Air Travel Organisers' Licensing (ATOL) Reform

Written evidence from the Civil Aviation Authority (ATOL 03)

Executive Summary

1.1 The Air Travel Organisers’ Licence Scheme (ATOL) is a financial protection scheme managed by the UK Civil Aviation Authority (CAA). All travel companies selling air holiday packages and flights in the UK are required by law to hold an ATOL Licence, granted after the company has met the CAA’s licensing requirements.

1.2 In the event of an ATOL holder’s failure, the CAA ensures customers who paid and contracted with the ATOL holder for an air holiday package or a flight, do not lose the money paid over or are not stranded abroad. The scheme is financed through a per passenger payment, known as the ATOL Protection Contribution (APC), which ATOL holders are required to pay into the Air Travel Trust (ATT). The APC is currently £2.50, and can only be changed with approval of the Secretary of State.

1.3 The scheme does not currently cover bookings and payments made to airlines, or to airline agents where airline tickets or a similar airline booking confirmation has been issued.

1.4 Every year, over 18 million people enjoy holidays which are ATOL protected. Although the majority of them will have no need to call on the protection offered by the scheme, in the past three years over 100,000 have been repatriated by the CAA following failures and over a quarter of a million people have received refunds to allow them to book replacement holidays.

1.5 The CAA supports the Government’s reforms of the ATOL scheme which will give consumers a greater chance of benefiting from statutory protection. This will be achieved in the short term with the implementation of revised ATOL Regulations which will extend the scope of ATOL to cover what is being called ‘Flight-Plus’ holidays, and which introduces the ATOL Certificate, a standardised document which will explain to holidaymakers what is protected and what assistance is available in the event of an insolvency.

1.6 The DfT have also included provisions in the Civil Aviation Bill which may be used to further extend ATOL to cover air holidays sold by airlines and sales where a travel firm is acting as agent for the consumer. The CAA supports these measures as they are vital to ensuring all holidays which look the same are subject to the same consumer protection requirements. The reforms are essential for consumer clarity and to ensure a level playing field across the travel market.

Background to ATOL

2.1 ATOL was established nearly forty years ago by the Government to protect holidaymakers whose tour operator ceased trading and to ensure they are looked after in the resort until the end of their holiday and brought home to the UK. In addition, if holidaymakers are yet to travel, they receive a refund of their money so they can book another holiday.

2.2 Subsequently, European legislation came into force which required, amongst other things, financial protection for all package holidays (Council Directive 90/314/EEC on package travel, package holidays and package tours, known at the ‘Package Travel Directive’ or PTD). ATOL provides the means by which the UK meets this obligation for air inclusive package holidays, except those sold by airlines, which are currently excluded from the scheme in primary legislation.

2.3 The travel industry has changed significantly since ATOL was established in the 1970s. Then, most scheduled carriers were nationalised and the structure of agents selling tour operators’ package holidays was standard practice, with most holidaymakers travelling on charter flights. Today, most former national carriers are privately owned and an increasing number of travellers and holidaymakers book over the internet and do not use the traditional High Street travel agent.

2.4 The rise in sales on the internet and over the telephone has meant that more people are putting their own holidays together, either by booking directly with suppliers or using intermediaries who replicate the flexibility and freedom of direct booking. Where intermediaries are used, it can be difficult to establish whether the holidaymaker has bought a package, which should be protected by ATOL and benefit from the broader protection provided by the Package Travel Regulations (‘PTR’, the UK implementing legislation for PTD). In some cases, the holidaymaker may have financial protection for the flight but find that, in the event of an ATOL holder failure, they have no means of recovering the cost of accommodation which they cannot reach as the flight supplier has failed.

2.5 In order to clarify whether such bookings should be licensed under the ATOL scheme and benefit from full financial protected, the CAA published a guidance note which set out how it interpreted the definition of a package as set down in law. This was subject to a Judicial Review bought against the CAA by ABTA which quashed the guidance note and resulted in a judgment on what constitutes a package. The CAA appealed this decision unsuccessfully, and the final judgment handed down by the Court of Appeal contained an interpretation of the definition of a package which concluded that whether components of a holiday were sold separately or as a combination in a package was a matter of fact to be decided on a case-by-case basis.

2.6 As a result of increased direct bookings and the difficulty in establishing whether a package has been created , the number of people taking holidays which are ATOL protected has fallen and today only around 50% of holidaymakers travel with full financial protection from ATOL. However, because financial protection was traditionally prevalent, the majority of consumers do not realise that the arrangements they buy today may not be ATOL protected and that they run the risk of either losing their money or, worse, having to make their own arrangements to get home if their holiday firm fails.

2.7 Around four years ago a decision was taken to change the way in which ATOL failure costs were met. For the previous 30 or so years, the primary protection device had been the provision of a bond from either a bank or an insurance company, with the money available to look after ATOL protected passengers in the event of the ATOL holder’s failure. In circumstances where bond monies were insufficient, the ATT would meet the cost of claims. By the early 1990s, however, the Fund was in deficit and the ATT had no means of replenishment.

2.8 A mechanism for replenishment came into effect in 2008 when the requirement for ATOL holders to make a per passenger ATOL Protection Contribution (APC) was introduced. This is now the primary way in which ATOL failures are financed.

Why is Reform necessary?

3.1 The confusion over whether a holiday sale is a package means that there are now many holidays available which may look like packages to consumers but do not fall under the legal definition and so are not protected under the ATOL scheme. This makes it difficult to explain to the consumer when their holiday company is licensed and they should be protected, and, conversely, when they are at risk and need to make their own protection arrangements.

3.2 This scenario was illustrated in September 2008, when the large integrated holiday group, XL Leisure, failed. As the CAA began its repatriation and refund processes, it became clear that it was possible for two holidaymakers to have booked identical holidays and for one to be fully financially protected, whilst the other has only partial protection or no protection at all. Since XL, consumers have had similar experiences with the failure of Goldtrail and Kiss Flights in summer 2009 providing further evidence of the confusion which exists.

3.3 The XL failure also demonstrated that it was increasingly difficult to run an efficient refund system that would swiftly allow people to book new holidays because of the ever increasing complexity of agents’ paperwork and the difficulty for even the CAA to judge whether claims were valid or not. An independent report (www.caa.co.uk/docs/33/Report201104.pdf) considering the payment of claims after the XL failure found that some agents consistently failed to comply with the CAA’s paperwork standards, which delayed the claims process.

3.4 The reason for ATOL reform is therefore primarily to ensure that consumers can understand the ATOL scheme, and that the valuable protection that it provides applies consistently to like-for-like holiday arrangements so that the CAA can provide the appropriate protection efficiently and effectively. As the confusion results from the definition of what is in the scope of the ATOL scheme, clarity can only be achieved through changes to the legislation which underpin the scheme.

What is proposed in the Reform package?

Secondary Legislation

4.1 Last year, the DfT proposed revisions to the ATOL Regulations to come into force in April 2012 to reform a number of key areas. These proposals include the requirement for persons arranging ‘Flight-Plus’ to be licensed. The CAA supports the concept and definition of ‘Flight-Plus’ holidays put forward by the DfT. This should ensure that holidaymakers benefit from ATOL protection when booking holidays which do not meet the strict definition of a package but where the arrangements are sufficiently similar that a consumer might expect ATOL protection and where the logic of related protection for connected holiday services clearly applies.

4.2 The CAA also strongly supports proposals for new requirements in the ATOL Regulations for travel firms to provide holidaymakers with a standardised ‘ATOL Certificate’ at the point of purchase, which will make it clear to them what their rights are and what is protected. The Certificate will also simplify and speed up the process of assessing claims for refunds following failures, ensuring that that holidaymakers are able to rebook more swiftly.

4.3 The CAA is also introducing the concept of Accredited Bodies, membership organisations (likely in many cases to be travel consortia), approved by the CAA to hold ATOLs covering the business conducted by its members. This will remove the need for the individual members to be licensed, and the Body will also be responsible for overseeing its member’s in accordance with mechanisms and criteria approved by the CAA, reducing the compliance burden.

4.4 These proposals will significantly improve clarity for consumers, and should also help achieve the DfT’s other stated aim of the reforms, which is to ensure that the ATT is returned to a sustainable financial footing as soon as possible. At present the financial arrangements in place to support the ATT are backed up by a guarantee from the Government which could ultimately expose taxpayers to the cost of holiday protection. The DfT expect the protection system to be financed solely by industry, and the CAA endorses this approach. The CAA does not believe, however, that this can be achieved through secondary legislation alone.

4.5 Consequently, amendments are required to the primary legislation under which the ATOL Regulations are made, to remove the ability of travel firms to avoid the need to obtain an ATOL, to protect consumer where the travel firm acts as agent for the consumer, and to bring holidays sold by airlines into ATOL. Industry have made clear that their support for the proposed reforms is conditional upon bringing airline holidays into ATOL, a view which the CAA supports as it will help to improve consumer clarity by ensuring that similar products sold in similar markets are covered by the same regulations.

Primary Legislation – ‘Agent for the Consumer’

5.1 Currently, it is possible for consumers to book holidays that they think are ATOL-protected air packages holidays, but subsequently find that the company they have booked with is acting as their agent (‘agent for the consumer’) and is therefore able to avoid ATOL regulations. This practice is most common amongst firms who operate outside of ATOL, but the CAA has experience of ATOL holder failures where this trading model has been adopted alongside traditional, protected, sales methods.

5.2 The Civil Aviation Bill (under which ATOL Regulations are made) states that regulations may be made to ensure that no one makes available flight accommodation other than the operator of the relevant aircraft and those who hold the relevant licence (i.e. ATOL). Court judgements have ruled that a business is not ‘making available’ flight accommodation if they act as ‘agent for the consumer’, and have no right to dispose of or sell the flight.

5.3 The increasing prevalence of this type of business was brought to the CAA and the Government’s attention following the failure of Sun4U in summer 2009. Sun4U had organised its entire business to operate as ‘agent for consumer’, avoiding the ATOL regulations and leaving thousands of holidaymakers out of pocket when they failed.

5.4 The CAA is concerned that the consumers in these transactions do not know that holidays have been sold on this basis and do not understand the consequences for their financial protection provisions. Travel firms who choose to arrange holidays and would otherwise need to comply with the proposed ATOL Regulations due to the extension in scope to cover Flight-Plus arrangements may decide to act as ‘agent for the consumer’ to avoid the proposed measures.

Primary Legislation – Airline Holidays

6.1 The confusion which exists around holidays booked through travel firms also exists when holidaymakers buy air-inclusive holidays arranged by the airline operating the flight. Again, the protection provided at present will depend on whether the holiday is a package as defined or not. Where a package has been created, the protection may or may not be provided by the ATOL scheme, depending on how the airline has decided to approach these requirements.

6.2 This has come about because the Package Travel Regulations (PTR) applies to whoever organises the package, whilst ATOL Regulations do not apply to the airline operating the flight. Some airlines choose to comply with the financial protection obligations in PTR by establishing a separate trading entity for the arrangement and sale of packages, which is subject to ATOL Regulations and able to apply for an ATOL.

6.3 There are currently an estimated 1.6 million such holiday sales protected by the ATOL Scheme (with a further 9.1 million sales by integrated holiday groups which could restructure to sell as an airline rather than as a tour operator). All of these sales may be removed from the protection scheme at any time.

6.4 In addition to the risk that these sales are removed, there are also a number of large airlines who arrange package holidays, sell direct and provide alternative financial protection (not including repatriation arrangements) to meet their obligations under the PTR. This adds further complexity to the already confusing financial protection landscape.

6.5 The CAA therefore fully supports the inclusion of ATOL reform measures in the Civil Aviation Bill so that airlines have to comply with the ATOL Regulations for package and Flight-Plus arrangements. As stated above, this will not only brings further improvements to consumer clarity, but ensure the success of short term measures which the DfT wish to achieve through the revised ATOL Regulations.

The Future

7.1 At the time of its last Report and Accounts, for the financial year 2010/11, the ATT’s deficit stood at £42m. Currently, projections indicate that the deficit will be removed by spring 2014, exempting the possibility of a significant, expensive failure in the interim period.

7.2 The DfT have made clear that part of the reason for reforming ATOL, in addition to improving consumer clarity and ensuring that when people book travel arrangements that appear to be a holiday they are protected, is to reduce the ATT deficit more rapidly by increasing the numbers of annual APC payments into the fund.

January 2012