Air Travel Organisers' Licensing (ATOL) Reform

Written evidence from the Department for Transport (ATOL 15)

Please find attached the Department’s written evidence for your inquiry into ATOL reform.

As you know, the Civil Aviation Bill, introduced on 19 January, contains a clause on ATOL reform which is discussed in the written evidence. However, the Government has not yet finalised its decisions on the proposed reforms to be implemented through new secondary legislation that were consulted on over the Summer. I hope to be able to make an announcement on this shortly.

Background

1. The Air Travel Organisers' Licensing (ATOL) scheme has been in place since the 1970s. Currently it protects those buying flight inclusive package holidays and certain flights against insolvency of their tour operator. The ATOL scheme does not apply to airlines, which are specifically excluded from it under legislation.

2. Over the past 5 years around 100,000 passengers have been repatriated, and over 500,000 have received refunds under the ATOL scheme. Over 100 million holidays in total have been protected.

Case for reform

3. In recent years there have been major changes in the way holidays are sold, principally driven by the use of the internet both as a means of selling airline tickets but also as a way of putting together and selling holidays, both by travel agents and also by consumers. There has been an increase in the number of 'dynamic packages' being sold. These types of holidays do not fit within the definition of a package holiday, and so do not require ATOL protection. As a consequence there can be considerable confusion for consumers, the travel trade and the Civil Aviation Authority (CAA - who run the scheme) about whether a holiday is ATOL protected or not.

4. It can be that out of two very similar holidays, with the same flight or hotel, one is and one is not ATOL protected, depending on which businesses the holiday was bought from or how it was put together.

ATOL Finances

5. The payment of refunds and repatriation expenditure due under the ATOL scheme is met by the Air Travel Trust Fund (ATTF). For each ATOL-protected holiday or flight purchased, a £2.50 ATOL Protection Contribution (APC) is paid into the ATTF. For historic reasons the ATTF has operated with a deficit for many years, and reported a deficit of £42m for the financial year 2010/11. It continues to meet its obligations through a commercial borrowing facility that is backed by a Government guarantee of currently £30m.

6. Government believes that the cost of ATOL protection should be met by holidaymakers and the travel trade, with no ongoing risk for taxpayers.

Aims of ATOL reform

7. Between 23 June and 15 September 2011 the Government consulted on proposed reforms to the ATOL scheme to address the issues identified above.

8. The key reform objectives for the short term are to:

· Provide greater consumer clarity about which holidays are protected by the ATOL scheme and which are not.

· Restore the scheme's finances to a self-sustaining position so that the Government guarantee can be removed.

For the longer to medium term, the objectives are to:

· Further improve the clarity of the scheme and developing a more consistent and coherent regulatory framework for businesses.

· Look at options for how the ATOL scheme is managed and financed once it is financially self-sustaining.

9. The consultation asked questions about the specific reform proposals to be implemented in the short term through new regulations, and also requested views on whether new primary legislation should be used to allow for holidays sold by airlines and procured on an 'agent for the consumer' basis to be included in the ATOL scheme. It also asked for preliminary views on how the management of the scheme's refunds and repatriations might be arranged in the future.

Secondary legislation

10. The key proposals for short term reform to be introduced through new secondary legislation are:

· Bringing 'Flight Plus' holidays into the ATOL scheme.

· Introducing a new ATOL Certificate.

11. These proposals should help to ensure that consumers are clearer about when they are covered by the ATOL scheme and when they are not. They will provide clarity to the travel trade and the CAA about when financial protection is required, and they should ensure that the ATTF is returned to a financially self-sustaining position, allowing the Government guarantee to be removed.

Flight Plus

12. The consultation proposed that Flight Plus be defined as holidays consisting of a flight and accommodation or car hire, where the components are requested within a short period of time. Essentially they look like package holidays, yet do not fall within the legal definition of a package, and so are not currently protected by the ATOL scheme. Bringing Flight Plus holidays into the ATOL scheme is intended to meet the aim of improving clarity for consumers as many more holiday arrangements made through an intermediary will be fully ATOL protected regardless of whether the way they were constructed and sold fits within the legal definition of a package.

ATOL Certificate

13. The ATOL Certificate would be supplied to customers once any payment had been made for an ATOL protected holiday or flight. It would be in a standardised form and content, to be set by CAA after discussion with the travel trade. The certificate would be an important tool in creating greater clarity for consumers about when a holiday is ATOL protected and the extent to which that protection applies. If introduced, it would also facilitate the efficient provision of refunds or repatriation in the unfortunate event that a travel company does fail.

14. The Government is in the process of considering its decisions on the proposed reforms to be implemented through secondary legislation, and is yet to make final decisions on these measures. We hope to be in a position to announce the details soon.

Primary legislation

15. The Civil Aviation Bill was introduced into Parliament on 19 January, and includes a provision to widen the Secretary of State's existing power to regulate the provision of flight accommodation. The new power gives the Secretary of State the option to create new regulations to require airlines to hold an ATOL for the sale of their flight-inclusive holidays. It would also allow the Secretary of State to require businesses procuring flight-inclusive holidays for clients as 'agents for the consumer' to hold an ATOL.

16. The decision to include this provision in the Bill was taken after careful consideration of the consultation responses. The majority of responses from tour operators, travel agents, trade representative bodies and consumer organisations were in favour of taking steps to facilitate the inclusion of airline holiday sales in the ATOL scheme. They argued that it was unfair that airlines were not required to provide ATOL protection, despite selling similar sorts of holidays. Airlines and their representative organisations were against the proposal.

17. Some airlines suggested that their inclusion in the ATOL scheme was unnecessary as there is already sufficient protection against their insolvency through credit cards, scheduled airline failure insurance and voluntary repatriation fares. We consider that although these options provide some financial protection, it is not as comprehensive as that which is provided by the ATOL scheme, which guarantees in the case of insolvency a full refund if a passenger is yet to travel, or repatriation at no extra cost if already abroad.

18. We decided that steps should be taken to allow for new regulations to be created to bring airline holiday sales into ATOL. This would ensure an even greater level of clarity on financial protection for consumers, whilst providing a more consistent and coherent regulatory framework for businesses selling flight-inclusive holidays.

19. Respondents to the ATOL reform consultation were almost entirely in favour of taking steps to include holidays procured on an agent for the consumer basis in to the ATOL scheme. This was seen as important for consumer clarity and also as an avoidance loophole that needed to be closed.

20. Subject to the parliamentary process, there will be further consultation and an Impact Assessment before any decision is taken to make regulations under the power in the Civil Aviation Bill that would bring holidays sold by airlines and those procured on an agent for the consumer basis into the ATOL scheme.

21. The power in the Civil Aviation Bill would not permit all flights sold by airlines to be protected under the ATOL scheme. It would not be possible to do so unless insolvency protection for airline passengers was required at EU level. The European Commission is currently considering options on this issue, the Government will respond to any proposals as and when they are made.

Longer term reforms

22. It is estimated that the measures proposed to be brought in under the new regulations would result in increased income which would allow the ATTF deficit to be repaid within three years, returning the scheme to financial self-sustainability. Once this position has been reached, the Government and the CAA will be looking at options for how the ATOL scheme is managed and funded, including the arrangements for refunds and repatriations. Initial views on this were sought in the ATOL Reform consultation. We are working with the CAA to develop more detailed options, with a view to initial discussions with stakeholders later this year.

23. The European Commission is also carrying out a review of the Package Travel Directive, and is expected to bring forward proposals in the latter part of 2012. We requested early views on this matter in the consultation in order to shape our response to any proposals.

January 2012