Select Committee on Transport Written Evidence


APPENDIX 11

Memorandum submitted by the Association of Independent Tour Operators

  You will have received from ATIPAC a memorandum for the House of Commons Transport Committee Hearing on Financial Protection for Air Travellers.

  I am a member of this committee representing the Association of Independent Tour Operators (AITO). You were kind enough to have given a video interview with Richard Hearn, our Chairman, at the time of our last overseas meeting in November 2004 in Dubrovnik.

  The memorandum was fully discussed at the last meeting of ATIPAC and, therefore, our views on the proposal for a £1 levy are accurately reflected within the memorandum. However, I would like to reinforce one or two points which we have been making to Government over the last months.

  Time and time again we have emphasised that this proposal does not add to regulation but would be like a breath of fresh air for tour operators who are regulated to the extreme both by UK Government and by Brussels. You cannot imagine the time we, who run small and medium sized enterprises, spend in trying to conform to the regulations that are imposed on us. We have to tie up huge amounts of capital in order to operate our companies. We spend hours at meetings with bond obligors and banks who are responsible for putting up our bonds and generally spend a great deal of executive time in form filling. We have estimated—details enclosed—that AITO members would save in the region of £4.53 million per annum if the current ATOL bonding system was to be replaced by a £1 levy. This figure is exclusive of the actual cost of bonding. Adding the two figures together would produce a figure in excess of £10 million per annum.

  I spoke personally to a Mr Livermore, one of Gordon Brown's special advisers, and did my best to emphasise this point. However, I felt throughout the conversation that there was no will to listen or to understand how the industry works. As far as he was concerned if we, as tour operators, were at a competitive disadvantage because of the amount of regulation to which we were subjected, then this was a matter for the European Commission and not for the UK Government. I do not have to tell you that any adjustment to the system at EC level would take years to implement.

  Somehow the airlines have managed to persuade Government that the collection of a £1 levy will impose an enormous regulatory burden on their operations. This is simply untrue. The £1 would be quite easily collected within the existing collection framework for Air Passenger Duty (APD); how the airlines can argue that this is an imposition when they are charging £30-£40 in fuel surcharges and other extras without any apparent problem is quite a mystery to us.

  The £1 levy will save the public millions of pounds. It will reduce regulation and will certainly not be inflationary. Currently Ryanair charge £3.50 per person for taking a credit card booking even if the fare payable is composed of only airport taxes in cases when the flight is given away free. This is an enormous percentage to charge when one considers that the airline is unlikely to be paying more than 1%-1.3% of the money charged to the credit card to the credit card merchant acquirer. Just imagine what the public would save if they could safely use a debit card (for which only a small charge is made by the operator) to pay for their flights knowing full well that, for an extra £1, they would not have to worry about losing their money or being repatriated if necessary.

  All along we have provided exhaustive information to Government and the CAA's Regulatory Impact Assessment explores the whole question of the suitability of the levy in considerable detail. We have not had a single argument from any of the airlines via Government which holds water. Government has merely reiterated to us again and again that the argument is finely balanced on both sides. We enclose replies to some of the statements made on European Low Fares Airline Association's website, www.elfaa.com, which illustrate how superficial the airlines' case is to date.

  It would be a great shame if this golden opportunity to update the whole ATOL system is not grasped. Currently, it is a system which is dying and if it is not replaced by what we are now suggesting then there will be no financial protection for travellers within the next five years.

  I would be very willing to attend any hearing of the Transport Committee on behalf of AITO should you feel that it would be helpful for your members to be able both to ask questions and to hear the views of the SMEs in the travel industry.

  While writing, I should like to place on record how much we in AITO appreciate your efforts to bring some plain thinking and commonsense to this whole issue. Thank you.

20 September 2005

SUMMARY OF PROBABLE SAVINGS BY AITO MEMBERS AS A RESULT OF THE CHANGE IN PROVIDING CONSUMER FINANCIAL PROTECTION UNDER AN ATOL LICENCE

  In 2004, 156 AITO tour operator members had a total turnover of £917 million. 145 of these members had an ATOL licence and their licensable turnover was £583 million. We estimate that the total licensed seats for that turnover would be 800,000. We have ignored the actual cost to each company of providing a bond as we understand that this information can be accurately supplied by the CAA. However, the change in the licensing regime will lead to considerable savings in cost to our members and we outline these below.

Application Forms and Monitoring

    —    Completion of application forms for the CAA.

    —    Completion of application forms for bonding obligor.

    —    Obtaining bank position forms on each account held.

    —    Quarterly returns.

    —    Auditor's verification of turnover and passenger carryings.

    —    Meetings with bond obligor—whether insurance company or bank.

    —    Meetings with credit card provider.

  We understand that much of the current bureaucracy which accompanies the ATOL licensing scheme will disappear and that this will be replaced by a far simpler system which, in due course, will be accessible on line. We estimate that the time spent per company in dealing with ATOL related matters is in the region of 50 hours per company per year. Those involved in the whole ATOL process are the senior managers of the company and because AITO members are all SMEs this means that the owners or managing directors of the company are personally involved when in fact they could be far more usefully employed in running the business and creating more money for their organisations. As a result, many of these ATOL related tasks are done out of normal office hours. Conservatively, we feel the cost relating to these 50 hours for managers'owners' time is £200 per hour. So for 145 members this would mean £10,000 per annum per company making a total saving of £1.45 million.

Credit Cards

  Currently, as a result of the Consumer Credit Act in the UK, the charge made by credit card merchant acquirers ranges from approximately 1.24% to 4%. This is because of the risk to the credit card companies of tour operators/airlines failing, resulting in their having to refund customers who have paid by credit card.

  However in France, where there is no consumer credit act covering purchases through credit cards, the fee charged to the travel industry is less than 1%. As the proposed fund will pay out in full for any claims where payment to the failed principal has been via cash or a credit card, the credit card companies' risk will be zero. This will enable tour operators to negotiate far better terms with the credit card companies to bring their charges into line with that in the rest of Europe.

  We estimate that a 0.5% reduction will be achieved. This 0.5% reduction will result in a saving of £1.17 million, being a reduction of the charge by 0.5% on estimated credit card turnover at 40% (£233 million) of total membership licensable turnover of £583 million.

  Credit card turnover is dependent on booking mix and the lead-in time. The perceived financial protection encourages consumers to pay by credit card. However, once the realisation dawns on the public that this is no longer necessary then the number of debit card transactions (already increasing) will rise even further and so represent an even greater reduction in charges to tour operators because only a 0.25% handling fee is charged per debit card transaction.

  The figure of £1.17 million saved could, therefore, double to £2.34 million.

  Another aspect to be considered regarding credit cards is the fact that bookings are being made later each year. We estimate that, in a few years time, 75% of all bookings could be made by either credit card or debit card. Thus the consumer levy could produce still more significant savings to our members.

  Approximately 25% of AITO members provide a bond or some other form of guarantee to their credit card provider or are subject to deferred payments by the provider. This has serious implications on our members cash flow and often requires considerable funds to be blocked in order to cover the credit card provider's risk. Technically the turnover involved is therefore doubly protected, once by the ATOL system and again as a result of credit card providers' demands.

  We estimate that 25% of AITO members (representing 36 companies) provide a bond or are subject to deferred payments or blocked funds. Total credit card turnover of these companies would be 25% of £233 million. This credit card turnover would, therefore, amount to £58.3 million. If the credit card providers require a bond of 5% (£2.9 million) of this turnover, which would cost each company approximately 3% in insurance premiums, then the total cost reduction would, as a result of the new financial protection scheme, be £88,000.

Trade Restrictions

  The anomaly of not being able to trade with another company both as an ATOL holder or a retail agent would disappear. This would make documentation far simpler and would result in considerable simplification and time saving. At a rough guess, we estimate the potential cost saving as £50,000.

Personal Guarantees

  All owners/directors provide personal guarantees, either to their obligors and to the CAA or to both. Some purchase directors' liability policies in order to cover the risks involved. However, this is expensive and most do not bother, thus puffing themselves personally at risk should their companies fail. There is thus a cost element and a "grey hair" element involved in personal guarantees. It is difficult to quantify but we would estimate £100,000 as a reasonable potential cost saving.

Protected Funds/Credit Scoring

  I is often a requirement from bond obligors and always a requirement from banks that funds are blocked in order to guarantee bonds. This is a burden that can be very costly for the smaller company in that better use could be made of the blocked funds to enable investment in additional personnel, technology and business development. There is also a considerable effect on cash flow. Across the whole association we consider that the opportunity cost of these blocked funds (the lost opportunity for wealth generation) would be a minimum of £500,000.

CONCLUSION

  We therefore estimate that the total saving (excluding the reduction in bonding costs, which is to be calculated by the CAA) across the Association of adopting the new method of customer protection would amount to approximately £4.53 million (the sum of the figures in red).

  With bonding costs included, the figure is estimated to be in excess of £10 million per annum.

27 May 2005



 
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