APPENDIX 8
Memorandum submitted by the Association
of British Travel Agents and the Federation of Tour Operators
1. BACKGROUND
TO THE
INQUIRY
ABTA, as the representative of the vast majority
of British travel agents, and the Federation of Tour Operators,
as the representative of the major tour operators, have a joint
commitment to securing comprehensive consumer protection for holiday-makers,
and, as such, submit this joint response for consideration by
the Transport Select Committee. ABTA and the FTO support the Transport
Select Committee strongly in its continuing focus on the future
protection regime for air passengers. The Committee's report of
July 2004 has had the effect of concentrating minds on the very
significant deficiencies of the existing passenger protection
system which is fragmented, confusing, insufficient, and, as demonstrated
starkly by the collapse of EUjet, leaves passengers exposed in
a way in which they are unaware.
The arguments in favour of adopting a comprehensive
system of passenger protection for all flights that originate
in the UK have been articulately expressed, not least by the CAA
in its advice to Government, published in July 2004 and by the
Transport Select Committee in its report of July 2004. Support
for the introduction of the consumer protection levy is further
underlined by cross-party support for EDM 137 which has been signed
by 109 members as of 8 September 2005.
The EUjet collapse Inquiry provides an opportunity
to reflect on how the discussion about a future passenger protection
regime has evolved since that time. To that end, rather than rehearse
the strong arguments in favour of legislation to introduce a levy-based
comprehensive passenger protection system, we have revisited the
Committee's own recommendations and analyse how they have been
responded to in the last twelve months or so. We also look at
some of the arguments against reform that have been deployed by
opponents to change both in the media and in conversations with
Government.
In so doing, ABTA and the FTO hope to contribute
to Committee's inquiry in a manner which updates the debate in
light of recent events.
2. THE COLLAPSE
OF EUJET
At the time of the EUjet collapse, there were
apparently 12,000 passengers awaiting their EUjet return journey.
The vast majority of these were overseas. In addition, over 100,000
had booked their holidays in advance. While airlines such as Easyjet
and Monarch offered passengers a £25 return flight to the
UK, the reality is that very few passengers took up this offer,
either because the £25 flight was not available on the right
day or at a convenient time or because, at this time of year,
airlines are closest to capacity meaning that the availability
of the cheap flights were restricted. Furthermore, the offer was
merely to return customers to a UK airport. EUjet operated from
Manston in Kent, and any customer would have had to incur the
not insubstantial cost of travelling to that airport to collect
their car, or return home—inevitably far more than the £25
flight cost offered. ABTA and the AUC have fielded over 150 calls
from passengers and it is clear from the nature of those calls
that EUjet passengers are significantly out of pocket and inconvenienced.
Many families have been denied their annual holiday.
The management of EUjet stated on their website,
the day after the company went into administration, that passengers
could reclaim the value of their flight through credit card protection.
This was a grossly misleading and irresponsible statement. Passengers
are very unlikely to receive compensation through their credit
cards. Credit cards only protect the passenger if the value of
the flight was over £100 (EUjet's average flight is below
this) and they book through a UK domiciled payment processor (EUjet
are based in Ireland.) Moreover, passengers will only receive
the value of their ticket not the overall cost of repatriation
and follow-on costs. There is no protection for debit card purchases
(over 40% of all payments) and it is extremely rare for holiday
insurance to cover airline failure.
Moreover, passengers who had booked on an EUjet
flight and then had made advance bookings for accommodation and
car hire would not receive the refund on these other holiday elements.
The overall effect of this is to magnify the loss resulting from
the failure of EUJET.
It is clear that the EUjet failure underlines
the points that the Transport Select Committee, the CAA, ABTA,
FTO, Virgin Atlantic, Which?, TSI, AUC, and all the major tour
operators such as Thomas Cook, TUI, First Choice, and MyTravel,
have been making. It must be of major concern that should a larger
airline go into administration, the disruption could be magnified
with spare capacity on other airlines very unlikely to cover repatriation
without intervention from the Government or the CAA.
3. REVISITING
THE COMMITTEE'S
KEY RECOMMENDATIONS
"The Government must swiftly introduce legislation
to provide the long overdue levy-making power, even if it rejects
the case for wider reform of financial protection."
We are pleased that the Government is introducing
powers to underpin the Air Travel Trust fund in the Civil Aviation
Bill which has just completed the committee stage in the House
of Commons. However, we do note that this levy will be additional
burden on providers of combined holiday packages as opposed to
direct flight bookings, and will merely act to increase the disparity
in cost and protection between those travelling on ATOL protected
flights compared to those on scheduled flights.
"Those in the insurance and travel industries
need to come clean about the extent to which airline failure is
not a risk covered by most general insurance."
Very little progress has been made on this.
There has been much discussion about airlines voluntarily adopting
pop-up boxes on websites to inform consumers about the insurance
position that they are in. Even this insufficient and minimal
change has not been adopted. In any event, experience of promoting
the ATOL scheme has shown that despite many years of advertising,
customers do not have any real understanding of whether or not
they are protected. ABTA has released a scheduled airline failure
insurance product to complement existing insurance packages though
take up is, as yet, very low indicating a low level of understanding
amongst passengers of the risks that they face.
"We are persuaded that there is a significant
risk of at least one further airline failure which will affect
UK passengers in the foreseeable future. We also believe that,
as things currently stand, it is likely that a significant proportion
of the passengers affected would not be protected."
As foreseen by the Committee over a year ago,
this has indeed occurred with the consequences outlined above.
Industry representatives such as Michael O'Leary, CEO of Ryanair,
have predicted further failures in the not too distant future.
Mercer Management Consulting, in a recent review of the state
of the "no-frills" aviation market predicted that "many
operating today won't be around" in five years time and a
number of them "could go belly-up very soon." It is
also worth noting that of the five US airlines, only one is not
currently in Chapter 11 administration. If an airline is in Chapter
11 then Scheduled Airline Failure Insurance does not cover the
passenger. Delta and Northwest Airlines filed for Chapter 11 bankruptcy
protection and reorganisation on 14 September 2005. The recent
IATA predictions of a $7.4 billion loss for global aviation in
2005 add further to the likelihood of scheduled airline failure.
"We are alarmed at the large and increasing
number of leisure passengers not protected by ATOL."
Since the Committee's Report, last year the
proportion covered has declined further to 56% of passengers from
65% the year before. It is probable that ATOL coverage will become
the exception within the next year for British holidaymakers.
"The Committee believes that competition
considerations in themselves make the current system of patchy
statutory financial protection untenable."
The competitive disadvantages for tour operators
remain and are becoming more significant as the proportion of
holidaymakers carried by scheduled and "no frills" airline
increases. Increasingly, tour operators are facing competition
on the same routes from "no frills" carriers. This competition
is healthy but should be on the basis of a level-playing field.
Tour operators are supplying an increasing number
of seat-only sales.Moreover, the competitive pressures are likely
to force tour operators to increasingly de-package their offer
further accelerating the decline of comprehensive consumer protection.
"We urge the Civil Aviation Authority to
hold its nerve and advise Government that a comprehensive financial
protection system for air travellers is now justified . . . Economic
impact and cost-benefit analysis is important and must be completed."
The CAA advised the Government that such a system
was necessary in July of last year. It was asked to prepare a
Regulatory Impact Assessment to evaluate the relative merits of
varying degrees and types of consumer protection. As yet, this
draft RIA is unpublished. Moreover, correspondence from Government
Ministers to elected members did indicate that the Government
intended to publish the draft RIA and consult publicly on the
preferred option. However, recent correspondence has played down
this commitment. Until an open public debate about the relative
costs and benefits of the introduction of a comprehensive consumer
protection regime has been undertaken, the issue of consumer protection
for airline passengers will remain in the current state of unsatisfactory
limbo.
"The perceived intentions of the European
Commission are not a good enough reason for the Government of
the UK to sit on its hands."
While conversations between the FTO, ABTA and
European Commission Officials have been ongoing and there has
been a sympathetic hearing for ABTA and the FTO's position, it
is very unlikely that there will be legislation at the EU level
for a number of years. The Commission is compiling background
information on the way the consumer protection regimes currently
operate and consumer understanding of those regimes. Only once
this information gathering phase is completed will there be any
movement towards the drafting of legislation. In any event, we
understand that the Commission is only giving consideration to
the costs of repatriation, not to refund of advance payments,
thus perpetuating a two tier system in any event. The issue of
gaps in consumer protection in the UK is more pressing than the
EU process can address.
"Government delay and prevarication will
only increase the risk to which passengers are exposed."
We understand the many complex issues in addressing
the need for comprehensive consumer protection. However, we feel
that the best way to resolve any outstanding issues is for the
Government to publish the draft RIA authored by the CAA so that
an open public debate could be conducted. In the meantime, a provision
could be added to the Civil Aviation Bill currently being debated
in Parliament that will allow the Secretary of State for Transport
to introduce a consumer protection levy through secondary legislation
should that consultation process result in a positive outcome.
Such a provision would mean that the golden opportunity provided
by the Civil Aviation Bill is not lost and there will not be a
wait of many years for the next opportunity to introduce the levy.
We cannot understand why the Government is taking so long to reach
a decision given the comprehensive advice it has received from
the CAA, the backing of organisations representing consumers and
the overwhelming support of the travel industry.
4. OPPOSITION
TO THE
INTRODUCTION OF
A LEVY
There is strong support for the introduction
of a consumer protection levy, not just in Parliament, including
the Transport Select Committee, but also the CAA, AUC, TSI, tour
operators and Which? A number of the scheduled airlines are against
the introduction of the levy as well as the "no frills"
airlines. BA, Ryanair and Easyjet have been the most vocal in
their opposition. The opposition has deployed a number of arguments
that we rebut below as we do not believe that they bear close
scrutiny.
"The consumer protection levy is a deeply
interventionist act that will hit airlines hard."
This argument may have had some merit if the
Package Travel Regulations and ATOL system had not been introduced.
The reality is that the existing system is a deep regulatory burden
on tour operators but that is a price worth paying to provide
the consumer with protection and piece of mind and the industry
with an underpinning of confidence. The design of the consumer
protection levy as proposed by the CAA has a much lower administrative
cost that the current system of bonding for tour operators as
it is simple. Therefore, the new system would relieve tour operators
of a degree of regulatory burden, remove an unlevel playing-field
but, most importantly, provide a genuinely comprehensive system
of financial protection for air passengers. Furthermore, an addition
of £1 to flight costs, paid directly by consumers should
have minimal impact on customers' purchasing patterns. This compares
favourably with the current level of fuel surcharges imposed by
many airlines. British Airways announced on 8 September an increase
in their long haul fuel surcharge of £6 per sector—six
times as much as the suggested levy.
"We have a tiny margin on our flights and
a £1 levy would severely eat into that."
It is in the nature of a universal levy that
it passes on the cost to the passenger and does not hit one airline
at the expense of another which is precisely the opposite of the
current patchwork of consumer protection that exists. In any event,
the levy would not be taken from the airline's income, and as
such, has no impact on the margin made by the airlines.
"Consumers are covered by their credit cards
and so Government intervention is not necessary."
The Transport Select Committee dealt with this
argument comprehensively in its last report on this issue. Most
disturbingly, EUjet executives used a variation of this argument
in the aftermath of the airlines collapse. For clarity, debit
card customers are not covered, only flight purchases worth more
than £100 are covered, and only card payments processed in
the UK with be protected. Moreover, the refund will be for the
cost of tickets that the passenger has actually paid rather than
for the cost of repatriation.
"IATA carriers will carry the passengers
of another IATA member in the event of its failure."
While in many circumstances this may be true,
it is difficult to test this voluntary agreement other than in
the event of major failure. There will still be capacity constraints,
especially for those returning from popular destinations. While
this may or may not provide a solution to the repatriation issue,
it does not protect those who have yet to go on their holiday
for whom it is probable that there would be no refund or only
a partial refund. An increasing number of airlines operating out
the UK today, such as Ryanair and Easyjet, are not members of
IATA, and in fact none of the new "no frills" carriers
are IATA members. In any event, IATA members collectively are
predicted to lose over $7.4 billion in 2005 and are unlikely to
be able to mount a major repatriation on less than fully commercial
terms.
"Why should our customers, on this financially
solvent airline have to subsidise customers on less financially
secure airlines?"
Firstly, it should be stated that airlines do
not "own" customers. Passengers travel on a number of
different airlines as this is a very price sensitive market. Of
course, there are balances to be struck in providing a cost effective
consumer protection system and not every airline has the same
degree of risk of financial failure. There is risk of failure
for any airline and we have seen many airlines that seemed financially
sound at a certain point fail, often as circumstances beyond their
control affect their solvency.
It is not the CAA's role to test for financial
viability and, should it begin to conduct such a test, the administrative
cost of the consumer protection levy could increase considerably.
Therefore, though risk of failure varies from airline to airline,
in order to provide a cost-effective, comprehensive system for
passengers, whenever and wherever they fly, a simple low-level
levy of £1 per flight makes a great deal of sense.
"Not all costs of repatriation are the same
so why should all passengers pay the same cost no matter where
they are flying to."
This is a variant of the relative risk of failure
argument. Essentially, the huge benefits of having an administratively
simple, lowest cost flat-rate levy outweigh concerns about the
cheaper cost of repatriation for European flights over long-haul
flights.
CONCLUDING COMMENTS
Events following the publication of the last
Transport Select Committee Report on consumer protection for holiday-makers
have underlined the urgent need to introduce a comprehensive consumer
protection levy. The continuing decline of ATOL coverage, financial
uncertainty of many "no-frills" operators, and now the
collapse of EUjet should urge the Government to act with alacrity
to address the current situation with regards to failure in consumer
protection for passengers. The CAA has proposed a scheme that
is simple, cost effective, comprehensive, and workable. The crucial
next steps for the Government are to publish the draft Regulatory
Impact Assessment and make provision within the Civil Aviation
Bill for the introduction of a levy once that consultation process
has concluded. Only then, will holidaymakers receive the degree
of protection that they and their families expect and demand.
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