's work specifically addressed
the implications of the proposal for the Government's objective
of better regulation:
"There would…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 the airlines. The CAA considers that it is consistent
with the Hampton review on regulatory inspections and enforcement,
carried out by HM Treasury, and the 'One-in One-out' approach
to regulation proposed in the Better Regulation Task Force's 'Regulation-Less
is More' report." [85]
The Government has produced no evidence to rebut
the CAA's position that its proposal for an 'all flights' levy
would actually lighten the regulatory burden of financial protection
on the air travel industry.
45. The Department quotes the Chancellor of the
Exchequer: "Instead of routine regulation attempting to cover
all, we adopt a risk based approach which targets only the necessary
few."[86]
In this case however the risk applies to all UK international
leisure travellers. The continued existence of ATOL addresses
the requirement to protect only one category of vulnerable UK
international leisure travellers, albeit a shrinking one. The
Government's decision to reject the CAA's advice perversely leaves
the growing number of scheduled airline passengers, including
budget airline passengers, vulnerable to the same risks as those
currently covered by ATOL. If it means anything, 'better regulation'
means regulation that is rational and equitable. To ensure that
all passengers have protection when they have purchased a package
holiday, while excluding others who have purchased a scheduled
air ticket, is neither.
Commercial insurance
46. Our predecessors stressed that Scheduled Airline
Failure Insurance (SAFI) is unlikely to be available where an
airline has sought some form of creditor protection and may be
financially unstable.[87]
In its latest evidence, the CAA restates the position plainly:
"Consumers cannot rely on other forms of
protection. 90% of travel insurance policies do not cover air
carrier insolvency."[88]
In her statement to the House on 31 October 2005,
the Minster said "The Government realises that not all travel
insurance covers insolvency, but some does."[89]
This is disingenuous when the CAA told that Government in advice
published only five weeks earlier, on 22 September that the vast
majority of travel insurance policies do not cover air carrier
insolvency.[90]
We are astonished that in taking its final decision the Government
can dismiss the fact that 90% of travel insurance policies do
not cover air carrier insolvency.
47. It appears that the Government did not perform
even a rudimentary analysis of whether the insurance market would
bear the increased risk exposure of SAFI expansion. This is especially
absurd given the amount of time and money (£400,000) spent
by the CAA on its analysis, including hiring the consultants Ernst
& Young.[91]
It is simply nonsensical for the Government to rely upon the insurance
market to plug the gap left by ATOL when the fact is that appropriate
commercial insurance is simply not yet widely available and there
has been no attempt to assess whether the market is organising
to provide it.[92]
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