| CAA proposals: modernising protection
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| 1. | 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. (Paragraph 23)
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| EUjet collapses |
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| 2. | Unfortunately our predecessors' prediction came true when the low budget carrier EUjet, registered and regulated in the Republic of Ireland, but operating primarily from Manson Airport in Kent, ceased flying in July 2005 leaving 12,000 passengers stranded overseas and 27,000 still to travel. The case of EUjet illustrates the deficiencies of the current arrangements for financial protection and the need for reform. (Paragraph 25)
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| 3. | Had the Government heeded the common sense recommendations of our predecessor committee to provide quickly an adequate and up to date scheme of financial protection for air passengers without delay, EUjet's collapse might have been addressed with less disruption and expense than the CAA's study proved to have been the case. (Paragraph 31)
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| The Government's decision
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| 4. | The decline in the numbers of those protected by ATOL is set to continue. By 2010 the Government estimate that only between 22% and 46% of UK international leisure travellers will have ATOL protection. The CAA's "worst case scenario" is "19% by as early as 2008". Whichever set of figures is chosen, the trend is clear. (Paragraph 34)
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| 5. | 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. (Paragraph 37)
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| 6. | 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." We agree. (Paragraph 39)
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| 7. | 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. 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. (Paragraph 42)
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| 8. | 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. (Paragraph 44)
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| 9. | 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." 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. (Paragraph 45)
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| 10. | 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. (Paragraph 46)
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| 11. | 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. 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. (Paragraph 47)
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| Further matters of concern
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| 12. | Immediately prior to our hearing on 2 November, we were alarmed to receive in writing an allegation from Virgin Atlantic, a major airline which supports the CAA proposal, that the Department had threatened to "name and shame" it in front of this committee if it did not agree to voluntary measures "to minimise the adverse impact on passengers of airline failures." (Paragraph 48)
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| 13. | While this incident may have reflected a misunderstanding, it indicates a very disappointing level of trust and communication between the Department and some parts of the industry. The Department needs to ensure that its working relationship with the industry is uniformly sound. Improvement here is clearly called for. This episode also exposes the problems of seeking a voluntary agreement for the protection of air passengers where there is no industry-wide agreement. (Paragraph 50)
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| 14. | We deplore what turned out to be a wildly over-optimistic estimate from the CAA in 2004 that the extra analytical work would take a "maximum" of three months. Estimates for work made to this committee must be accurate. (Paragraph 56)
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| 15. | But what is of greater concern is the evidence of Departmental drift. Had the Government moved swiftly when our predecessor's report, 'Aviation', was produced in 2003, or a year later on publication of the first report on air protection, then the plight of the EUjet passengers might have been eased. We accept that General Elections cause extra pressure on Ministers for a concentrated period, but that cannot explain the entire delay. Ministers should have ensured that the interdepartmental discussions, which appear to have lasted from April to September, possibly as a result of a dispute between the Department and the Treasury, proceeded more quickly. (Paragraph 57)
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| 16. | For the Government to reject what it describes as "excellent" CAA work is bad enough. But what is more alarming is that the grounds of that rejection remain unclear. As we say, the Government's rejection of the regulator's advice is based on assertion not analysis. The Government now needs to present the detailed evidence on which its decision was based. The powerful arguments for a modest "all flights" levy to protect passengers presented in the evidence we have received need to be addressed by the Government in detail. (Paragraph 59)
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| 17. | The Department presented no evidence to support the strong implication in its evidence that because travel is "a lot more routine" it no longer involves a "significant proportion" of family income. We challenge the Government to argue this case with those families of four who, according to the CAA's research, had to pay out an average of £400 to return to the UK when EUjet collapsed. We would be interested to know if those people consider £400 to be a "significant" sum. Travel remains expensive. (Paragraph 60)
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| 18. | A member of the Liaison Committee challenged the Prime Minister on 22 November that: "The Government makes much of the fact that it operates on the basis of what it calls evidence-based policy and yet often policies seem to descend from the blue skies…and we wonder where the evidence is." The Department's approach to the policy of financial protection for air travellers is a blatant example of the Government's departure from evidence based policy making. It is essential and, we think, self-evident that the process of Government policy making should be based on clear and convincing analysis. We see precious little evidence that this approach was adopted in the present case. (Paragraph 61)
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| 19. | It is clear from the evidence we received that there were concerns over the viability of EUjet before its collapse. When asked if there were indications that the company was going to collapse the Chairman of the CAA said "No, we did not." This may have been strictly true but was not the whole story. Sir Roy also told us that "There had been rumours but no hard information." (Paragraph 62)
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| 20. | How much information about the chequered history of EUjet's parent company the CAA knew prior to the company's collapse earlier this year is unclear. But given the CAA Chairman's comment to us on 2 November that "If we hear information that leads us to believe that something ought to be looked at we have, on occasion, contacted the regulatory authority in the country concerned", and his suspicion that the company may not have been viable, it might have been reasonable to expect that the CAA would have pressed its concerns urgently to the Irish Commission for Aviation Regulation, EUjet's regulatory body, even on the basis of "rumours". Had such action been taken, it is possible that the problems experienced by thousands of UK travellers could have been avoided earlier in the year. We accept that EUjet was not regulated by the CAA. We hope however that the CAA will intervene more courageously in future if presented with similar circumstances. (Paragraph 66)
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| 21. | In January 2005 "87% of Eujet's then 81 flights per week were departing from the UK." Quite properly, the CAA was concerned and approached the Irish Commission for Aviation Regulation in January proposing that EUjet should be regulated in the UK, but this was rejected. We understand the CAA is "looking at this problem with the Department for Transport". The problem must be addressed as a priority. It is absurd that the present rules prevent the CAA regulating a company's aviation activity where the majority of its flights depart from this country. We hope that a common sense solution is being pursued vigorously by the CAA and the Government with the European Commission. (Paragraph 68)
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| 22. | We are pleased that the Government has taken the opportunity of reform offered by the Civil Aviation Bill currently passing through Parliament to ensure that the present approach is rationalised: "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." While this is welcome however it is no more than overdue housekeeping and has no direct bearing on the wider issue of air protection policy. (Paragraph 70)
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| Conclusion |
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| 23. | We believe that the Government has taken the wrong decision to reject the CAA's case for the levy to finance the return journeys of passengers stranded by the collapse of their air carrier and to provide refunds. (Paragraph 71)
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| 24. | An opportunity to improve consumer protection has been lost. The present arrangement in which ATOL passengers have protection and others do not is plainly unfair. We believe that as the market covered by ATOL shrinks, and the number of unprotected passengers grows, the present arrangements will become increasingly untenable. The Government's decision however means that the present inadequate arrangements will be prolonged. (Paragraph 72)
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| 25. | The Government has ignored the CAA, the industry regulator, which has produced a well argued and robust case for a levy on all flights originating from the UK. Worse, there is no evidence of sound, or indeed any serious analysis underpinning the Government's decision. The quality of the written evidence submitted by the Government to this inquiry was strong on assertion but weak on substance, and the Minister proved unpersuasive at our hearing. (Paragraph 73)
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| 26. | Meanwhile, the Government is spending time embedding voluntary arrangements for repatriation which do not guarantee the stranded passenger a flight home and which are bound to be structurally fragile. This is an amateurish approach. (Paragraph 74)
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| 27. | The Government has asked the CAA to examine whether tour operators' obligations under the Package Travel Directive could be fulfilled by moving away from ATOL bonds to a system that avoided tying up capital and creating barrier to market entry. While this is welcome evidence that the Government recognises the practical difficulties for tour operators of the ATOL arrangements, it will do nothing to ease the problems of protection for the growing numbers of travellers whose arrangements are made independently. (Paragraph 75)
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| 28. | The Government has said in response to our predecessors' report that the European Package Travel Directive is in the "early stages" of review by the Commission, and that there may be a legislative proposal in 2006. This hardly amounts to a firm promise of early action by the Commission or enhanced protection for travellers in the mean time. The Government has provided us with no further details about what European legislative proposals might emerge, so we can make no assumptions about whether these are likely to enhance air passenger protection or not. These are not sound grounds for delaying effective action now at a national level. Demonstrably successful UK policies might also contribute positively to wider European policy development. Instead, the Government appears content to wait passively on what has been glacial progress to date on this matter in Europe. Meanwhile, millions of UK air travellers continue to fly unprotected against carrier collapse. (Paragraph 76)
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| 29. | Unless the Government takes the steps recommended in our predecessor's report, and the advice provided to it by the CAA, the reality is that the number of UK international leisure air travellers in receipt of adequate financial protection will continue to fall steeply. This is unacceptable. The Government's decision not to implement the CAA's advice amounts to allowing the present policy of protection, on which ATOL is based, to wither on the vine. The day of 'bond based' protection like ATOL is passing; modernisation is required. Given the very large numbers of air travellers and the continuing fragility of air carriers, however, the underlying rationale for protecting passengers against airline insolvency embodied by ATOL remains sound. The Government must take the opportunity afforded by this report to reconsider its decision. (Paragraph 77)
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