Air Travel Organisers' Licensing (ATOL) Reform

Written evidence from Lowcosttravelgroup Limited ("LCTG") (ATOL 12)

LCTG has held an Air Travel Organisers Licence ("ATOL") for 7 years, maintained the necessary level of funding in addition to maintaining significant bonding under our ABTA membership (mostly so we can trade with TUI and Thomas Cook!). We have complied with the regulations and have worked hard to maintain a close working relationship with the CAA and ABTA, to ensure at all times we operate within the regulatory framework.

This has created huge pressure on our business, and frankly stifled our growth; despite this we have created over 350 jobs in the UK which we wish to continue.

As a significant employer in the South East of England, and as a company that is investing millions in growth, creating hundreds of jobs, we would urge you to ensure that the proposals to change the ATOL regulatory system are reworked to create a level playing field.

Failure to do so will result in continued protection of the large airlines and tour operators, resulting in artificially high prices, and suppression of the significant growth opportunities which exist in the tourism industry.

LCTG wholeheartedly supports a fair and reasonable consumer protection scheme that most importantly, ahead of other similar schemes, provides full repatriation.

The ATOL Scheme ("The Scheme") – History

The Scheme was implemented in 1973 with consumer protection being provided by means of individual ATOL bonds.

In 1975 the Air Travel Reserve Trust Fund ("ATTF") Act 1975 introduced legislation to create a back up fund for individual bonds financed initially by a £15 million Government loan and afterwards by a 1% and then 2% levy on holidays.

The Scheme proved to be robust right through until the late 1990s when the ATTF became exhausted due to some material financial failures between 1991 (International Leisure Group "ILG") and 1997.

At its zenith in 1998/9 the Scheme covered 99% of all departing UK consumer holidays.

The numbers of protected holidays began to deteriorate from then on principally due to the advent of the no frills carrier airlines and the move to "tailor-made" holidays.

By 2008 the deficit in the ATTF stood at circa £20million. The Scheme had provided a stable and robust consumer protection model with bonds backed by the ATTF for approaching 35 years. The ATTF deficit of £20m showed only an increase of £5million over the initial Government loan in 1975. The obvious question is "Why change it"? Why not have a modest "one off" levy to replenish the ATTF?

The Current ATOL Scheme ("The Current Scheme")

The Current Scheme now covers only 48% of all departing UK consumer holidays of which in excess of 50% relate to two ATOL holders only – TUI and Thomas Cook. In ten years a halving of individuals covered by the Scheme, a Scheme very much centred around two companies both of whom, despite consolidation, have underperformed and one who has shown marked financial weakness.

The main reason for the deterioration in the number of individuals covered by the ATOL Scheme was the advent of no frills carriers. If the levels covered by the scheme in the 1990s had been maintained there would have been no rationale for this "flight-plus" reform.

The Current Scheme was "sold" to the travel industry as a full bond replacement scheme replacing any previous form of bonding with an across the board £1 ATOL Protection Charge ("APC"). The Current Scheme was purported to have been structured so as to withstand a £250million failure (Only TUI and Thomas Cook could cause a failure of this size).

In 2009 XL Airways failed. This has been reported as an £80million failure. It was in fact "only" a £40million failure as the CAA still held the ATOL bonds provided by XL of circa £40million.

On the back of this the CAA proposed an increase in the APC charge by 150% from £1 to £2.50, the current level of APC. The Current Scheme was built to withstand a £250million failure and yet within a year the APC charge was being increased by 150% on the back of a mere £40million failure.

The natural conclusion is that the Current Scheme was seriously flawed from inception. In addition to the APC increase the ATTF deficit has grown in just over three years from £20million to £42million.

Why continue to support The Current Scheme with further "sticking plaster reform" as is proposed and not look coldly and calculatedly at genuine reform based upon a sustainable structure?

The CAA will state that the Travel Industry, upon consultation, "approved" the Current Scheme. This was because they believed the CAA when it said it would withstand a £250million failure, had been robustly put together and that bonding would be replaced. When the final Standard terms of ATOL were presented the CAA, through the back door, maintained the ability to request bonding arbitrarily at their discretion from existing ATOL holders as well as requiring it from all new ATOL holders in the first four years of their holding an ATOL.

ATOL Reform ("Flight-plus")

The Current Scheme generates only £46.2 million annual income of which £10million is spent on an underlying £250million insurance indemnity that underpins the ATTF, a policy that is effectively in place to cover the failure of two ATOL holders only, either Tui or Thomas Cook.

This cannot fill the ATTF deficit quickly enough, neither can it provide longevity and sustainability for a flawed scheme.

The new proposal intends to extend the burden of underpinning an ailing scheme by introducing onerous and expensive legislation on travel agents whereby they would need to obtain a "flight-plus" ATOL where they sell a flight as an agent together with other separate travel components at the same time.

ABTA estimate that ABTA members that will need to hold an ATOL will broadly double from 631 ABTA members to 1360 ABTA members. For these travel agents it is not simply a question of an additional £2.50 charge. They are being asked to take on the role of a quasi-principal including exposure to supplier failure and possible consumer liability claims. This is an iniquitous burden and is unfair. These companies will also need to meet CAA financial free asset testing plus provide bonds in addition to paying the £2.50 APC.

"Flight-plus" also proposes to limit the protection given to consumers in relation to "flight only" and indeed on the back of the proposed "reform", TUI and Thomas Cook have withdrawn a large proportion of their "flight only" business from the regulated arena now selling these as airline seats outside of the ATOL Scheme.

A level playing field

Under the current ATOL system and the proposed flight plus changes, some companies have to pay and some don’t – often for the same holiday. It is grossly unfair.

As just one simple example – if a consumer were to book a holiday with LCTG, under the proposed rules, customers would pay £2.50 per passenger for ATOL protection, yet if exactly the same holiday were booked with easyjet holidays (which LCTG operate) there would be no ATOL charge. How can that be fair and reasonable?

There are numerous gaps in the proposed legislation: "click throughs" (where a consumer clicks through to different web sites to assemble their holiday, from a single umbrella web site, acting as an agent to the consumer), acting as agent for the consumer, certain flight only bookings, and of course all airlines.

Historically many travel companies have found ways around the rules, and the current proposal merely exacerbates the potential for this. The major players, both airlines and operators, can relatively easily "unbundle" and sell via "click throughs". Currently the ATOL system has circa 18 million holidays potentially licensed of which only about 16.5 million will actually be carried. The "flight plus" proposal, according to the CAA will likely encompass only a further 2 to 4 million holidays (Not the 6 million originally envisaged by the DfT).

Included in the 18 million holidays licensed with the CAA are a number of "double bonded" arrangements – packages that involve a charter flight seat upon which £2.50 APC has already been paid, sourced from an ATOL holder, packaged up and sold under the Current Scheme with a further £2.50 APC paid by the package ATOL holder.

Respectfully, the final ACTUAL figures will be much less, and will continue to reduce. Why? Simply the travel industry will find ways around it. The result? The CAA will be back in court again and regrettably could lose yet again. How can that be the way forward for a Consumer Protection Scheme?

We believe that the APC income for the last four quarters (Information not yet public) will reflect the diminishing returns.

Airlines

Airlines are exempt from the need to hold an ATOL and participate in the ATOL Scheme. This is unfair and does not provide a level playing field in a free market economy. Why should airlines be able to sell "flight-plus" product and provide no consumer protection at all whereas travel agents have to even though they are selling identical arrangements.

It has been said that the DfT are considering the airline "flight-plus" position but require primary legislation.

Under this proposal Airlines will have an anti-competitive advantage over travel agents. Airlines can sell "flight-plus" without APC giving them a £2.50 advantage on each sale, a sizeable amount in an industry surviving on very small margins.

In all historic failures the main draw down of funds from the ATTF have principally been by either the providers of air flight seats as ATOL principals (Goldtrail, Kiss Flights etc) or by integrated groups that contain an airline e.g ILG, XL, Globespan etc.

ABTA and the Travel Industry View

ABTA – The Travel Association was founded in 1950 – and is the largest travel trade association in the UK, with over 1,300 members and over 5,000 retail outlets and offices. ABTA member sales account for 90% of the package holidays sold in the UK annually, accounting for roughly £41.2 million of the ATTF’s £46.2 million annual income.

ABTA’s view on behalf of 90% of ATOL holders is that the only fair and reasonable Consumer Protection Scheme is based around an "all flights levy". The APC charge would be modest for each flight seat and would encompass ALL UK leisure originating travellers.

A simple, fair and reasonable scheme - sustainable and with longevity.

Barriers to entry and favouritism to Big Business

Currently a new ATOL holder must provide bonding for the first four years of holding an ATOL IN ADDITION to paying the £2.50 APC. This is anti-competitive and places an extreme burden on start ups and new entrants. How can the smallest and newest companies be expected to compete against the travel giants when they have to effectively double bond?

To make matters worse there is virtually no market for ATOL bonding available within what was a thriving bonding insurance market. Before the Current Scheme was implemented there were at least a dozen insurers willing to write travel bonds. After its implementation in 2008 this has decreased to a mere three. All of the insurers blue chip ATOL business was taken away with the CAA expecting them to base a book on start up bonds and bonds for ailing ATOL holders.

How can a regulator with responsibilities under Better Regulation implement a scheme that decimates the bond obligor market and then continues to request the provision of bonds from new and ailing companies?

Under the new "flight-plus" proposal the CAA wish to score the "flight-plus" turnover as full 100% risk turnover when it is currently scored as 10% risk as agency turnover. The sole reason for this re-classification is the CAA induced risk of supplier failure where none exists currently for travel agents.

The resultant additional funding created by this when aligned to the CAA’s published free asset criteria will mean many travel agents having to find additional funding in these difficult financial times. This will result in additional travel failures and the closure of some smaller businesses. It is difficult to relate this free asset test to Thomas Cook, a company carrying £1.1 billion of core debt. Once again a reflection of a scheme clearly biased towards the biggest two ATOL holders.

TUI and Thomas Cook are of course adherents of the Current scheme as it restricts competition by raising barriers to entry through both the paucity of bond availability and the stringent free asset testing applied by the CAA to new ATOL holders. It is clear that the current proposals favour these large European tour operators, as well as the airlines, and the risk to the Government are that they are seen to be acting with bias, due to pressure from those companies.

TUI and Thomas Cook already have the commercial advantages of scale, it may be seen that they now have a regulatory system that has been manipulated by them, to their advantage, to the detriment of start up businesses and smaller expanding businesses.

It is self evident that the ATOL Protection Charge (APC) introduced by the previous Government was driven by the large tour operators. They were unable to put in place the necessary bonding and insurance required by the CAA due to their risk profiles and the economic environment; consequently a £1 APC charge was introduced by the CAA to help them. The CAA then later decided to increase this to £2.50 to make up for shortfalls in the ATTF. £10 million is taken from the ATTF each year just to cover their risk to the Current Scheme.

The Travel Industry is an innovative and fast moving industry that has been built on the endeavours of free market entrepreneurs. The regulatory regime is now making it a domain in which only large corporate have the opportunity to grow. LCTG is an established still growing innovative group that is being disadvantaged by this regulatory structure due to the advantages given to the largest ATOL holders.

Timings

This matter is being rushed through with the sole reason to raise funds as quickly as possible given the damaging state of the ATTF deficit. It is acknowledged this must be extinguished but by a well thought out and sustainable scheme not a flawed scheme already repaired twice in under 3 years.

The above evidence clearly reflects that the Current scheme and proposed "flight-plus" is not a robust and sustainable platform. The "flight-plus" proposal is merely a further "sticking plaster" to a flawed scheme, conceptually incorrect and materially miscalculated.

It would be better for an independent body, not a regulator trying to justify an inconsistent and miscalculated scheme, to work through in a conscientious considered manner a scheme that will provide longevity, as indeed the original scheme did, and sustainability. A scheme that recognises the correct differentiation of principal and agent and one that provides clarity consistency and fairness in its impact.

Costs

It is self evident to all that airlines who sell flight-plus must enter into a fair scheme. The CAA, themselves, recommended to Government some six years ago that the only effective and fair structure for consumer protection was the implementation of an "all flights" scheme covering not only airline "flight-plus" but all UK originating flights. This is ABTA and the Travel Industry’s view also.

This will be a clearly robust and sustainable scheme which will encompass only a modest levy of between 50p and £1 on all UK originating flights. If applied directly to each flight it is easy to collect and monitor. It will do away with all anomalies and inconsistencies. The industry has recommended to Government an "all flights" levy for a number of years. If all flights were brought in to the consumer protection mechanism for repatriation, then the cost per passenger for each exiting flight or holiday would be between 50p and £1 or lower.

A clear recommendation would be for flights to be protected at 50p and packages to be protected at £1, which would result in the ATTF being replenished more quickly, provide future sustainability of the Fund, and most importantly would be perceived as fair, and not something to be avoided by using legislation "loopholes"!

Airlines have been faced with a substantial hike in APD of in some cases £320 per passenger. A 50p levy to provide consumer protection is hardly material in comparison. Airlines in any event have to pay consumer protection insurance for flight related packages of a not dissimilar amount – an insurance of course which does not provide repatriation.

The overall numbers

Under the current proposal it is evident that AT BEST only circa 20.5 million holidays would be within the Scheme as highlighted above, probably considerably less. The ATTF projected income would therefore be £51.25m at best (less of course the £10m insurance premium it has to pay to provide cover for a Tui or Thomas Cook!) It will be much less than that given the Travel Industry’s likely "avoidance methods".  

We believe this figure will rapidly diminish with a levy pitched at £2.50 that is considered unfair and unreasonable. The "Big Two" are airlines themselves and could also stop selling their packages as airlines without ATOL cover as they have done elsewhere in Europe e.g Germany. As airlines they have already withdrawn a sizeable amount of "flight only" product from the ATOL Scheme.

Currently circa 70 million UK resident consumers leave the UK for leisure travel by air (Source – CAA Passenger Survey Report 2009). The CAA estimates that 37 million of these are holidays (ATOL covered, "flight plus" or airline packages) with 33 million "flight only". A £1 levy on holidays and a 50p levy on flights would generate £53.5m in a fair and equitable scheme which could not diminish due to "avoidance methods"! Additionally there are circa 12 million other non-leisure flights originating in the UK being sold to UK resident consumers which would generate a further £6 million if a 50p levy was applied on these.

It should be noted that airlines who sell packages already have to pay for payment protection insurance at close to 50p under the Package Travel Regulations International passenger protection Insurance). To contribute instead to the ATTF would not be a material difference.

The CAA has indicated a desire once the fund is replenished to reduce the levy from £2.50 to £1 possibly in 2014. By the same token the aforesaid proposal could similarly reduce the holiday and flight levies to 40p and 20p respectively!

The Way Forward

Firstly a considered review of the entire ATOL Scheme by an independent body who will review the feasibility and sustainability of any Scheme and will consider the following key facts:

· Create a level playing field by requiring all airlines, "click through" agents  and flight only operators to pay towards the ATOL protection charge in addition to tour operators and travel agents who sell "flight-plus";

· Ensure there is a free and fair competitive platform with an even handed protection model to avoid an ever increasing travel "Duopoly";

· Introduce a reduced two tier ATOL protection charge of 50p for flights and £1 for holidays.

· Support the proposed introduction of a new ATOL certificate.

The proposed new "flight plus" scheme as a tax on travel agents is inadequate, unfair, anti business and most importantly anti-competitive. It favours the established players, and penalises those companies that are innovating, creating jobs and encouraging investment and provides major barriers to entry for smaller businesses.

Key questions

Why was the ATOL Scheme reformed in 2008 away from a scheme that had adequately protected UK consumers effectively for 35 years?

Why is/has the Current ATOL Scheme needed to be changed 3 times since 2008?

Why should travel agents contribute to the ATOL Scheme and not airlines?

How does this scheme compare with other European countries? Has the rest of Europe been effectively considered in this process? Do other European countries require travel agents to consumer protect as if quasi-principals?

Has the full impact of agency law been considered in relation to the new proposal?

What is the criteria for the net free asset test and how has this been applied to Thomas Cook given the recent publicity regarding its’ finances?

Has the full impact of "anti-avoidance" been factored into the new calculations?

How can Government justify the anti-business and anti-competitive nature of some aspects of the Scheme specifically in relation to small businesses and start ups having to both bond and pay the APC levy where larger corporate do not?

Has a full financial review of the positive impact to the ATTF been considered in relation to the addition of airlines to the scheme a) in relation to all flights b) in relation to airline packages only?

Why is the new proposal being brought with such haste the inception date already having been put back and the current implementation date of April 2012 still considered unworkable by ABTA and the Travel Industry?

January 2012