Air Travel Organisers' Licensing (ATOL) Reform

Written evidence from ATBA, the Travel Association (ATOL 4)

INTRODUCTION

1 This response is submitted on behalf of ABTA – The Travel Association. ABTA was founded in 1950 – and is the largest travel trade association in the UK, with over 1,200 members and over 5,000 retail outlets and offices. Our Members range from small, specialist tour operators and independent travel agencies through to publicly listed companies and household names, from call centres to internet booking services to high street shops.

2 ABTA Member sales account for 90% of the package holidays sold in the UK annually, accounting for roughly £41.2 million of the Air Travel Trust Fund’s (ATTF) £46.2 million annual income. ABTA estimates suggest that our Members are licensed to sell in excess of 18 million ATOL protected holidays each year (in 2010-11 this represented 16.5 million in sales); ABTA Members are also responsible for the sale of millions of independent travel arrangements to UK travellers.

3 Currently, 631 ABTA Members are ATOL holders. It is estimated a further 629 ABTA Members could be required to enter the ATOL scheme under the proposed reforms currently being considered by the Department for Transport (DfT). The proposed reforms of the ATOL scheme are likely to entail significant systems and process changes for ABTA Members.

4 ABTA welcomed and contributed to the Transport Select Committee’s evidence sessions on the Draft Civil Aviation Bill and we warmly welcome the Committee’s further inquiry into ATOL reform. ABTA notes that the Transport Select Committee has been a strong advocate of consumer clarity. We are grateful for the opportunity to submit our views on this policy area of critical interest to ABTA Members, and we wish to offer our continuing assistance to the Committee in the form of our participation in oral evidence sessions, if it is deemed helpful.

KEY EVIDENCE

5 ABTA remains firmly supportive of the Government’s key aims in the reform of ATOL: clarity, transparency and coherence for consumers; ensuring a greater proportion of travel arrangements are protected; and eliminating the ATTF deficit, and its on-going replenishment.

6 ABTA believes all holidays – however they are booked – should be financially protected. This is the starting point for our call for an extension of consumer protection. ABTA notes however, that the proposals will mean that just over 50% of all holidays taken by UK nationals will be protected by the ATOL scheme. The current proposals are a first step towards creating a more comprehensive, clear and transparent system of consumer protection. However, we believe the scheme cannot be made fairer or successful if at a minimum, airline holiday sales are not brought within the scope of the reform.

7 ABTA welcomes the introduction of the Civil Aviation Bill (19 January 2012). We welcome the proposal to extend the Secretary of State’s powers to include holidays sold by airlines within ATOL. This is a major step forward. We now urge the Government to outline its concrete commitment to bringing these sales into the ATOL scheme.

8 ABTA notes that the Department for Transport's summer consultation on ATOL reform directly addressed the question of holidays sold by airlines. At that time, all stakeholders (including airlines) had the opportunity to respond to the proposals. Furthermore, the case for inclusion of holidays sold by airlines was emphatically made by ABTA and other respondents during that consultation period. For this reason, and in order to avoid delay in creating a comprehensive and fair scheme of consumer protection, ABTA believes a further consultation on the case for bringing holidays sold by airlines into ATOL is unnecessary.

9 ABTA notes that the European Commission is currently in the process of considering the issue of airline insolvency, and may at some point bring forward proposals for all airline sales, including where airlines are acting as flight-only providers, to be included within a scheme of consumer protection. ABTA would urge the Committee to ensure that the drafting of the Civil Aviation Bill allows the flexibility whereby future Parliamentary time need not be taken up to make amendments to allow the extension of consumer protection.

10 We will continue our work with the Department for Transport and the Civil Aviation Authority to ensure that the Civil Aviation Bill is not a missed opportunity for consumer clarity, and establishing a level playing field for travel businesses. We urge the Transport Select Committee to utilise this o pportunity to impress upon Government the importance of the inclusion of airlines selling holidays within ATOL if the Government is to achieve the objectives of clarity, transparency, and comprehensiveness.

11 ABTA supports swift action on implementation; however, we caution that these reforms must not be implemented so swiftly that they create more problems than they resolve and render these proposals ineffective. We need a workable solution, not just a quick solution. While we strongly supported the Government announcement (October 2011) that the implementation of these proposals would be pushed to April 2012, we question whether, with less than three months until this date, and the Government yet to report on the consultation, full compliance with the reforms is achievable by the deadline set out. While the industry will make every effort to comply in time, the initial period of implementation may make complete compliance at the time the regulations come into force impossible. The Government should be very clear in relation to this, and its expectations of travel businesses considering the increasingly limited implementation window.

12 While ABTA initially expressed concerns that the consultation process had left open some fundamental issues, the Department for Transport and the CAA have both been constructively and effectively engaged in consultation with ABTA, and the wider industry throughout the reform process. The consultation has resulted in significant improvements in the proposals, and ABTA strongly supports the cooperative approach taken by the CAA and the Department for Transport.

13 For clarity, transparency, and a level playing field, ABTA believes that all business travel should be exempt from the ATOL scheme. We welcome the Government’s intention to exclude business travel in the draft regulations; we note that the proposed credit exemption will not exclude all business travel arrangements; however, we are working with the CAA to ensure that the right balance is struck with these proposals.

14 ABTA Members feel strongly that microbusinesses should not be exempt from the scope of these regulations. Whilst we accept that to include microbusinesses would contradict current Government policy, the alternative of an exemption would perpetuate consumer confusion and uncertainty. When ABTA Members were asked if they agreed that microbusinesses should be exempt from the ATOL reform regulations if it increases the regulatory burden on these businesses, 58 respondents said yes (28%), 117 respondents said no (56%), and 33 respondents said they were unsure (16%). Furthermore, a large majority of all Members, 67%, thought that excluding microbusinesses would have a negative impact on the clarity of consumer protection in travel – 12% thought it would have a positive impact. Of the 223 responses we received, 119 of these responses came from microbusinesses (53%).                              

15 ABTA support for the inclusion of microbusinesses within the ATOL scheme is two-fold. Firstly, we want a comprehensive and clear system of protection. Exempting small businesses would not provide the clarity we have called for. Secondly, our microbusiness Members have stated that they would want to be in a position to offer the same comprehensive protection as their larger competitors. Microbusinesses sitting outside the scope of ATOL would create a disincentive for customers to book with small businesses and this would be extremely unhelpful for the overall health of the sector.

16 ABTA in principle supports the proposed ATOL Certificate. However, we remain very concerned that some of the practical issues involved in the introduction of the Certificate may give rise to uncertainty about protection amongst the trade and especially consumers. The key concern regarding the ATOL Certificate is, again, the timeframe for implementation.

THE CASE FOR INCLUDING AIRLINE HOLIDAY SALES WITHIN ATOL

17 In developing the ABTA response to the June 2011 DfT Consultation on the reform of ATOL scheme, ABTA carried out a robust consultation of Members, including the distribution of a comprehensive questionnaire. The results of this questionnaire were overwhelming; with 95% of ABTA Members believing that airlines should be included within the ATOL scheme if the reforms were to achieve the Government’s stated objectives.

18 87% of our Members believe that all airline sales, including seat-only, should be brought within the scope of the scheme. 93% of Members agree that airline website sales resulting in click-through arrangements should be included as Flight-Plus. This supports ABTA’s long-advocated position whereby all holidays should be protected regardless of how they are booked.

19 The airline-led unprotected flight holiday market is substantial and a solution that excludes airline holidays beyond the short term can neither be effective in terms of consumer protection, nor can it be fair competitively. We believe it is essential that all customers buying similar products should be entitled to clear, comprehensive and similar protection – therefore, airlines selling holidays must be included within the protection regime.

20 Airlines can, and do, fail financially. Comprehensive evidence of recent failures of airlines is included within this submission. ABTA firmly believes that not only will the Government’s aims remain unachievable if airlines are not included within the scheme, but furthermore, in their current form, the reform proposals would create a system with market distortions. Such distortions are not only unfair in a competitive marketplace, but we believe they also perpetuate consumer confusion about whether their holiday arrangements are protected or not.

21 Consumer confusion coupled with the distorted competitive landscape in favour of airlines could well lead to fewer and not more consumers choosing financially protected travel arrangements. ABTA estimates that it will cost a Flight Plus arranger roughly £5-£10 per person to financially protect a holiday arrangement; this expense is passed on to the consumer via a higher price. These costs represent a considerable financial disincentive to purchasing protected arrangements. ABTA believes excluding holidays sold by airlines will also incentivise traders to seek to avoid the scheme, as far as legally possible, in order to remain competitive against those companies trading without the costs of protection.

22 For example an identical flight and an identical hotel sold by a travel agent as a Flight Plus arrangement could have £40 added to the overall price of the holiday than the same hotel and flight being sold by an airline as they are excluded from the costs of compliance. The travel agent would be required to financially protect the customer’s monies, provide an ATOL Certificate and replace any failed elements. The airline, selling the same product, would have none of these obligations. If left unaddressed, we believe that this would perpetuate consumer confusion and not achieve the Department’s objectives in making a clearer, simpler and more balanced system.

23 The majority of ATOL failures that have involved significant withdrawals from the Air Travel Trust Fund (ATTF), leading to the current deficit in the fund, have been largely a result of airline failures, usually driven by external crises, which impact on the businesses of airlines and travel companies. Throughout the lifetime of the ATOL scheme systematic collapse, where the failure of an airline has subsequently led other travel businesses to cease trading, has been a common occurrence.

i The first example of this was the failure of Courtline in 1974. The failure of Courtline was driven by the oil crisis of the early 1970s and the failure of the parent shipping line. As a result, the impact on Clarkson Holidays was significant, and a failure resulted – leading to the creation of the ATOL scheme.  

ii In 1982, Laker Airways collapsed, taking along with it subsidiary operators Aerosmith Holidays and Laker Holidays. The Air Travel Trustees was able to deal with the resulting costs. By 31 March 1990, the ATTF stood at +£25 million, rising to +£28.3 million in 1991.

iii However, on 8 March 1991, in the midst of the uncertainties of the Gulf War, Air Europe failed, taking down the International Leisure Group (Intasun/Global/Lancaster/Club 18-30 etc. – the UK’s second largest operator only to Thomson at the time) with it. By March 1992, the ATTF was +£19.3 million and by March 1993 had fallen to +£7.6 million – the link between the collapse of ILG and the depletion of ATTF is clear.

iv Best Travel Group (including Ambassador Airlines) ceased trading in 1994, further depleting the ATTF until by 1997, it was -£5.2 million in deficit and it has not been able to climb back into the black from this point.

24 The major jump in the ATTF deficit can be attributed to the economic climate of recent years, when airlines have failed: XL Travel and Leisure; Kiss Flight; Freedom Flights to name but a few.

25 According to the Air Travel Insolvency Protection Advisory Committee (ATIPAC) reports (2000-2011), substantial amount of monies have been paid out from the ATTF on failed ATOL holders, whose failures can be directly attributed to airline insolvencies over the last 11 years. This comes to £50,140,000 of a total £108,101,000 in calls, representing 46.38% since the inception of the ATIPAC online reports in 2000. This clearly demonstrates the importance of including airlines within the ATOL Scheme if the Government wishes to achieve its stated objection of eliminating the ATTF deficit.

26 In the last three years, 51.2% of all claims on the ATTF can be attributed to monies paid out following failures of ATOL holders as a direct result of airline insolvencies; we would highlight the failures of Silverjet, XL Leisure, and in particular, their Freedom Flights business, as well as Goldtrail and Flight Options Ltd, who appear collectively to have cost the ATTF somewhere between £80 million and £90 million between 2008 and 2011.

27 The failure of an airline tends to have a very significant impact on the ATTF when they occur. We would like to draw your attention to the failure of flyGlobespan, which as a non-ATOL holder did not result in a call on the ATTF. However, some 3,500 passengers had booked directly with flyGlobespan and they were adversely affected, along with some 90,000 passengers yet to travel. This caused considerable consumer detriment that we believe could have been mitigated if holidays sold by airlines had been included within the ATOL protection scheme. It also added to consumer confusion about what holiday arrangements are protected.

28 ATIPAC reports from 2009-2011 also highlight the particular significance of the airline failure in terms of impact on the consumer. 70% of repatriations that were necessitated during the period were due to an airline associated failure (67,424/96,940) and of the licensed passengers affected, the airline associated impact was 63% (1,101,851 / 1,747,605).

29 The CAA was sufficiently concerned about the impact of the EUjet failure in July 2005 to undertake its own report and analysis. When EUjet ceased flying, there were some 12,000 passengers still abroad and 27,000 yet to travel. The failure of Zoom in August 2008 with some 40,000 passengers affected also illustrates the necessity for airlines to be included.

30 In light of this clear evidence, ABTA believes that the Government should make an unequivocal commitment in its response to the consultation to introducing such legislation as is necessary, within the Civil Aviation Bill, to bring airlines into the ATOL scheme. While the announcement on 23 November 2011 is the clearest indication yet that the Government is seriously considering the inclusion of airlines in ATOL, clear and concerted pressure on the DfT will help to ensure that appropriate measures will be taken by Government to bring holidays sold by airlines into the scheme of ATOL financial protection.

31 ABTA is aware of the work of the European Commission to introduce airline insolvency measures. The Commission undertook an impact assessment this year which showed that although the number of passengers affected by airline failures was relatively small, in comparison to the total number of flights across the EU, the impact on those passengers affected was significant [1] . We do not believe that activity in Brussels should preclude activity in the UK and, moreover, believe that without UK action the ATOL scheme is not workable in the medium-term. However, the practical difficulty of applying any national solution to airlines based outside the UK must be recognised. We would recommend the Department for Transport liaises with colleagues in the European Commission on this matter. ABTA believes that efforts to address airline insolvency in the UK should be cognisant of but not tied to efforts in Brussels. We favour a regulatory route to address airline insolvency in Westminster and in Brussels to achieve a level playing field between providers and clear consumer protection.

INCLUDING ‘AGENT FOR THE CONSUMER’ SALES WITHIN ATOL

32 An ‘agent for the consumer’ scenario is a reversal of the traditional travel agent-tour operator relationship, whereby the principal will be the consumer, the travel agent will be the agent of the consumer and the third party will be a travel services provider. The travel agent, as the consumer’s agent, will source travel services from third parties and place the consumer into contract with those third parties. Under the current Government proposals on ATOL, ‘agent for the consumer’ sales would sit outside of ATOL financial protection as the agent for the consumer is not, itself, making available flight accommodation but is sourcing such accommodation on behalf of the consumer. Such arrangements cause great confusion for consumers and, as they are outside of ATOL, place at risk monies taken by the travel agent from the consumer.

33 In order to include ‘agent for the consumer’ sales within the reform of ATOL, primary legislation would be required. ABTA supports clear signals from the DfT that it intends to introduce primary legislation to bring ‘agent for the consumer’ sales into the ATOL scheme at some point. However, in order to dispel consumer confusion in the ATOL scheme, and to create a level playing field for industry, the DfT’s priority must be the provision for the inclusion of holidays sold by airlines within ATOL in the Draft Civil Aviation Bill.

34 ABTA believes that the current agent for the consumer loophole should be closed as soon as reasonably practicable. If there are failures before the loophole is closed, the current regime of financial protection for air travellers will be brought into further disrepute.

35 25% of ABTA’s Members agree that the agent for the consumer exemption should exist, 52% think it should not, and 23% are unsure. 59% of ABTA Members are not currently acting as agent for the consumer, as defined in the proposals, while 25% are. The majority (52%), are not considering changing their business model in light of these proposals, however 48% have not ruled it out (13% are considering it, 26% are unsure, and 9% are not considering a change yet).

January 2012