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 estimateddetails
enclosedthat 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.
Auditor's verification of turnover
and passenger carryings.
Meetings with bond obligorwhether
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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