Air Travel Organisers' Licensing (ATOL) Reform

Written evidence from the Association of Independent Tour Operators (ATOL 09)

Introduction

1.1 AITO was formed in 1976 and the reason for its formation was to facilitate smaller companies to obtain ATOL financial protection more easily. It now has 144 members with joint carryings in excess of 800,000 passengers and turnover of approximately £950M. So we represent the SMEs of the tour operating industry who provide the passion, innovation and specialisation that holidaymakers benefit from and enjoy.

Currently, 128 members hold ATOL licences. As a condition of membership, all members have to provide 100% financial protection for their licensable, non-licensable and accommodation-only business. All members act as principals, so taking full responsibility for all the actions of their suppliers as required by the Package Travel Regulations.

Successive Governments have failed to rectify the rise of a totally unregulated sector of the industry, led by the airlines and the so-called dynamic packagers, which have sought to avoid the provision of any financial protection for their clients, have refused to act as principals as required by the Package Travel Regulations and which also avoid payment of VAT on TOMS. This sector now represents more than 50% of all overseas holiday bookings. It has led to unacceptable confusion for consumers with a lack of clarity on financial protection and liability claims.

1.2 The Association therefore welcomes the ATOL Reform proposals which it accepts as the first step towards providing full financial protection for all outbound travellers by air. It accepts that the Government has expressed a wish to include all airline-arranged packages and all click-through sales by airlines within the scope of the legislation but that, currently, because primary legislation would be required to do this, there will be a delay in achieving this aim. We urge that this is introduced in the forthcoming Aviation Bill.

What is now proposed goes some way towards bringing retailers which have acted as quasi tour operators within the ATOL Regulations, so partially levelling the playing field and providing added consumer financial protection. However, the ultimate goal has to be the inclusion of the airlines within this remit.

1.3 AITO would like to stress that the real reason why a quasi tour operator sector has built up within the industry has less to do with the responsibility and significant burden of providing financial protection but is more to do with the avoidance of paying VAT under the Tour Operators’ Margin Scheme. A tour operator or accommodation-only provider taking full responsibility for the actions of its suppliers by acting as a principal has to pay between £15 and £20 per person in VAT. AITO has campaigned, so far unsuccessfully, to persuade HMRC to publish comprehensible guidelines as to when VAT on TOMS is payable. The current confusion which exists within the industry is largely down to the rules, which can be interpreted in many ways, thus allowing the unregulated retailer/dynamic packaging sector to flourish at the expense of traditional tour operators which are intensely regulated via the Package Travel and ATOL rules.

We would request that high priority be placed on the issuing of clear guidelines so that travel organisers can decide on the business model they wish to adopt. We would ask the Transport Committee to press for coordination between and decisions from Government Departments so we are able to see that these guidelines are issued before the reforms are introduced in April 2012.

AITO warns that, unless there is clarity on whether VAT on TOMS is payable or not, whole swathes of traditional tour operators will become dynamic packagers with the resultant loss of not only financial protection for consumers but also, importantly, back-up if things go wrong, ie the consumer will be faced with undertaking legal action abroad to gain redress.

This will also result in considerable further revenue loss by the Government.

1.4 Our principal worry is that the proposals for ATOL reform as currently set out by the Department for Transport will not lead to clarity for the consumer which is the intention. They create a bureaucratic nightmare. The proposals as they stand will create different levels of ATOL protection, cause further confusion for the public, and add unnecessary additional regulatory burdens particularly on the SMEs of the tour operating industry.

2 Areas where AITO has major concerns over the DfT proposals for ATOL Reform

2.1 Definition of Flight-Plus

We do not agree that arrangements which cover less than 24 hours should be excluded from the definition.

The alternative that we propose is that a Flight-Plus package covers all bookings including those of less than 24 hours’ duration.

Why? Because, with the vast array of flights which are now available throughout Europe, it is quite possible to combine a flight with expensive transfers/car hire and costly tickets to football matches, operas, etc., which could be put together for a period of less than 24 hours. The collapse of the organiser of such events would cost many thousands of people considerable financial loss. That this has not happened to date to any large extent does not mean to say that the public does not deserve protection in these circumstances.

2.2 Proposed time period in which elements of a Flight-Plus must be requested by a consumer

We do not agree with the short time period suggested.

AITO feels that a Flight-Plus situation should also be created if the time period between the booking of the flight and the arrangement of the hotel or car hire is more than one calendar day. It is a growing trend amongst consumers initially to book a flight in order to get the best possible deal and, subsequently, to book accommodation a few days later.

The alternative proposed is that the period during which a Flight-Plus arrangement is created should be extended to at least seven days. It is immaterial whether the organisation concerned is aware that the same customer who booked the flight subsequently books accommodation on their site a few days later.

Why? Because the public would never understand that, having booked a flight and accommodation from the same organiser, the organiser could avoid any sort of responsibility for the package created because the accommodation element was booked later than the flight. We accept that accommodation booked many weeks after the flight reservation should not, however, form a package. However, to restrict a Flight-Plus creation to one calendar day from the initial flight booking will just serve to confuse clients – exactly what these reforms seek to avoid.

2.3 Proposed liabilities of Flight-Plus arrangers

We don’t agree with the proposed liabilities of Flight-Plus arrangers.

Why? AITO does not believe that agents which choose to play at being tour operators should be excused from acting as a principal and therefore allowed to avoid the Regulations laid down by the PTRs – and the associated costs. Basically, what the ATOL Reform is proposing is a dumbing down of the protection afforded to the public.

Flight-Plus arrangers will only be responsible for financial protection. Consumers will be unaware that, when they are booking a Flight-Plus arrangement, the organiser does not offer the same level of cover as a legacy tour operator. The Flight-Plus arranger will not be paying VAT, will not be taking responsibility for the actions of its suppliers and yet it will carry the ATOL symbol, creating huge confusion.

This is a very negative potential result of the revised legislation.

2.4 ATT Payment policy

We do not agree with the proposed changes to the ATT payment policy.

Why? Because the ATOL reforms seem to indicate two classes of ATOL holder. One, the full ATOL holder, will have onerous obligations to comply with ATOL and PTR requirements and will shoulder all the costs of the failure of one of its suppliers. The other, the Flight-Plus arranger, will be entitled to a hand-out (although as yet we do not know how much) from the ATT in the same circumstances. This is a dangerous step and will considerably distort the playing field in favour of the Flight-Plus provider who acts as an agent, does not take responsibility for the actions of his suppliers and who does not pay VAT. It is completely illogical. The Transport Committee should be aware that this creates an unequal treatment of ATOL holders.

2.5 Exemptions for micro-businesses and start-ups for regulations dealing with Flight-Plus

AITO does not believe that micro-businesses and start-ups should be exempt. The impact of any such moratorium would be to seriously confuse the public.

Why? The public simply wouldn’t understand this differential. This situation would also create an uneven playing field between competing businesses. We understand that this proposal is likely to be withdrawn.

2.6 Proposal to amend ATOL protection for flight-only sales

AITO does not agree with the proposal or the rationale.

Why? Because this proposal would mean two very different organisations carrying one (identical) symbol – the ATOL logo – but offering very different levels of financial protection from one another. Only confusion can result.

To avoid confusion, either offer full protection across the board or no protection at all. Then tour operators selling flight-only would compete on a level playing field with airlines.

We understand that this proposal is likely to be withdrawn.

2.7 The ATOL Certificate

AITO supports the principle of the proposed ATOL Certificate, if it can provide clarity for the consumer- in particular, with regard to Flight-Plus arrangements. For bone fide tour operators, AITO has not felt that an ATOL certificate should be necessary but, after numerous meetings between the CAA and the industry working group, the ATOL certificate for use with packages has been simplified and is quite acceptable.

However, problems still remain. Many operators put together complicated itineraries, the work on which cannot begin unless a deposit has been paid. There could well be a lapse of several weeks between the time a deposit has been received and an ATOL certificate issued and when the confirmation/ account is finally sent. By that time, a new ATOL certificate could well be required because even the very basic details on such complex itineraries could well have changed. An ATOL Certificate cannot always be issued immediately the deposit is taken.

For smaller tour operators, the suggestion that an electronic template can be developed by the Civil Aviation Authority which can then be licensed for use by operators is a good one and one which is welcomed. However the issuing of the certificate to an agent to hand over to the customer before leaving the high street agency is sometimes impractical and certainly tour operators are unlikely to allow agents to issue such an important document. It is already proposed and agreed that ATOL certificates, for direct and telephone bookings, made by consumers with the operator can be posted along with the confirmation and account. The same requirements should apply for face to face transactions via agents

2.8 Agent for the consumer sales

AITO is concerned that certain sectors of the tour operating/travel agency sector can legally squirm out of their obligations to the consumer by opting to act as an agent for the consumer. We understand that primary legislation is required to outlaw this practice and to bring these companies within the ATOL Regulations.

AITO believes that the only way in which the public will refrain from booking flight-onlys and packages from an organisation acting as an agent for the consumer is to make it quite clear that no protection is available in such circumstances. AITO therefore does not agree that, on the failure of an ATOL holder, from whom a seat has been purchased as agent for the consumer, the DfT propose the passenger would be entitled to repatriation but not for a refund for forward bookings.

In such instances, the consumer should not be repatriated as it muddies the water when clarity is sought. AITO understands that being an agent for the consumer will not necessarily negate VAT payments whether these are in the UK or in the country where the accommodation is located. It would be a great help if HMRC issued guidelines so that the VAT position became clear. Clarification is important. If such guidelines were unfavourable to the companies acting as an agent for the consumer it is likely that this model of operating would lose its attraction.

2.9 The provision of financial protection for non-licensable turnover within the ATOL system

Although not specifically part of this consultation, AITO would like to remind the Transport Committee that, under the Better Regulation initiative, Government promised, via the ATT trustees, to consider allowing tour operators with licensable turnover the facility to include non-licensable turnover within the ATOL scheme. This proposal was included in the CAA consultation ending March 2010 under measure number 5 and was supported by the majority of respondents.

This matter has become even more urgent as there are only three insurers currently offering per person failure insurance cover – one of which will no longer consider amounts less than £100,000 and the other two currently have policy wording which is not acceptable to ABTA or AITO. This makes it extremely difficult for ATOL holders with small amounts of non licensable turnover to obtain protection at commercially acceptable costs.

The CAA is now proposing to change its standard terms to monthly (from quarterly) reporting and payment of APC for tour operators with an annual turnover of over £5m This would impact adversely in terms of added and disproportionate administrative burdens on around 25% of our members. This is contrary to the Government’s stated intention of reducing regulations and red tape on SMEs. It would therefore be an enormous help and offer great savings (of both financial and time resources) for those tour operators with predominantly licensable turnover to be able to cover both types of business via the APC as proposed in the earlier consultation.

AITO cannot stress enough how beneficial this would be to many SMEs (whether AITO members or not).

3 Other matters which need to be taken into consideration

3.1 Timing

We are asked whether it will be practical to implement any of the new ATOL Regulations by April 2012. It is understandable that the Government is keen to collect any additional £2.50 charges per travelling passenger from companies that are brought into the scheme as soon as possible. AITO members will not have to change their business model because they are already ATOL holders and comply with current regulations and also with the PTRs. However, the provision of an ATOL certificate by April 2012, will give rise to difficulties as many will have to schedule considerable IT changes to their systems at what is a very busy time of the year.

AITO sees no problem in phasing in the new regulations over a longer time period. The collection of the £2.50 charge for those booking after April, 2012, is not really affected by the fact that not all systems will be in place to provide the ATOL Certificate. AITO feels that it is unrealistic for Government to expect that those organisations that have to alter their trading models will be able to do so in while we are still awaiting the response to the DfT September consultation and the commencement of a formal consultation by the CAA on changes to Standard Terms and Official Record Series 3.

3.2 SAFI Insurance and Tour Operator/Supplier Failure Insurance

AITO believes that the current wording of the majority of insurance policies which provide so-called cover for consumers have too many exclusions. Recently, one of the largest insurers (triple-A rated), has simply cancelled the insurance pertaining to an ex-AITO member which had been unable to meet its obligations to a significant number of school children from 87 schools which had booked with the company. The insurer cancelled its policy as a result of material non-disclosure by the operator and has left the insured, who had booked holidays with the tour operator rightly believing they were insured, considerably out of pocket in flagrant contravention of the aim of the EU Package Directive, despite having taken premiums for a number of years.

There are a number of instances where insurers have refused to meet their obligations. Unless there is a complete rethink and thorough examination of the wording of policies currently in use, we believe that the insurance industry should not be allowed to take any part in providing consumer financial protection under the reformed ATOL Regulations.

Both ABTA and AITO are seeking urgent action and are in discussions with the ABI and DeptBIS

SAFI (Scheduled Airline Failure Insurance) policies, when they are withdrawn by an insurer from a particular carrier for whatever reason, cause a crisis of confidence which often leads to the collapse of the airline in question. This cannot be right. Insurers should not be the sole decision makers about the financial stability of an airline.

We believe that the wording of Failure Protection policies should be subject to Department of Business approval.

3.3 The longer-term view

AITO understands from comments that have been made by people within Government and the Civil Aviation Authority that, ultimately, the aim is for the financial regulation of the industry to be put into the industry’s own hands.

AITO is very opposed to this concept. We do not believe that the private sector - and especially the insurance sector - is capable of providing the structure required to handle such an important issue. Insurance companies will simply walk away from any risk which they feel will damage their future profits. Currently, the insurers operating within the travel industry seem to be very reluctant to pay out when obliged to do so. As soon as the risk is considered to be too great, insurers simply withdraw from the market. Government cannot divorce itself from the provision of financial protection for the travelling public. Should it do so, it will put at a considerable disadvantage the many thousands of SMEs which operate within the travel industry vis-à-vis the large corporations that exert considerable control over the sector. There is no doubt that SMEs would be required to pay proportionally higher premiums to insurers in order to put financial protection in place for their customers. Government involvement will ensure fair play in this scenario, as it does with the £2.50 levy which is equal across all sizes of company. History has shown that it is the failures of large operators that have created the major deficits in the Air Travel Reserve Fund.

Government has often been criticised for the way that refunds and repatriation are currently organised via the CAA. The Merrick Report has highlighted many of the shortcomings which are currently being addressed by the CAA. Increased co-operation between the CAA and bodies within the travel industry is the best way forward and the proposed ATOL Reform should remove many of the difficulties experienced by the CAA when dealing with collapses like those of XL and Kiss Flights.

3.4 Credit card providers

Merchant acquirers have increasingly carried the burden of providing financial protection to the consumer. The consumer press, insurers, Government and industry bodies alike have shifted the burden of financial protection to the credit card. Everyone is advised to book using a credit card to avoid financial loss. Understandably, the banks don’t like this and have increasingly asked for financial guarantees to allow airlines, tour operators and retail agents to continue to use their credit card services.

The industry is thus faced with double protection. Not only is £2.50 currently payable as a levy on tour operators for every passenger carried by an ATOL holder but, more often than not, that ATOL holder has to carry the cost of the financial guarantees required by the credit card providers.

Once the deficit in the Air Travel Trust Fund is wiped out, it is imperative that credit card providers are indemnified from any loss as a result of the collapse of an ATOL holder. AITO believes that there is no reason why the cost of consumer financial protection should be borne by the credit card companies.

A substantial benefit of an enlarged and healthy ATT fund will be the reduction in the overhead costs of providing guarantees to credit card companies.

3.5 EU initiatives

Although the UK is part of the EU, AITO believes that the UK Government should not delay implementing measures to improve financial protection because of the delays in the European Commission of its review of the PTRs and passenger rights relating to the collapse of airlines. It is now unlikely that there will be any change in the PTRs until the end of 2014. In the meantime, there will be more collapses and more consumers will be left out of pocket. The UK Government should take the initiative and do what is right for UK consumers, even though it is much easier to delay matters using the excuse that being part of the EU overrides any UK imperative.

To conclude

The proposals put forward in the Consultation document on ATOL reform go some way towards improving consumer financial protection and, if industry observations are taken into consideration, may clarify the very complicated current scenario to the benefit of all. These are definitely the first steps towards levelling the travel industry playing field.

AITO hopes that the Transport Committee will support those tour operators which act as principals and therefore deliver greater benefits to the public by recognising that they represent the Gold Standard of the industry. Flight-Plus arrangers may have been partially brought into the system, but what they offer is still inferior to that which the full ATOL holders abiding by the PTRs provide to the travelling public.

We would welcome the opportunity to discuss with the Committee any of the above matters in more detail.

We will also continue to play our part in achieving the overall objectives – the expansion and clarification of consumer financial protection.

January 2012