Transport - Minutes of EvidenceHC 1798

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House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Transport Committee

Air Travel Organisers’ Licensing (ATOL) Reform

Tuesday 31 January 2012

Mark Tanzer, Noel Josephides, Paul Evans and Mike Bowers

Michael Carrivick, John Hanlon and Jill Brady

Dame Deirdre Hutton and Richard Jackson

Evidence heard in Public Questions 1 - 131

Oral Evidence

Taken before the Transport Committee

on Tuesday 31 January 2012

Members present:

Mrs Louise Ellman (Chair)

Jim Dobbin

Julie Hilling

Kwasi Kwarteng

Mr John Leech

Paul Maynard

Iain Stewart

Graham Stringer

Julian Sturdy

________________

Examination of Witnesses

Witnesses: Mark Tanzer, Chief Executive, ABTA, Noel Josephides, Director, Association of Independent Tour Operators, Paul Evans, CEO, lowcosttravelgroup, and Mike Bowers, General Counsel UK & Ireland, TUI Travel, gave evidence.

Q1 Chair: Good morning, gentlemen. Welcome to the Transport Select Committee. Could each of you give your name and the organisation you are representing? This is for our records.

Mike Bowers: My name is Mike Bowers. I represent TUI Travel PLC.

Paul Evans: Good morning, Madam Chair. My name is Paul Evans and I represent the lowcosttravelgroup.

Noel Josephides: I am Noel Josephides. I represent the Association of Independent Tour Operators.

Mark Tanzer: I am Mark Tanzer. I represent ABTA, the Travel Association.

Q2 Chair: Can ATOL be reformed or do you think it is better just to start again? Who would like to give me a view on that?

Mike Bowers: We think that ATOL can be reformed. There is a good basis within the ATOL regulations to move forward. From our perspective the changes that have been proposed by DfT, working with the CAA and the industry, are a good and helpful set of additions. What they do, and what they do very helpfully, is start to bring into the scope of regulation what people in their own terms consider to be holidays. What this industry needs, when people buy holidays and what they think of in their own terms as holidays, is for holidays to be regulated in the same way. This is a very good first step towards that, but it is not sufficient on its own because the step that is currently proposed through the reformed ATOL regulations simply brings in everyone except airlines selling holidays. What we need to do next, of course, is to bring those airlines selling holidays into scope so that everyone buying a holiday knows that they have a common set of protections and the industry knows that they have a common playing field upon which to compete.

Q3 Chair: What is the biggest problem about holiday insurance from the point of view of the consumer-the holiday maker?

Mark Tanzer: On pure holiday insurance our research suggests that people, even though they should buy it, do not. There is that problem. In a very price-sensitive market it is an extra that they do not purchase; so they can, and do, end up travelling without any kind of protection at all. Even where insurance policies exist, as ever, the detail is in the small print as to exactly what that will do in the event that your holiday company goes bust. Of course, the problem is that when it does go wrong you are very often overseas. Whether or not you have insurance, it is ultimately going to be a responsibility of the Government to make sure that people are able to get home. Insurance on its own is a pretty flawed mechanism for everything that a holiday needs in terms of protection.

Q4 Chair: Mr Josephides, do you have a view on this? Where is the biggest problem from the point of view of the traveller?

Noel Josephides: I do have a view. Because of the small print on a lot of policies, very often, when there is a failure, there are many exclusion clauses which would enable the insurer to avoid responsibility. If we are to use insurance in order to go forward to cover holidays and Flight Plus, then we have to make sure that Government look very closely at the wording of these policies. The other problem that we have is with what we call SAFI policies, which are the airline failure policies. Very often an insurer will decide to withdraw cover and that, in itself, causes the failure of the airline.

Q5 Chair: Do we need an ATOL scheme at all? Why can’t people just sort this out for themselves as they do with anything else? They can get insurance if they want it and, if they do not, take a chance with it. Mr Evans, do you have a view on that?

Paul Evans: I think that is a very good question. It is a broad-ranging issue. In some senses you are covered with your credit card. In another sense you might have some travel insurance, but, as Mark has quite rightly highlighted, repatriation is a key issue. The Civil Aviation Authority and Department for Transport have a very difficult job trying to put in the correct regulation. It is not an easy or straightforward issue. Just take this weekend. Spanair went out of business. Later on, no doubt, you will hear that airlines don’t go bust. Airlines do go bust. If you were looking at an airline going bust on a Greek island, as XL did, or as Globespan did recently, or previously to that International Leisure Group, you need to get home. Insurance will get you your money back. The credit card might get you your money back, but there is a time-scale difference between getting home and getting your money back. That is the key thing on which we will probably all agree. The ATOL scheme gets you home, but it also gets you your money back. I am not sure we will necessarily agree on everything else, but we will agree at least on that particular item.

Q6 Chair: You said in the written evidence, Mr Evans, that you think the whole scheme is about trying to protect the biggest companies like Thomas Cook. Do you really mean that?

Paul Evans: There are three areas where I believe we do not have a level playing field. The legislation as it is proposed is being introduced with undue haste. I welcome the opportunity to talk to the Committee and ask you to consider that and hopefully make some recommendations. If you go back to 2008, there was a scheme that had been in operation for 25 years, and it worked extremely successfully even though it had a deficit. It did not have the deficit that it now has, which is something over £40 million. That scheme in 2008 released TUI and Thomas Cook from their bond obligations. It allowed them effectively to go on a buying frenzy because they no longer had to tie up £500 million in bonds. They only had to pay a fee that was originally introduced at £1, which has since gone up to £2.50 per passenger. They have had one Christmas present where they were released from £500 million. They are now about to get another one.

I am a travel agent; Noel is a tour operator; Mr Bowers represents a large tour operator, and ABTA is a regulator. As a travel agent it is hard. We are about to be penalised and asked to pay £2.50 and, in many cases, we will also be asked to have a bond. We do not believe it is fair that you should be asked to have a bond and to pay £2.50.

The second issue, as Mr Bowers has quite rightly said, is that an airline does not have to pay that fee. If you look at the market, why are we in the position that only 48% of passengers are now covered? The reason is because no-frills carriers have come in and customers have chosen to book on price and flexibility. The market has set those rules. As a result of that people are now booking holidays in different ways. Yet those very same airlines, one of which I help with their tour operation, are not necessarily paying that fee. You have one rule for one and a different rule for others. They will argue, "We are not going to go bust so we don’t have to pay it." If you were in my operations department this weekend clearing up the mess of the fourth airline that has gone bust, you would take a very different view.

Q7 Julian Sturdy: I would like to apologise to the panel because I am going to have to leave halfway through to go to a delegated Committee. There seems to be broad support for extending the ATOL scheme in its broad principles but some criticism over proposals for it being slightly short-term, rushed and maybe costly as well, and also not delivering potentially the level playing field that it set out to do. With that in mind, do you think that travel companies and airlines will continue to find ways round the new proposals in their current form, as they have done in the past?

Mike Bowers: There will be some of that. It is incumbent therefore upon Government to find ways to make sure that those loopholes are plugged. The most obvious example is dynamic operators and dynamic travel agents saying that they are going to start acting as agent for the consumer. If you are in the steps of the customer, they do not know what that means and they really don’t care. They want to be able to buy a holiday with confidence and to know that, if something goes wrong, then they will have a level of protection that they are entitled to think they are going to get. That is what the ATOL scheme covers. That is why we say, when people buy holidays, they need something they can trust. The ATOL scheme is a well-established brand. It is well established in the customer mind. Let us not throw all of that out. Let us extend it and make it so that everybody buying what they consider to be a holiday has that protection. I echo what Paul said. Yes, we do need airlines to come into that scheme as well, but just because we cannot do everything at once does not mean we should not do what we can do now, because it is a step in the right direction.

Q8 Julian Sturdy: Do any of the other panel have views?

Mark Tanzer: Obviously the biggest avoidance mechanism is the big hole that has been left open, which are holiday sales by airlines. They do not have to do anything; they just have to carry on. Not only is it a gap, but, perversely, it will drive people to the one sector that is unprotected. It is a very price-sensitive market. Online holidays are listed in terms of the cheapest first. Those top listings will be the ones that are not paying the additional protection costs, so you will find consumers automatically being moved towards the one bit of the market where there is no protection if that is not closed as soon as possible.

Q9 Julian Sturdy: How many more holidays do you think will be covered under the new proposals? How many more will that deliver?

Paul Evans: Publicly, the Civil Aviation Authority is claiming that between four million and six million additional holidays will be covered, but that will still leave a huge number-I do not know whether it is 46% or 56% but somewhere in that area. It will still leave 40% of people travelling on airlines effectively uncovered. That is part of our argument. We would like to see the net thrown wider at the same time, because, if you do not do that, you are going to have an uncompetitive position of some people paying and some people not.

I will give you an example, if I may. If you book on lowcostholidays, you will pay £2.50 under this scheme. If you book on easyJet Holidays, which is on the same system run by me, for exactly the same hotel on exactly the same flight, you will not pay that £2.50. That cannot be right or fair. If you are a small travel agent trying to package that holiday, you may be asked to take a bond and pay the £2.50, and yet, if you are TUI, you will not be asked to take the bond. You will just be asked to pay the £2.50.

Q10 Chair: Do you not think the traveller would understand that they got a benefit from paying a premium? Would they see it like that?

Paul Evans: No; it is the company that will pay the bond, not the individual. The passenger will pay the £2.50. They will pay £2.50 on both, but one business will be asked to take a bond by the Civil Aviation Authority in addition to paying the £2.50, while another company, i.e. a big tour operator, will not be asked to take that bond. We believe that that puts pressure on small business.

Noel Josephides: I would like to correct what Paul has said. Initially, there would need to be a bond because they are coming into the scheme, but, once you have proved your financial fitness, then everybody just pays £2.50. The majority of tour operators just pay £2.50, whether they are small or large.

Q11 Chair: You are not agreeing with Mr Tanzer.

Paul Evans: It is for four years.

Q12 Iain Stewart: I would like to press you a little further on the overlap, or lack thereof, between ATOL and travel insurance. A number of you have said that the small print of travel insurance policies would not cover you for repatriation and other elements. Is that lack of cover in travel insurance because ATOL exists, and, if ATOL did not exist, then the market would cover that gap so that personal travel insurance would be a catch-all? Then it would be up to the consumer to decide whether they want to protect themselves or not, in the same way as they decide whether to insure their house contents.

Mark Tanzer: In the medium term, a system of financial protection that is basically handed to the industry and the financial markets would be a better solution. To get to that, there is a deficit that has to be paid off, and you have to have markets that are comfortable with the level of risk that they would be taking on. For that, they have to have experience and they have to get comfortable with the nature and quantum of the risk. You could not simply turn off ATOL today and say to the markets, "Just go and insure it." The strategy in the medium term is that that is what you would want to do. Effectively, the Government would be a licensing body and would put the obligation on the travel companies, which they already have under the Package Travel Regulations, to provide protection. That is provided by a mixture of insurance and bonds. That is probably where we should be going. As I say, you cannot do it in one immediate jump.

Q13 Iain Stewart: I would like to ask another question in this field. Just as an experiment at the weekend, I went through a number of airline websites to book, notionally, a flight and a holiday. Every single one said, "Do you want to add travel insurance?" How valuable is it to airlines to have that product? Is there too much of an overlap there that we need to be looking at addressing?

Paul Evans: You probably need to separate travel insurance from repatriation insurance. Travel insurance will tend to cover you for baggage, illness and loss of something on the holiday.

Q14 Iain Stewart: Does the consumer appreciate that?

Paul Evans: No, I do not think they do. That is a very good point. In our view, in the industry, insurance is viewed to cover that. The repatriation element of it is something completely different. The way that they have tried to do it is to say, if you have two weeks’ worth of passengers overseas, how much is it going to cost you effectively to bring all those people back who are in resort? To be fair to the Civil Aviation Authority, in the last three or four major collapses they have been absolutely fantastic in sending aircraft out to rescue people, with the help, to be fair, of airlines such as TUI, Thomsons, Thomas Cook and various others. They have flown empty aircraft out to some of these remote places and flown them back at the cost of the scheme. That is one of the reasons why the scheme is in negative deficit.

The problem that we have with the scheme is that you are now trying to tax one particular part, i.e. travel agents, to try and bring them into the net while ignoring the actual cause of the reason that fewer people are now covered, which is the no-frills carriers. What I am saying is that we are not casting the net wide enough. If you want to fill up the Air Travel Trust Fund, as Mark correctly said, which is £40 million in the red, surely the best way is to have a slightly lower charge but throw the net wider so you fill it up more quickly, rather than just try and target an incremental four million or six million people. That is the problem.

Q15 Chair: You think that wider coverage is the solution.

Paul Evans: I do, because, if you have 70 million people going on holiday, you are currently only covering 46% and this is going to bring in another three or four million, we do not believe that this sticking plaster approach is going to solve the problem of an Air Travel Trust Fund that is £50 million or £44 million in the red. If you were to charge a wider net a lower amount, you would top up the fund more quickly and customers would see it as being fair. One of the big problems here is that, if they do not see it as being fair, you are going to get avoidance.

Q16 Mr Leech: I have a number of unrelated questions to each other. First of all, on the issue of insurance, how much extra would the average holiday-goer have to pay in insurance if it was purely done in terms of an add-on to make sure that they were covered for repatriation?

Noel Josephides: It is not only that; it is whether in fact the insurance route would be long term. What you find with insurance companies is that as soon as there is a big claim they tend to walk away from future bookings. It is very difficult to say how much they would charge, but I would say it would be more than £2.50, which is what we pay for our licences.

Mike Bowers: I am concerned that there is potentially a false choice being understood here between personal travel insurance on the one hand and the ATOL scheme or an extension of it on the other hand. The ATOL scheme, in part, responds to a requirement of European law under the Package Travel Directive, which requires anyone selling a package holiday to have in place a system of financial protection. That cannot be done on a voluntary basis through the offering of personal travel insurance.

Q17 Mr Leech: What I am trying to establish is whether or not the ATOL scheme, as it is, is good value for money. My guess is that it would be significantly more than £2.50 on personal insurance to cover people if we were going to have a completely different regime.

Mike Bowers: Absolutely. Of course, £2.50 is not the real economic cost of providing this protection. £2.50 makes a contribution to refilling the deficit. £2.50 is not what it really costs. It is what it costs to provide the protection plus what it costs to fill the deficit. You are absolutely right that there is a cheaper way. Once the deficit is filled it will be cheaper and there is no doubt that there is a role for insurance within that. There is a role for insurance now.

Paul Evans: You can buy an insurance policy that covers your holiday. Forget the selling price, though. The actual cost from one of the two major providers is between 50p and 70p. Airlines currently pay that, and that is why they will argue, "We already have insurance. We are not going to go bust and, therefore, of course we can fly you home." If that airline went bust, with regard to that 50p charge, when we get to the "all levy" fee, we are saying that that fee is almost the same as what you are paying anyway on insurance. You, the airline, are not necessarily going to be penalised because it is not much different from the fee that you are currently paying on insurance.

Q18 Mr Leech: My next question is in relation to why we have a deficit in the ATOL scheme. Mr Evans made a fair point that all the new people that come into the scheme are going to be expected to pay towards the bond. Would it be fair to say-and please correct me if I am wrong-that all the organisations that are going to be brought into the scheme, plus the organisations that are not going to be brought into the scheme, are part of the reason why we have a deficit in the first place because they were not in the scheme? Practically every holiday was covered by the ATOL scheme 20 or 25 years ago. Is that right or wrong?

Mike Bowers: Yes; that is right.

Q19 Mr Leech: In some ways would it not be fair to say that the people that would be brought into the scheme would be contributing to what they should have been contributing over the last 20-odd years?

Mike Bowers: I think that is fair.

Q20 Mr Leech: I would expect TUI to agree.

Mike Bowers: I understand that. The other point to make is that, if you ask who is responsible, you can be sure, for one, it certainly is not TUI, for example, because we have not gone bust. If people are saying, "It is not us because we were not in the scheme", I think your point is right. You were not in the scheme; you were not contributing. But those customers who are now taking those types of holidays and those types of arrangements that happen to fall somewhat arbitrarily now outside the confines of the scheme are, indeed, part of the reason why the scheme is in deficit. We say it is up to the whole of the industry to be refilling that deficit. There is no reason why it should be landed with just those who are historically members of the scheme.

Mark Tanzer: Can I just put a view for the travel agent community? ABTA has both agents and tour operators. A large number of our members will be coming into this scheme of protection that have been in the position you have just described of being outside it. There is no doubt that there is a sense of disgruntlement that they are being invited late to a party to pay the bill for the people who have left already and that they should not be penalised for that. If it was £1 instead of £2.50, they would find it easier to swallow. That said, our consultation with our members said that they do see the benefit of being within a scheme of protection, having consumer clarity and wanting to come in at the right price, given that the airlines will be competing on a similar basis.

I do not think you can really say that they are responsible for the deficit that has accrued in the Air Travel Trust Fund. That is a combination of unfortunate claims experience of companies that have failed without sufficient bonding or the air passenger contribution having been there to pay those. It is an industry problem. The ATOL scheme, as Mr Bowers has said, is one of the cornerstones of financial protection that we have to offer under the Package Travel Regulations and it is not currently viable. If you left it as it was, then the pressure would be on existing ATOL holders to unpackage their packages and to come out. You would have a smaller number of people contributing to an increasing deficit.

Q21 Mr Leech: Would it not be fairer for it to be all-encompassing? I am surprised, because TUI, in many respects, is very keen on the extension but does not want to see airlines involved. Thomson is one of the biggest airlines in Britain, so I can kind of understand why you might be against it for that reason, but, surely from a fairness perspective, it would just be a lot simpler if everyone was included, including all airlines.

Noel Josephides: Four or five years ago that is exactly what the CAA recommended: that there would be a £1 levy on all outgoing flights. As an industry we supported that and worked very hard in order to get that passed. That would have been a very good solution, but the airlines torpedoed that. What we have at the moment is a step approach. We are bringing part of the industry in. Hopefully, we will be able to bring the airlines in for when they sell holidays but unfortunately not flights only. We have been told that that is not going to be possible, although that would solve a lot of problems. At least if we can bring the holiday part in, that would be a further step. We understand that this is likely to happen in a few years. If it does not it, will be an immense disappointment in the travel industry.

Q22 Chair: Does anyone else want to give a view on that?

Paul Evans: The reason the fund is in negative is because three massive airlines have gone bust in the last 10 years. XL Airlines cost the fund somewhere in the region of £40 million. Intasun, ILG, which had Air Europe, cost it a huge amount of money. Globespan just two years ago cost it a large amount of money. The reason that the fund is in negative is because of airlines.

The second thing is that, publicly, my colleagues over here have stated that they have considered turning themselves into airlines so that they do not need to pay this fee. Remember that in Europe-and we all operate across Europe-there is not this £2.50 fee. It does not exist. Effectively, it is an insurance scheme, depending upon which country that is. You have the potential of airlines not being included and travel agents being penalised. I believe this is more about raising the barriers to entry for small businesses and travel agents and putting an uncompetitive spin on it than necessarily just about consumer protection. It is about big business protecting itself and raising those barriers to stop people like ourselves growing.

Q23 Chair: Mr Bowers, do you agree with that?

Mike Bowers: No, I do not. I would correct one misapprehension. We are in favour of airlines being brought into the scheme. What we are saying is the fact that they cannot be brought in now, for what we understand to be reasons of parliamentary time and what can be done within-

Graham Stringer: I do not believe that. There is more time available than there has ever been.

Q24 Chair: You think it should be done.

Mike Bowers: We do think it should be done. If it could all be done now, we would be delighted. We certainly believe that airlines selling holidays and airlines selling flights only-if it were capable of being done-should absolutely be brought within the scheme of protection. What we have also said is that, even if it cannot be done now, then the proposals as they stand today are still a good first step.

Just to answer Paul’s point, this is absolutely about two things. It is about consumer protection and customers being able to book holidays with confidence. When they book what is, in their own terms, a holiday, then they should have a standard form of protection that they recognise and that everyone in the industry understands. When you look at it also from a competitive perspective, when players are playing in the same field, then they should have the same regulation applied to them. That is fair, that is what the industry needs and that is what we are asking for. That is why we say, yes, this is a step in the right direction, it is a necessary step, but it is not a sufficient step because we also need the airlines in.

Q25 Paul Maynard: I am sure we would all agree that this is the most appallingly complex issue imaginable. I was awake at 3.00 am this morning still trying to get my head round it. The grave danger is that we can all buy into reform and think that certain things are a good idea, such as bringing Flight Plus into the parameters of ATOL, but one of the common themes that I have read in everybody’s evidence has been a concern that the Government are defining Flight Plus too narrowly, excluding bookings of less than 24 hours, and also, if we believe what the Society of Our Lady of Lourdes said in their evidence, hampering those who take more than 24 hours to put a booking together. Does the panel have any views on whether the Government have their definition of Flight Plus right rather than it just being a good idea in principle?

Noel Josephides: We would certainly like to see the time period extended where the accommodation is added to the flight. The problem that the industry has at the moment is that computer systems cannot trace that fact. When someone books a flight today and then in four or five days decides to book accommodation, on these computer systems it looks like two separate bookings. For smaller tour operators that is no problem at all, but for the larger companies there is a technical problem. We believe that it should be extended because it seems ridiculous that somebody who decides to book accommodation a few days after having booked a flight is denied similar protection given by ATOL.

Q26 Paul Maynard: What could be the unintended consequences of having that 24-hour cut-off? Does that not give unscrupulous individuals in the travel industry an opt-out to get around it, as it were? You are all very creative individuals in getting round these rules, I am sure.

Chair: You mean that in the best possible way.

Paul Maynard: I am not sure I do.

Mark Tanzer: As part of the consultation, it is where you draw that line. Is it seven days or is it a day? You have to draw it somewhere, and there will always be someone who can just move the other side of the line to avoid it if they want to. What I would say is that we should not assume that everybody is out to avoid giving this protection. In fact, we have had people saying, "If it is longer than two days, can I buy in anyway because I want to be able to offer the customers the ATOL certificate and I want to be able to say that the holiday is protected?" Far from them seeing this as a way of not having to pay the £2.50, they are saying, "If I am out, can I pay it anyway in order to give that assurance?" A strong consumer awareness campaign built around looking for the ATOL certificate will make the customers say, "I want a protected holiday", and put the onus on the organiser to provide it.

Paul Evans: Mr Maynard, I think this comes into the issue of undue haste. It is a very complicated area, as you have quite rightly indicated. This is the third proposal in three years. We believe it is a sticking-plaster approach and that people are going to circumvent it, whether as agent to the consumer or as an airline. As a result of that, we believe that the fund will not be topped up as quickly as it could have been and that customers will think they are covered as a result when they are not covered. The 24-hour rule that you have highlighted is just one aspect of it. Being an agent of the consumer is another aspect. If you book a flight only, on TUI you are not covered either, and that is another aspect of it. There are numerous aspects across this piece where you are potentially not covered. The consumer will be confused, the fund will not be topped up, and we do not think that is the right approach.

We are asking for a more measured approach. Slow down. It is almost like a video game controlling the legislation, where we are running around trying to fill this hole, when we had a scheme previously that worked for 25 years. Now we are having the third change in three years. I do not believe the changes as proposed are going to fix it either.

Q27 Paul Maynard: Given the technical issues that Mr Josephides referred to, is the April 2012 deadline for implementation at all realistic?

Noel Josephides: We have to start somewhere. Of course Paul would say that, because he has had 10 years in order to build up his business without any of the regulation that the rest of us have had. We would like to see more people brought into the system and ultimately that airlines are brought into the system as well.

Paul Evans: Madam Chair, can I just correct something?

Chair: What everyone says is being taken down.

Q28 Paul Maynard: We will leave that to one side and I will ask another question. Clearly we are looking into this matter not for the benefit of the travel industry so much as the benefit of the travelling public. They want to know that, when they go on holiday, they are covered. I am not a very sophisticated traveller. I assume that if I pay by credit card I am probably covered, provided I have my travel insurance as well. I struggle as a deregulating wannabe libertarian to wonder why the state has to get involved in this to begin with. Why is it that the travel industry cannot somehow come up with a product? It is only £2.50 per person. Why does the state need to pass legislation to ensure that you all do what you should be doing?

Mark Tanzer: The ATOL protection relates to package holidays with a flight. There is a whole category of package holidays that have protection and are nothing to do with the state scheme. ABTA provides it, AITO provides it, and there are a number of bodies that do exactly as you say. Either through bonds or trust accounts or so forth, they can provide consumer protection without having a state mechanism behind it.

If you look across Europe, it is a very mixed picture as to how people have implemented the Package Travel requirements. As far as I know, there is not a similar state-run scheme to ATOL. There is a trade-run scheme in Holland. Others use a mixture of bonds and insurance. The Italians don’t do anything at all. You are quite right to say that a state-run scheme is not an essential element of consumer protection, but, as I have said, it is what we have at the moment. It has worked historically. I disagree with Paul when he says we can take a slow approach to this. The numbers of people travelling without protection are now sufficiently large that it is urgent.

Q29 Paul Maynard: Do they not have protection with their credit cards? What proportion is protected with credit cards but not ATOL?

Mark Tanzer: The credit card will give you a certain protection in terms of getting your money back, but, if you buy a low-cost fare for £50 and the company goes bust, getting back from where you are will not cost you £25. It could cost you a great deal more than you would get.

Q30 Paul Maynard: But, if we believe the airlines, they are all saints and will give us these really cheap rescue fares that will float down from the sky like manna from heaven.

Chair: Mr Josephides, is that correct?

Noel Josephides: No. You might get a cheap rescue fare, but with the CAA you do not pay to come back. That is the difference. The other very important point is that, if we all come to rely on credit cards in order to bolster up the security of the industry, the credit card companies do not consider themselves to be risk-takers. They simply come to us and ask us to provide the guarantees in case we fail. It is exactly the same.

Q31 Chair: With the credit card system, there is still a cost to the company and then to the passengers. Is that what you are saying?

Noel Josephides: Very much so. A lot of tour operators have to put up bonds to credit card companies because they consider the travel industry a great risk. Whether you put up a bond to the Civil Aviation Authority or to the credit card company, you are still stuck; you still have to do it.

Q32 Chair: Are you saying that the company is still paying, and presumably that is passed to the passenger-the traveller?

Noel Josephides: Yes.

Q33 Jim Dobbin: I am totally confused on the issue of regulation. I got the impression that the feeling was that travel insurance needs regulating but not the industry. Is that what is coming out of this conversation?

Chair: Who can advise us on that?

Noel Josephides: We are saying that the insurance industry could play a hand, but we must make sure that the small print on the policies works and does exactly what it is meant to do. There are policies out there that are not worth the paper they are written on.

Q34 Jim Dobbin: I just thought that needed clarifying. The other point I was going to raise is that Mr Evans suggested that this was being introduced too hastily. When do you think it would be appropriate to introduce some legislation on this? There is a directive expected in 2014 or around that time. Is that too soon?

Paul Evans: We agree that change is required. We support change, as I said, but we want it to be right and we want it to come in once. We do not want to have a third and then maybe next year have a fourth because it is still not right. At the moment the time scales vary. It was going to be October. Then it was going to be April this year, and who knows whether it then gets stretched out further. There are a lot of technical issues to do with introducing a new ATOL certificate, which we support, because that would give clarity to the customer that they are actually covered. It will take companies some time to do the technical changes. There are a lot of companies-I believe 600 or so travel agents-that would then have to apply for an ATOL or a mini ATOL, which will take time. There needs to be absolute clarity in marketing to the consumer, which we have talked about, so that they understand whether they are booking something that is covered or not.

We also understand that there is primary legislation under review whether to ban agent for consumer sales. There is a view as to whether Parliament is going to consider bringing airlines into that. There are a number of issues which we believe would need to be looked at, not sequentially but at the same time. If you introduce the part-step, which is being argued here, what you are going to have is one side paying and the other side not paying. That cannot be right. The part that is now paying is the small agent. There is a part that does not have to pay a bond in addition to the £2.50. This is the bit that I want to keep stressing. We are being asked to have a bond and pay the £2.50. They are only being asked to pay the £2.50. Nobody will argue against the £2.50 and all the benefits that repatriation gives you, but not also to pay the bond. That is an unlevel playing field in favour of big business. Also, airlines are not being asked to pay either, which is also unfair.

That is why we think that it is in undue haste and why we would urge the Committee to influence the DfT to take a measured approach and introduce it once. Do the legislation, bring in a wider net, top up the fund more quickly and give us all consumer clarity. The industry has been talking about this for 10 years, and it has been going round and round and round and round. Successive changes have failed to tackle what is required. We would urge you to take a measured approach to arrive at the right solution.

Mark Tanzer: I have a couple of points to follow on from what Mr Evans has said. This idea that it is small agents against large tour operators is not quite right. There are some very large online travel agents out there who are coming in-in fact they have taken the lion’s share-and there are some very small tour operators who are currently carrying the cost of protection. Unfortunately, it does not just break down on large versus small companies coming in.

The implementation timetable is very challenging. It has slipped, and we would argue for a back-end of April implementation at the earliest in terms of collecting the air passenger contribution, and maybe October for some of the elements such as the certificate and agency agreements. The industry does need time to get in shape. That is different from holding back the whole regulatory change, which is what is needed now, and I would encourage us to move ahead with that.

Mike Bowers: We would agree with that. This is hard and complicated. It is a really complex area. I am not at all surprised that Mr Maynard was up at 3.00 am looking through the detail of the regulations. Just because it is hard, difficult and a challenge does not mean that we do not need to push ahead and do it. We do, and there will be teething problems. There will be issues. There will be difficulties for all businesses, large and small, in complying with these new regulations. There will be areas of confusion and doubt and areas where we need to consult with the CAA. We will need flexibility with Government and the CAA. We need open communication between the industry, the CAA and the Government to make sure this all works. Whenever it gets introduced, there will be those who benefit from current inactivity and who say, "Let’s push it off; let’s not do it yet", because it is in their interests to say that. The fact is that, the sooner we start, the sooner we will get through those difficulties and the sooner we will get to a position that is satisfactory for the consumer, because that is really what this is about.

Q35 Graham Stringer: Mr Tanzer, you were talking about how other European countries implement the Travel Package Directive. Can you give us more detail on that?

Mark Tanzer: As I said, it is a real patchwork in terms of how they have set about this. In Germany, I believe they use a mixture of insurance and then financial guarantees that the companies have to have in place in order to sell package holidays. There have been issues there about whether or not the consumer gets all their money back. At the moment, if the insurance tops out, they just go to the consumer and say, "I’m sorry, you will only get pro rata what you paid." That has been challenged in the European courts because it is not in accordance with the Package Travel Regulations. It is partial implementation there.

As I said, in Holland they have an industry-run trust fund, where the consumer is encouraged not to deal with any member who has not been able to demonstrate that they are complying with this. It is not a statutory scheme but an industry-run scheme. I believe that works satisfactorily. It is a different picture there. We are unique in having so many flights. When people go on holiday, by and large they have to fly, whereas a lot of package holidays in Europe are holidays where people will drive to the destination. It is a different sort of a challenge that they are wrestling with, but the actual implementation has been very inconsistent and enforcement is very inconsistent across Europe.

Q36 Graham Stringer: This might be difficult to answer, but which do you think is the best scheme?

Mark Tanzer: Ours probably. In providing consumer confidence and effective repatriation, the ATOL scheme has worked well. Because of the failures that were mentioned earlier, we have the financial deficit that it has incurred and that has to be put right. If it is extended in the way that is proposed and the airlines are brought in, the ATOL scheme will be a solid scheme. As I have said, in the medium term the financial markets, once they understand this, will be able to take over the role of the mechanism for financial protection. The ATOL scheme has not been a failed scheme. It has done what it was supposed to do under the Package Travel Regulations.

Q37 Graham Stringer: Should we wait until the next EU directive and not bother changing our own scheme?

Mark Tanzer: You might wait a long time. That is the difficulty at the moment. There is an urgency about this, both from the customers’ point of view and the industry being able to compete properly. I would also say that we spend a lot of time in Brussels talking to the Commission about reform, and they are looking at us and how Flight Plus would work as an example that they might take forward. They are very much seeing this as a model that could work for extending it. They recognise the problem that a large number of holidays are now not packages as formerly described. They are looking to see what happens here as to how they take their ideas forward.

Q38 Graham Stringer: My final question, and I do not mind who answers it, is, if you are given a choice between creating a level playing field or getting better consumer protection for nearly 100% of the market, which would you choose? I have been puzzled all the way through the evidence about whether you are more excited about the competition issues or the consumer protection issues.

Mike Bowers: There is a danger there of another false choice. We do not have to have one or the other. The two things point in the same direction.

Q39 Graham Stringer: I understand that you do not have to have one or the other, but I am trying to prioritise them.

Mike Bowers: I do not think you need to. The reason that the two things go together is because, when goods or services are sold and those are similar goods and services, then the two things correlate. The fact is that, on the one hand, the consumer protection objective of having consistent consumer protection for all of those people and, on the other hand, having a consistent regulatory regime correlate. The two things go hand in hand. I do not think there is a need or it is helpful to make a choice between those two things.

Mark Tanzer: Can I make a case for why you would need consumer protection here? A holiday is unusual in a number of respects versus other consumer purchases. First, it is an infrequent and quite sizeable purchase. That puts it immediately in a category where people are not practised. Secondly, when you come out having bought it, you do not come out with something tangible. You come out with a promise of a holiday some time in the future. A lot can go wrong with a promise. The third thing, which goes to Mr Maynard’s point, is that with a holiday you buy components. If there is a flight and accommodation, if one bit fails, the holiday has gone. You may not get the refund for the totality. A flight without a hotel is not much of a holiday and a hotel without a flight is even less of a holiday. Getting a refund on your flight does not really help you because you still have the hotel there.

The fourth point, which comes back to the first point I made, is that when it does go wrong you are overseas. That is a very different problem for the Government and it is a problem for you in terms of getting back. As an industry we want a robust system of consumer protection. We have built an industry where consumers feel they can travel to a number of places in the world and it is straightforward, but underlying that is a system of protection that will get them back. It is very important for the confidence of the consumer and the growth and robustness of the industry that we have that.

Paul Evans: I would like to add to that. Consumer protection is important and, contrary to what my colleague has said, we have had consumer protection since the very first day we founded ATOL, ABTA and IATA bonds. That is part of the issue, unfortunately. The problem we have is that this issue has been wrapped in consumer protection when there is an aspect of it that is attempting to raise the barriers to entry. The level playing field approach goes hand in hand, as Mr Bowers has said. These guys are the establishment, effectively.

I would argue to you that, having set up a business in my bedroom seven years ago and now employing 350 staff, it is tough. Regulation is tough. Business needs help. Nobody can argue that a scheme that flies people home from a Greek island is not something that should be supported. We would all support that, but let us do it within a framework that allows business in this country to thrive and succeed and that we do not get artificial barriers to entry. They had a Christmas present in 2008. They do not need another Christmas present whereby there is one rule for one, a different rule for these guys and yet another rule for an airline. That is not fair. All we are asking for is fairness and a level playing field with consumer protection.

Q40 Chair: Mr Josephides, do you want to comment on that?

Noel Josephides: Yes. Those of us that have been around for a long time have grown our businesses within the regulatory framework of ATOL and we have all managed to grow our businesses. It is not true to say that it is restrictive.

The other thing to bear in mind is that, if you abide fully by the Package Travel Regulations and have an ATOL scheme, not only do you provide financial security for your client but you also take full responsibility for the hotel and anything that your suppliers do. That is still far superior to Flight Plus, which only deals with financial security. It does not deal with the fact that, should anything happen abroad at the hotel, the organisation that is selling you the package could be acting as an agent for the hotel rather than a principal. The financial protection provided by a great many tour operators in the UK and taking responsibility for what they do is second to none.

Chair: Thank you very much for coming and answering our questions.

<?oasys [pg6,cwe1] ?>Examination of Witnesses

Witnesses: Michael Carrivick, Chief Executive, Board of Airline Representatives in the UK, John Hanlon, Secretary General, European Low Fares Airline Association, and Jill Brady, Director of HR and External Affairs, Virgin Atlantic, gave evidence.

Q41 Chair: Good morning and welcome to the Transport Select Committee. Could I ask you to give you name and the organisation you represent? This is for our records.

Jill Brady: I am Jill Brady. I represent Virgin Atlantic Airways.

Michael Carrivick: I am Mike Carrivick. I am on the Board of Airline Representatives in the UK representing 86 scheduled airlines.

John Hanlon: I am John Hanlon, the Secretary General of the European Low Fares Airline Association, ELFAA.

Q42 Chair: Would you accept that the present ATOL scheme that applies mainly to travel agents but not to airlines is unfair and confusing for the customer?

Michael Carrivick: We think the current ATOL regime is in fact very complex. It is inconsistent and it is also very difficult for some of the people selling travel to know whether they are acting as agents or whether they are the principal. There have been legal battles over the years as to what constitutes a "package" as well. We are in broad agreement that the ATOL regime needs reforming. We do not agree that the reforms that are proposed are suitable.

Q43 Chair: Are there any other views on that? Does it need changing?

Jill Brady: It is very difficult probably for the operators to know how they are acting, but it is more difficult for consumers to know how they are buying. Under the current regime they can buy in a number of different ways. The current regime was established when there were far fewer options for customers as to how they buy. In the previous evidence the gentleman talked about how operators have built different systems in order to avoid this protection. What we also find is that customers are very creative about how they buy their travel solutions. You can have a customer who wants to buy a tour-operated holiday, where they can have a resort rep that can assist them overseas. You have customers who want to buy for convenience on one website or customers who want to shop around and are very happy to go and buy direct from hotels and airlines in different countries, with many different sorts of regimes in terms of protection. It is a very confusing system to try and regulate it all in one go. Trying to grow an ATOL system that was established many years ago for quite a straightforward set of requirements is quite complex to do now given the very varied requirements of the travelling public.

Q44 Chair: What do you conclude from that? Do you think the ATOL scheme should be reformed in the way that has been suggested? Should it perhaps be scrapped and something else be done, or perhaps nothing should happen?

Jill Brady: We need to step back and look at what we are trying to protect. I have heard many different things in the course of the conversation this morning about whether we are trying to protect the money that somebody gives to an operator for a holiday-whether it is for the travel part, the accommodation part and other things they might buy, and we are protecting the whole of that and to refund that should an operator not exist. Are we trying to protect just for repatriation or are we trying to protect for other things? There are many different options for consumers in how they buy. Therefore, you have to take a step back to look at what we are trying to protect and what the Government are trying to protect in order to get the right solution for consumers that does not just layer additional costs on additional costs so that they can get things effectively, that they have a choice and can do things in a way that suits them, can buy in a way that suits them and are protected in a way that suits them. Also, we must make sure we are not just simply layering complexity on complexity and cost on cost.

Q45 Chair: Mr Hanlon, do you want to make any comments at this stage?

John Hanlon: Yes. I would just point out that the ATOL scheme was brought in at a time when the market was totally different. The market is very dynamic. Consumers’ needs have developed considerably. The way they buy and what they buy has moved on. It would be wrong to approach a scheme that was laid down 30 years or more ago and try and fiddle at the edges of that to make it adapt to that market. We need to see what those changes have been and therefore the best way to react to provide the protection.

Q46 Chair: How are you looking at the current proposals? Do you think that ATOL should be scrapped and looked at again completely or perhaps that a scheme of that nature is not appropriate today?

John Hanlon: I am very attracted to the questions from one or two of your members who have questioned the need for the state to intervene to protect, when there is a market for insurance and it is a very prominently offered service on the websites of airlines. It is also quite interesting because, from a European regulatory point of view, a lot of our members were criticised by the Commission for making insurance too automatic in their website sales. It was an opt-out option on their website. The Commission took the view that consumers are much more savvy, they have to have a conscious choice and they should not be required to pay for something or risk paying for something that maybe they do not value enough consciously to purchase.

Q47 Chair: Is that a position with which you agree?

John Hanlon: Yes, I do. In fact, since we have removed the opt-out for insurance, people have been made aware that if they need to be insured they have to opt for it. It has a cost and many of them have decided that they would rather self-insure. There is much more availability of alternatives to get you home now. 30 years ago it was £300.

Q48 Chair: You are talking about self-insure rather than reporting to a system.

John Hanlon: Self-insure coupled with closer regulatory oversight.

Q49 Kwasi Kwarteng: I would like to widen your point to the other members of the panel. It seems to me, looking at this, given the complexity of the scheme and the fact that the scheme does not even cover 50% of people, that we might as well just throw the whole thing out of the window. As you say, there are very sophisticated markets of insurance and consumers are very savvy about this. I want to know what other members of the panel think about Mr Hanlon’s remarks. Is it time perhaps to look at getting rid of ATOL altogether?

Michael Carrivick: We have been quite clear on this. One of the previous witnesses said that for the first 25 years it worked very well. Since then, the way in which travel can be purchased has fragmented technology-wise and all the rest of it. The legal relationships within travel purchasing have become quite complex. We believe that we should go back to basics. There are still a lot of traditional packaged holidays sold. Under the Package Travel Directive those would be obliged to be protected anyway. There is nothing wrong with that whatsoever.

On the other hand-and this is the real point of clarity-where a consumer product or travel product is purchased and is not protected, then the consumer must be told so. That is the critical part in all of this. The ATOL branding is so strong at the moment. It is on various bits of paper, stationery and advertising. People assume that they are protected and that is not the case. Let us tell them they are not and give them the choice.

It goes back to why the state should be mandating protection. I live next door to somebody in a similar house. I am going back to the consultation that said that somebody who bought a similar holiday is not insured. With respect, so what? As long as they know they are not insured what is the problem?

Jill Brady: It can become very emotive when we start to talk about consumers. My airline cares hugely about our customers. We work in a very competitive market and we have to look after our passengers. We are covered by lots of regulations such as EC 261. We make sure that our passengers get home when they are stuck in places because of ash clouds and snow. That is of great importance to us. There is a risk that there are so many different ways consumers can buy that it will be very difficult to apply the current regime in a way that is suitable to cover all of those things.

We compete with international airlines from all over the world. A customer can go on to our website and purchase an airline ticket. At the moment we would offer an add-on of a hotel. You would have to go in, pay for that and put your details on separately because it is sold through our sister company Virgin Holidays, which is a tour operator. They could equally go on to the website of Continental Airlines in the US. They could book a ticket, hotel, car hire and other things on that website. It would be very difficult for a regime that is put in place in the UK to cover all of those bookings. Therefore, we need to be careful that this is more about customer information and customer choice than it is about mandating particular regulatory outcomes.

Q50 Paul Maynard: I point to my entry in the Register of Members’ Financial Interests regarding Virgin Atlantic. That said, I am struck by the way in which the airlines seem so hostile even to the extension of the idea of insurance to Flight Plus arrangements. If I read your evidence correctly, none of the three of you endorse that even, let alone moving it to flight only arrangements. Can you explain why it is you think that what seems to me a modest step towards extending consumer protection is so unacceptable?

Jill Brady: From our perspective we are not entirely against how the legislation is currently being looked at. What we are concerned about is that it does not fulfil the objectives of the Government. If you are looking to protect for repatriation purposes, are we looking to protect for company failures pre-travel? None of this is particularly clear, and, because the absolute objective that we are trying to achieve is not clear, it is not clear to me whether we are coming up with the right solution.

Passengers book in a number of different ways. It is not clear to me that what is being suggested in itself will always cover the ways in which those customers seek to buy. My example of an overseas airline and buying what would essentially be covered by Flight Plus but through an airline in a different country will not be covered. I am concerned that consumers will therefore not know when they are covered and when they are not.

Q51 Paul Maynard: Even though they will have an ATOL certificate issued.

Jill Brady: The Government will still have a problem in how consumers are repatriated. It would be much more effective to educate passengers about insuring themselves and taking responsibility for their own choices rather than trying to mandate a solution that they may not want.

Michael Carrivick: We did not actually resist Flight Plus at all. We made some fairly vague comments in there about how the liabilities could go on to travel agents at this stage that would be selling Flight Plus. Flight Plus may at a later stage be pushed on to the airlines, but until that consultation is aired we are keeping our thoughts very much to ourselves.

Flight Plus as it stands is yet another bit of confusion for the consumer. If you buy a flight and other arrangements within a day either side, you are protected; but, if you do not, then you are not protected. Again, that is just one of the added confusions that arise out of the proposed reforms.

Q52 Kwasi Kwarteng: I would refer people to my Register of Members’ Financial Interests in respect of Virgin Atlantic. To what extent do you think this extension of ATOL to airlines would be a burden in terms of costs on your industry? Clearly you are operating against a headwind where there are lots and lots of costs. You have air passenger duty and all sorts of things in the new regulatory framework. How do you think this would add to your costs?

Jill Brady: There are concerns on costs. For Virgin Atlantic, our concerns are about us being able to compete with other airlines in our marketplace that potentially would not be covered by this. We have long-haul competitors, many of whom are overseas, and it would be hard to see how they could be regulated in this way. Therefore, we believe there are better ways for consumers to be protected, and that is through knowledge and having the access to purchase the products they need in a different way.

Q53 Chair: You see consumer knowledge as the alternative way of approaching things.

Jill Brady: Yes, I do. It is consumer knowledge and options for them to make their own choices about how they protect themselves.

Q54 Iain Stewart: I also draw attention to my entry in the Register of Members’ Financial Interests. Our previous panel of witnesses expressed some concern that the travel insurance products would not cover a passenger for repatriation in the event of an airline going bust. On your website at the moment, when you buy your flight and hotel and then add on travel insurance, if the airline went bust-not just having to deal with an ash cloud or something-would the passenger be covered for the cost of repatriation?

Jill Brady: I do not know the answer to that. In relation to the products that we offer, largely we do not see ourselves at risk of going bust. Our products are there for other reasons such as bringing people back from skiing holidays when they have broken their ankles and those sorts of things. I do not know the answer to that. A customer would have to be aware of what they were buying their insurance for and what it covered. I am not aware of what the products cover today.

John Hanlon: At the time of the last CAA proposal to include a £1 levy on all passengers departing the UK, when that was dropped, we were asked to ensure that any insurance we offered to mitigate that decision to drop it would include scheduled airline failure insurance-SAFI. Our airlines have done that. We would be prepared to be mandated to ask customers whether they want insurance and to make them aware of what elements are not covered by insurance. That would have the merit of providing an audit trail that this customer declined to be insured. That is part of the argument we hear. They turn up at overseas consulates and claim that they thought they were insured. By making it voluntary and by requiring the airline to ask that question, you have a record of whether that customer felt the need to be insured, whether it was an insurable decision for him or whether it was a product that he considered gave him so many alternatives to get home.

Don’t forget but there are ways to get out of the failure of an airline. This very week one has failed in Spain. Four of our airlines have provided fares. They did not drop from heaven, but they provided repatriation to people at €49 to any destination that they served. Between the four of them they covered most of the network of that airline. That self-regulatory approach is so much better.

I would also like to see greater preventive regulatory oversight. If an airline fails, how did it get to the stage of being allowed to fail and not paying its dues to the Treasury for air passenger duty, not paying its fees to the airport and increasing the number of sales that are out there and the number of people who are exposed to that risk? I would like to see airlines that emit signs of financial distress being called to account on a much tighter rein by the regulatory oversight body. They should present their accounts and satisfy them that they have enough working capital. If that includes any of our members, so be it. That is protection. Most of the measures we are discussing in ATOL are mitigation after the event.

Q55 Iain Stewart: I would just press more on the point you make about people being aware of whether they are covered or not. Most of the time, if you click on yes to insurance, you will get a whole screed of terms and conditions. If most people are like me, they probably do not bother to read it, and, if you do, you probably don’t fully understand it because it is written in insurance jargon. Is there a need therefore to have a much clearer requirement that, if you are taking out insurance, you are explicitly accepting or rejecting the cover of repatriation in the event of the airline going bust?

John Hanlon: We would be open to that. A much more positive and proactive way to deal with it is to require us-mandate us-to offer that alternative and to provide a record to the regulator that we had drawn it to the attention of the consumer and required him to make that decision actively, but he must be free to make it. At a European level, the European Commission, as you probably know, considered a global rescue fund. They found that the proportion of passengers that were at risk was so infinitesimally small that it was grossly disproportionate. It was 0.07 of all air passengers over the last 10 years, of which 0.008 were away from home. It is a very small problem. They asked the insurance industry to attend a workshop in Brussels, where the findings of the consultants’ report were discussed. They said they would not undertake anything on a global scale if the industry did not have the capacity. On a voluntary basis, where the passenger opts for it, we can provide that cover. The state is attempting to do something here that the insurance industry would not take on.

Q56 Chair: If the answer is in the hands of the industry itself, why doesn’t the industry provide a comprehensive scheme so that we would not need to have this discussion?

John Hanlon: We consider that we offer a number of self-regulatory measures. I have made the case for closer regulatory oversight by the regulator. We also sell principally by credit card, which brings its own protection. It covers all transactions with a value over £100. If you are buying two tickets or for more than one person, it would be covered. That also has a cost to the consumer. They pay to use a credit card, they pay to have it and we pay a financial deposit with the processing company. Those are costs that are ultimately passed through to the consumer. He is paying to have his credit card and he is paying the cost to us of that working capital being tied up. Now we are proposing to charge him a levy on top of it.

In the event that all those measures fail, we will step in and help. We want our colleague airlines to practise rescue fares as actively as we do. To provide a global solution, the legislators have to be able to point to the general availability of rescue fares. We would suggest that that would be a reasonable thing to require the industry to do on a general scale, covering the costs of carriage and getting people home.

Q57 Chair: Mr Carrivick, can you tell us what proportion of the aviation industry provides a comprehensive scheme of the sort that Mr Hanlon is advocating?

Michael Carrivick: To be honest, Madam Chair, I have no idea whatsoever.

Q58 Chair: I ask the question because all of you are putting forward solutions of this nature. I am just inquiring whether the aviation industry itself has any comments and, if not, why not.

Michael Carrivick: We have tried in the past as an industry. When I was in another career with IATA-the International Air Transport Association-we tried to bring in a global protection scheme. Oddly enough, it met a lot of resistance among the travel trade around the world. They did not want to know about it at all.

Secondly, the clients themselves said, "We are protected by credit cards." There was a lot of consumer kick-back on this. This boils down to the fundamentals of what we are here for today. Should we be mandating protection, or should we, in a marketplace environment, be making it clear to consumers whether or not they are protected automatically and, if they are not, to give them the option?

The actual consultation document itself in the DfT highlighted the fact that some consumers do not want it, so why should they be made to pay for it? Others are paying by credit card. From an airline point of view, in many cases in this country the airlines selling holidays are selling them subject to the ATOL regime. British Airways Holidays, Virgin Holidays and Emirates, which have their own holidays, are selling as separate entities and buying into ATOL. It is very important to get the impression across that airlines are not totally exempt.

Q59 Mr Leech: Mrs Brady, you suggested that there would be issues of competitiveness if airlines were within the scheme. What is the average cost of a flight from Britain to America?

Jill Brady: There are varying flights and there are a large number. On a bad day we can make about £100 on a flight and then there will be the APD costs on top of that.

Q60 Mr Leech: I am talking about the actual cost to the consumer.

Jill Brady: That is what I am talking about. It is £100 to £150 ticket cost, and then on top of that would be the APD costs and the other duties that a passenger has to pay.

Q61 Mr Leech: When you add in all the costs, what is the average cost that someone pays?

Jill Brady: I would not know that number off the top of my head, but it would be £250 to £300.

Q62 Mr Leech: Do you think an extra £2.50 on top of that for the consumer would potentially make Virgin Atlantic uncompetitive with other airlines?

Jill Brady: We do see customers move for £1. If you look on all of the websites where people can go and compare prices, and they do, they will choose the lowest cost.

Q63 Kwasi Kwarteng: As a retailer, if you added 1% on your cost, that is quite considerable-£2.50 on £250. I was a member of the Committee and, as someone with experience of business, I appreciate that an additional 1% cost for any business is quite significant.

Jill Brady: My point was not just about the cost and competitiveness for Virgin Atlantic, though. It is also about the consumers knowing whether they are going to be covered or not and what their expectations are. What we see is that customers make choices to avoid cost. I know in my own life, were I to book car hire, I probably would not take all of the additional insurances that were offered to me. I would probably decide that I was going to self-insure for those things because I think I am a pretty good driver and the chances of me having a crash are low. There has been some proof recently that women are better drivers. I would make those choices based on my own situation. You will see that customers will do that as well in terms of how they use credit cards and how they use travel insurance.

The same would be true of this scheme. There will be operators out there trying to find a way round it, but there will also be customers out there trying to find a way round it. The Government will be left with the same situation in terms of repatriation.

Q64 Mr Leech: Mr Carrivick, you said that the new regime would be potentially confusing to consumers. Do you think consumers at the moment are not confused about whether or not they are covered?

Michael Carrivick: Yes; I said that at the very beginning. They are confused now. Reforms are necessary but the reforms as proposed add to the confusion. In our response to the DfT we set out a table of events as to why. Apart from airlines’ direct sales, which some parts of the community would love to see included, you have agents for the consumer, you have people who are buying what would be called Flight Plus but because of the time scale they are not included, and you have people paying an APC on a flight only but if the airline goes bust before they travel they get no protection. It really is totally inconsistent.

My challenge to the CAA in the past-and I repeat it now-is to put what they are proposing on an easy-to-follow flowchart in relation to two things. One is whether the consumer is protected. The second is, within the travel industry, what is your liability? Are you a principal, an agent or a middle man?

Q65 Mr Leech: Would you accept then that the least confusing option would be for the ATOL scheme to be all-encompassing, to include all flights and all holidays?

Michael Carrivick: No, I would not, for the very reason that we have stated in our response. The relationships of what you buy, where you buy and how you buy it are very complex. We have proposed that you go back to basics. There are still a lot of pre-packaged holidays around, which is how the ATOL scheme started. Make those compulsory. Anything else is not and you tell the client.

Q66 Mr Leech: Now you are confusing me. I would have thought the simplest system for the consumer would be to know that, regardless of how they have booked a holiday, a flight or a combination of the two, they are always going to be covered. Surely that is the least confusing.

Michael Carrivick: You might think so at a high level, but once you get into the detail of the forms, which we have had to, first of all consumers can end up paying two lots of APC. They pay £5 instead of £2.50. Some of them are still not covered. I sent as evidence to this Committee some of the questions and answers that arose out of the consultation. I do not think you could follow them, with respect. We found it difficult within the industry. If you cannot follow them and it is not that simple, then I do not think you have a manageable product.

Q67 Mr Leech: If a consumer knows that, whenever they book a holiday, a flight or a combination of a holiday and flight with accommodation, or whatever it is, they may pay twice-which obviously they do not want to do-but they know that they will be covered, would you accept that they cannot be confused about whether or not they are covered?

Michael Carrivick: They might not be, but how it would work in practice is subject-

Q68 Mr Leech: I am asking about the consumer.

Michael Carrivick: I know, which is what this is all about.

Q69 Chair: The point we are really putting to you is that, if that were the case, it would be clear to the consumer-to the traveller-that they were covered. It might have other effects that you do not agree with.

Michael Carrivick: If we are talking holidays, but the CAA has tried to expand the net into every type of travel purchase, including what we call flight only, i.e. a ticket to and from with nothing else attached. That has ramifications attached to it to which we simply do not subscribe. That is why I am trying to put across to you, Mr Leech, what the difficulties would be.

Q70 Mr Leech: With respect, I think you are giving a politician’s answer.

Michael Carrivick: I am representing my members.

Q71 Mr Leech: I have one last question for Mr Carrivick and Mr Hanlon. Our previous panel was talking about airline failures. They mentioned a number of airlines that have recently failed in the last few years. Have any of your members failed as airlines and gone out of business in recent years?

Michael Carrivick: Yes. If you take "recent years" as meaning the last 10 years, Swissair is probably one of the main ones. There is Sabena, I think. In all cases the industry came together through a mixture of either special fares or moneys protected in the IATA system through the BSP and/or credit card.

John Hanlon: Yes; I freely admit that SkyEurope failed. Other airlines in the ELFAA moved in, became stronger as a result of that failure and helped out the passengers who were stranded in the short term as a result of it.

Q72 Mr Leech: But would you both accept that as a result of those failures there has been financial pressure on the ATOL scheme, and therefore it would not be unreasonable to have all the airlines within the ATOL scheme so that they are paying their way?

John Hanlon: SkyEurope was a Bratislava-based airline and I do not think it imposed any burden on ATOL. I do not think the question is justified there. I agree with the summation of the ATOL arguments. They were more like, "We have a grievance. Let’s have a level playing field, and, by the way, the consumer will benefit." I summarise it, but that was crudely what I was hearing. In a way, that is extremely unfair to the large majority of consumers. We said we would take a flat rate. That is what the scheme needs. It is £40 million in deficit, so let’s say £2.50. If you are paying €20 for a fare to Europe, you are massively subsidising somebody whose total trip has a value of £5,000 or £10,000 but you are paying the same rate. It is very convenient and in our case it brings another 172 million passengers into the kitty, bails out the reserve and enables a manageable supplement for those who have higher value products. It is very crude. It can be done in the name of the consumer, but it actually traduces the interest of the majority of consumers. If you asked what the burden is of an extra £2.50, on an average fare of €30 or €39, it is considerably greater than on a fare for the transatlantic.

As parliamentarians you have a responsibility to protect consumers. We do not operate; so I am not an interested party in this. The biggest risk facing an air traveller to the United States is the risk of falling ill and having to sell his house to pay for it. Nobody is worrying about regulating that and requiring or mandating insurance to cover that eventuality, which is much more catastrophic for the people who face that. We are worrying here about how to get people back from Europe where there are a plethora of low-cost alternatives and people voluntarily offering sympathetic fares to help out. I wonder whether we are not really using a sledgehammer here to crack open a nut and over-focusing on one particular aspect of the travel experience because it has always been regulated. The biggest development in European air travel was deregulation. We are now creeping ever closer to re-regulation, which has an impact on fares.

Q73 Julian Sturdy: I want to probe a bit more on the level playing field argument made by both sides. Mr Carrivick, you mentioned that package holidays should be kept in the ATOL scheme. I think the word "compulsory" was mentioned. It has also been expressed how the industry has changed over the last decade and probably longer. We all accept that it is going to continue to change. Do you think that the ATOL scheme in its current and proposed form does deliver a level playing field? The way it is looking at the moment, it does favour airlines over the package industry. I would like to ask all three of you if you think that there is a level playing field out there, or is it, in your eyes, favouring more one side than the other?

Michael Carrivick: If there is a tilt, then it is down to the parliamentary time scale because the DfT and CAA have made it plain that they want to bring airlines in, and that is subject to primary legislation being passed. We can debate the rights and wrongs of that. In our approach to the response to the consultation, and we have said this in our evidence to you all, we said this should be looked at from the point of view of the consumer. Rather than competitiveness-some people have talked about the £2.50 element here and others have mentioned bonding, which we have not gone into-what is right and sensible for the consumer? Bear in mind that the CAA has had to fight legal battles at great cost over what a "package" is from a legal point of view. That is a major part in all of this. Therefore, it is bringing into play this time round what legal representation an intermediary has. Are they an agent? Are they an agent for the consumer? Are they the principal? It is riddled with confusion and cost, and I do not think it serves a system that has served itself very well but needs reform. These reforms are not the ones that are called for and certainly not in the haste that they are being brought in.

Jill Brady: In our response we have not commented too strongly on whether we think the original target of ATOL should be left in ATOL because the Package Travel Regulations are still in force and, therefore, it is not an option to take those out. Our view is that that has to stay as it is until those regulations are reformed. We are trying to comment on how the industry has changed since then, the complexity that there is in how consumers buy, and therefore the appropriateness of trying to stretch those regulations to cover all of these new circumstances.

John Hanlon: I do not see any unfairness. Some of our airlines do act as integrated package operators and they accept to be covered by ATOL for that part of their business. The majority of their customers prefer to construct their own packages and choose their own hotels independently. Then they buy an airline ticket off that provider. The consumer should be free to do that. We cannot restrict choice to protect incumbents that are operating to a business model of 20 or 30 years ago. It is the consumer who is driving that change.

Q74 Julian Sturdy: Given that point, more and more people are constructing their own holidays. As you say, the industry has changed dramatically over the last few years. Is it not the case that we are talking about a scheme that is really only a halfway house? We are in danger of more and more companies in the industry potentially opting out. Is it not the case that we should be looking at no ATOL scheme at all and just the basic insurance but making that absolutely clear to the public, or, on the other hand, as Mr Leech mentioned, there should be an ATOL scheme that is all-encompassing? Those are potentially the two sides we should be looking at. At the moment we are just in the middle and not going to achieve what the scheme is setting out and also be financially viable in the long term as well.

Jill Brady: There is little choice at the moment because of the Package Travel Regulations in force. What we are not talking about today is where that should be in the future, what should be protected and what consumers should expect to understand, have information about and do for themselves. Yes, if we had a blank piece of paper, I am sure that is what we would be looking at. We would be looking at the choice between something that was much more simple and easy for customers to understand and opt in and out of at their own choice, but at their own peril potentially as well, and how that applied to the different relationships that the different business models have among themselves and with the consumer. We are not in that place at the moment because there is something that has been put in place for those traditional packages. Some airlines, like mine, have companies that sell those packages and we are covered by the regulations for those. There are lots of different ways that consumers are trying to buy their travel today. The question is whether this is a suitable regime to try and stretch it to cover all of those circumstances.

Q75 Graham Stringer: Mr Hanlon, you obviously have experience all over Europe. Where is the Package Travel Directive implemented most effectively, or what is the best scheme?

John Hanlon: I would not attempt to answer that off-the-cuff. I can perhaps supply you with a written answer after the event, if that is acceptable to you.

Chair: Yes; that is absolutely fine.

Q76 Graham Stringer: That would be helpful. I want to follow up Mr Sturdy’s questions. Is it right that the conclusion you are coming to is that the ATOL scheme within the Package Travel Directive should be abolished?

John Hanlon: No; we are not objecting to it in terms of its raison d’être, which was to protect all-inclusive packages. We have members who are into that business of providing integrated packages. If the market moves away from that, and progressively it is, then I think the market should be dictating.

Q77 Chair: You are leaning that way in your comments, are you not? An ATOL tax scheme is as relevant now as it was in the past.

John Hanlon: The package holiday is an option that people opt for because it includes all elements of a package. If one element fails, they tend to lose the rest of the value of the package; so let that continue to be protected. If they have decided to construct their own holiday, exercising the choice that I think they should be free to have, it is less dependent on that. If an airline fails, they can find an alternative way of getting there and picking up the rest of their holiday arrangements.

Kwasi Kwarteng: I understand that the ATOL scheme was introduced in the 1970s. There are changes on the consumer side in regard to how the insurance market has developed and the way in which tickets are purchased. It is a completely different world, is it not?

John Hanlon: Yes.

Q78 Kwasi Kwarteng: Do you think we are doing the right thing in trying to tinker around with something that was established before there were even exchange controls? If I went to France in 1971, there was a limited amount of money that I could even take with me. Obviously, if I was stranded, that would be a completely different situation from the situation now. Do you think the right approach is to try and adapt this to modern-day conditions?

John Hanlon: I think you are putting your finger on it. Consumers in those days were exploring overseas holidays. Court Line was a big element in accelerating that. They were previously involved in domestic tourism. They began putting their foot in the Spanish market.

Q79 Chair: Looking at the present time, do you think there is a need for a different approach? Is that what you are saying?

John Hanlon: People are more experienced travellers now. Therefore, they are able to make decisions on their own about whether they feel this is a risk that requires protection and to take a more informed decision about that. I do not feel the same need, but I am not making an all-out case to abolish ATOL for integrated packages.

Chair: I think that what you are saying is clear.

Q80 Julie Hilling: I want to pick up a few different areas. Mr Hanlon, you said that there should be stricter regulation or observation-whatever the right word is-of airlines. What happens if people have already purchased tickets? If the DfT say, "This airline is not economically stable at the moment", what happens to people that have already purchased those tickets?

John Hanlon: This is something on which I have given our input to the CAA. I know they will be speaking later. I am not saying anything they have not heard out of my mouth before. The CAA does an excellent job before awarding a licence to an airline of satisfying itself of its access to capital, its backers and the extent of working capital. They grant or not the air transport licence on the strength of what they find.

The monitoring from that point on is less effective. Airlines get into difficulty, and then the emphasis in my perception is on rescuing them after they have failed. Travel agents have a nose for picking up when airlines are in difficulty, not paying their bills and they book away from them. It should be open to the regulator to know that Treasury has not been paid APD, which was the case with XL, but it still continued to sell. This is my own personal view. If it has concerns but does not want to close them down, limit the forward selling. The problem with airlines’ exposure is that you can book a ticket now and pay for it for travel in a year. If you have worries of that sort, limit them to forward bookings over a range and gradually extend that.

Q81 Julie Hilling: How would those people who had paid-

John Hanlon: They would already be out there but they would not grow in number. The concern I have about the scheme is that the big temptation for airlines or a tour operator in difficulty is to trade their way out of it, to get cash; so they slash their prices.

Julie Hilling: I hear all of that but I am just asking about the protection.

Q82 Chair: Are you saying that the airlines themselves should do that or that there should be tighter regulation on them that would enforce that?

John Hanlon: Tighter regulation. They should be called in and they should be submitting their accounts more regularly. They should be satisfying the regulator of their going concern.

Chair: Could I ask you to give answers as short as you can, just because of the time element? We have more witnesses waiting.

Q83 Julie Hilling: There would still be no protection for that person who has already purchased the tickets. That is a yes or no.

Michael Carrivick: It covers both our types of carriers and we do represent quite different parts of the airline community. Many carriers, not least on John’s airlines, would have paid by credit card. They are protected under that. We are talking pre-departure. In respect of IATA airlines, which are 99% of my membership, they are protected in two ways. It is either through credit card payment or through what is known as the Billing and Settlement Plan, where money is then put into escrow and sorted out behind the scenes.

Q84 Julie Hilling: You raise the next point I wanted to ask, which is on credit cards. What percentage of people pay by credit card? For a period you could only pay by credit card, but now of course you can pay by debit card.

Michael Carrivick: You can indeed, yes.

Q85 Julie Hilling: What is the percentage of people paying by credit card?

Michael Carrivick: That I do not know. It is just not in my purview.

Q86 Julie Hilling: There is an assumption being made that people are covered by credit cards when actually they may not be.

Michael Carrivick: If they have paid by debit card, they are certainly not; I agree with that.

Q87 Julie Hilling: And we do not know what the percentage of people is that are then not covered,

Michael Carrivick: No.

Q88 Julie Hilling: I think it was you, Mr Carrivick, but I am not sure, talked about the time limit on Flight Plus; you have to buy your package within 24 hours.

Michael Carrivick: Yes.

Q89 Julie Hilling: Are you saying it should be a longer period of time for Flight Plus to be covered?

Michael Carrivick: No. The point I was making was about the inconsistency for the consumer. The ATOL reforms as proposed are inconsistent. There are various gaps in them. If you are a consumer, you want consistency. The point I was making is that, if you request a flight and a hotel within 24 hours of either side, you are protected. You might do it a week later-and the point was made by one of the previous panellists-and that falls completely outside the ATOL regulations.

Q90 Julie Hilling: That could be covered by increasing that time limit and then making it clear to the customer.

Michael Carrivick: Possibly. The point I was making was on inconsistency. On that, I am surprised that opting in to the ATOL scheme has never been presented to the public. Just to answer that point there, it says in the consultation that, if somebody books a flight and then wanted to book a supplementary such as a hotel or something after the time limit has expired, if they want the Flight Plus they have to cancel the air ticket and rebook the whole thing all over again. First, that is a hindrance, but, secondly, the chances are that you have an air ticket that has conditions attached to it and you would have cancellation clauses. Again, it is not meeting consumer needs.

Q91 Julie Hilling: You have not convinced me as to why you should be excluded from the scheme. It seems to me there is unfairness. If it looks like a package, people think they have bought a package and therefore think they are protected.

Michael Carrivick: We are talking holidays here. That is the phrase that has been used, whatever "holidays" may mean in DfT parlance. I do not know what the consultation is going to say. Many of our members have said they already sell holidays from separate legal entities. Virgin Holidays, British Airways Holidays, Emirates and other airlines do the same. It is not all of them, I grant you. They already sell holidays under ATOL as part of that separate legal entity, so in many cases holidays through airlines are protected.

Jill Brady: It is a question of whether the customer feels that they need to have that protection. It would be very possible for customers today to go to those places where they did see the ATOL badge and to buy a holiday there, but often they choose not to do that. That is possibly because they are not that concerned about whether they are covered or not.

Q92 Julie Hilling: Do you accept that a lot of people would think they are covered because they have bought a package and are not?

Jill Brady: I am not sure about that, no. I am not sure that they are.

Chair: We must end there. Thank you very much indeed for answering our questions.

Examination of Witnesses

Witnesses: Dame Deirdre Hutton, Chair, Civil Aviation Authority, and Richard Jackson, Group Director, Consumer Protection Group, Civil Aviation Authority, gave evidence.

Q93 Chair: Good morning and welcome to the Transport Select Committee. I apologise for keeping you waiting. As I am sure you have heard, we were listening to a lot of very interesting and relevant evidence. First, please could I have your name and organisation for our records?

Dame Deirdre Hutton: I am Deirdre Hutton, Civil Aviation Authority.

Richard Jackson: Richard Jackson, Civil Aviation Authority and specifically Group Director, Consumer Protection.

Q94 Chair: First of all, could you tell us what evidence there is that the consumer-the traveller-wants or needs the changes that you are proposing?

Dame Deirdre Hutton: We are in a position, as you have heard, where the whole business of ATOL protection has become extraordinarily complex. We have, as has also been pointed out, repatriated many people. There have been something like 100,000 repatriations over the last three years. We find that people often have no idea that they are not covered. If you take, for example, XL, there were people who had identical holidays where one was covered and the other was not.

The public place a lot of faith in ATOL. It has really quite an enviable brand recognition. In that sense it is a very considerable advantage to the travel industry. The position of complexity that we have got to is very unsatisfactory for the customer.

Q95 Chair: We have been told that the use of credit cards and consumers having a personal choice on taking out insurance would deal with the problem. What is wrong with that as a solution?

Dame Deirdre Hutton: Several things. There was one slightly flippant answer to that. Given how much is usually charged for credit cards now, if you pay by credit card, as an add-on extra, probably the £2.50 contribution to the Air Travel Trust Fund looks like quite good value. In point of fact, we are obliged by EU regulations to have a scheme in place for package holidays. The Government have chosen to implement that through ATOL, which, as you have heard, has worked pretty well up until the last decade. We believe that you can sort out some of the problems of confusion and the gaps in the coverage through the secondary and the DfT’s proposals for primary legislative changes.

Q96 Chair: Isn’t ATOL just outdated if you look at the changing market for holidays, the wider scope of consumer choice and more information available?

Dame Deirdre Hutton: You are completely right that packages, as defined in the directive, are rather outdated in terms of the way people are now buying holidays. People buy one bit and it is dynamic packaging. They buy through the internet. You are completely right. As other witnesses have said, this has not kept up with the way people now buy holidays. I do not necessarily believe that that rules out the concept of ATOL. What it does mean is that it needs to be brought up to date. We believe, as I have said, that the proposals that are going to do that will solve many of the related problems not just for customer understanding but also for the costs that fall subsequently on the Air Travel Trust Fund to bring people home.

Richard Jackson: With ATOL, you have to distinguish the scope of who is covered and then the funding. Quite a lot of people get those two confused. There has undoubtedly, as my Chair has said, been a big evolution in how people buy holidays. Everyone is agreed that ATOL works well even in today’s world for packages. The question is what you do about the dynamic packages. This is where there are intermediaries, who, in this country under the law as we have been given it by the Court of Appeal, can do that as agents so that there is no protection. Then there are people buying holidays themselves and putting them together on the web. We are not talking about those at all. We are looking at where there are intermediaries.

If you look around Europe, and broadly northern Europe because they are the people who go on holidays, Sweden and Holland interpret the Package Travel Regulations with the consent of their industry to say it covers packages and dynamic packages where there is an intermediary. The effect of Flight Plus is to bring us into line with that because we do not have that consensus at the moment. The law does not say dynamic packages are packages.

Q97 Chair: Can better regulation of the industry solve the problem? If a company is not viable, should they be prevented from trading? Is that not a better way of looking at the problem?

Dame Deirdre Hutton: There is always a conflict between letting a wide range of varied people into the industry to provide a wide range of varying holidays at varying costs and keeping out absolutely everybody that you think might go bust. Part of the job we have is to find a balance between those two. We take a lot of care when people are starting. We require to see their accounts. We require them to have bonds in the initial stages to make sure they are viable. We continue to monitor people. Richard will give you the detail of that. It is one of the truths of being a regulator that, if you are looking at the accounts of an airline or travel company because you are not quite sure whether they are doing very well at the time, you certainly do not make that public because you would then create precisely the uncertainty for that company that you are trying to avoid. We do have a strong process of regulation and monitoring of companies. In a free market, we are never going to get to the position where companies do not go bust because it means you would be so cautious about letting companies into the business that it would be very restrictive.

Q98 Chair: Why would new companies have to pay a bond as well as paying a levy? It has been put to us that the new proposals would be a bar on new entrants to the market.

Richard Jackson: The bond they have to provide is £40,000, reducing by £10,000 a year. The reason for that is very much because the existing industry that has paid into the fund thinks it is very unfair that a new entrant can come in, effectively using customer money as their capital, and not put anything in themselves which puts them on the hook. It is seen as a means of giving a stake in the success of that new business to the owner/managers.

Q99 Iain Stewart: In both their written and oral evidence Virgin Atlantic made the point that, with dynamic packages, Flight Plus, you would not be covered if you booked with a non-UK airline. Is that a fair point?

Richard Jackson: I do not think that is necessarily the case. You have to draw a distinction between the EU, where there are European regulations, and then the rest of the world. I do not think we can produce UK rules that conflict with European rules or where European law governs. Outside that an example was given, for instance, of Emirates. Foreign airlines can be caught.

Q100 Iain Stewart: Is there a reciprocal arrangement? Say I have booked a flight and hotel with Lufthansa. Would I be covered by whatever system they have in Germany and ditto with Emirates with whatever system they have there?

Richard Jackson: If you booked in the UK, the people who are offering you-let’s call it-a "package" for simplicity, because everyone agrees that the rules cover that now, you should have an ATOL or you should be an airline protecting your package either, as a number of them do, through an ATOL subsidiary or through your own arrangements.

Q101 Iain Stewart: I am more confused now than I was.

Richard Jackson: That is the answer. I am not saying it is not confusing.

Q102 Mr Leech: I am seeking some clarification on the issue of the bond. Am I right in thinking that all new entrants would be expected to pay the same amount regardless of the size of company and regardless of the relative risk of failure?

Richard Jackson: Yes; that is true of new entrants now. If Flight Plus comes in, then we would obviously look at the trading record of the company and so on. That would be a different issue. In their cases we would look at some of the other techniques we have for ensuring that consumer money is protected. For instance, we would use things like trust accounts and so on. That would be taken into account as to whether we would require a bond or not. If you are a typical new entrant, it is £40,000 to start with, yes.

Q103 Mr Leech: Then it goes down by £10,000 a year.

Richard Jackson: Each year, yes.

Q104 Mr Leech: It was suggested by our first set of witnesses that the ATOL scheme had effectively paid for certain airline failure. I put this to the second set of witnesses but I did not really get the answer that I was looking for. Is it fair that airlines can be kept out of this system but then potentially be a massive drain on resources when they fail?

Dame Deirdre Hutton: I will just kick off on that and then I will let Richard answer. It is also important to say that a number of airlines, and Virgin is one of them, have subsidiary companies for their package holidays or whatever we are calling holidays in order to operate through an ATOL. A number of the airlines in their holiday business are already covered by ATOL.

Richard Jackson: The problem for us in terms of managing the fund is that we have ATOL holders that can book flights with anyone and they can sell those flights on to people who package. If that airline fails, it should not affect us. The ATOL holder is responsible for rebooking the flights. But if the nature of the contract, which has recently been the case, has been that the cash seems to be swept out of the ATOL holder before the airline fails, so the ATOL holder fails, then your analysis is right and that airline is causing the ATOL fund to be depleted. Two examples of that were Goldtrail and Flight Options.

Q105 Mr Leech: On that basis I ask my question again. Is it fair that they are not in the system?

Richard Jackson: "Fair" is more your area of judgment than mine. Is there a case that says airlines should be contributing? Yes, if you take that view. What we are trying to do as our part of ATOL reform is to find some way of restricting those claims arising, not by depriving the consumer of protection but ensuring that ATOL-holding intermediaries dealing with airlines, which quite often we do not see at all and are not even EU airlines where we would have some oversight, have limited exposure to that sort of event.

Q106 Mr Leech: It strikes me that the people who are objecting to airlines being included are the airlines that then potentially might be the airlines that cause the ATOL system to be in deficit.

Richard Jackson: There is an argument that way.

Q107 Chair: Would you say Mr Leech’s description is a correct assessment of the current situation?

Dame Deirdre Hutton: You heard the witnesses. There is a view that probably the travel industry is largely in favour of the reform of ATOL and sees ATOL as a benefit to them, particularly in terms of the branding of ATOL. The airlines would rather not. I think it was clear from your witnesses.

Q108 Mr Leech: It was suggested-I cannot remember who mentioned it now-that the reason why we were not doing it all in one go and dealing with airlines was because there was not parliamentary time. If there was parliamentary time, would the CAA like to see airlines brought into the scheme and have an all-encompassing scheme so that we can get away from all the worry about whether or not someone is covered or not covered, because everybody would be covered?

Dame Deirdre Hutton: We are very much in favour of airline holidays being brought into the scheme, yes.

Q109 Mr Leech: That is not what I said. That is not the question I asked.

Dame Deirdre Hutton: When I first joined the CAA two years ago, one of the things I asked for was a plain English version of who was covered and who was not. It was not possible to provide it.

Q110 Mr Leech: No one has actually defined exactly what a holiday is. If I book a flight and I take a tent with me, I would like to think that I have booked a holiday. I do not require any accommodation because I have a tent with me. What I am suggesting is an all-encompassing scheme that includes flight only, flight with accommodation, flight with car hire, flight with campervan hire or whatever it might be. Would it be the view of the CAA that it would be sensible, if there is parliamentary time, to have an all-encompassing scheme that involves everything? That means in all circumstances, whether it is a flight or a flight and accommodation, they are covered?

Dame Deirdre Hutton: I find it very difficult to give you an off-the-cuff answer because we would have to look at the economics of it and precisely what it would mean. I am very clear that there is a separation between the businessman buying his flight to New York and back and the person who is buying a holiday from Virgin Atlantic, where they are using Virgin Atlantic to go on a holiday in America. We would very much like to see airline holidays brought in. I think seat only on airlines is a different question. I personally do not at the moment have a view on that.

Q111 Mr Leech: I am slightly alarmed that we are proposing secondary legislation on something that the CAA does not have a view on.

Dame Deirdre Hutton: We do have a view on the things that secondary legislation is proposed for.

Q112 Mr Leech: But a decision has been made, whether it is to do with parliamentary time or not really wanting airlines to be involved, that secondary legislation will be introduced that does not include flight only options. I am concerned that there has not been a discussion with the CAA about the appropriateness of bringing in the secondary legislation as opposed to primary legislation that might be all-encompassing, including flight only options.

Dame Deirdre Hutton: I am going to pass it over to Richard because I was not at the CAA at the time that it was discussed. There was a proposal a few years ago, as I understand it, to have flight only.

Q113 Chair: Mr Jackson, can you tell us about the proposal for flight only?

Richard Jackson: Yes. It was back in 2005. We put a proposal to the DfT and the then Government that all flights should be covered and there should be a blanket £1 for any passenger leaving the UK. That was turned down. In a sense that left us having to think again about how to deal with the evolution in the market, which is why we are where we are.

One of the problems we have is that, under the current European regulations covering aviation, we would not be able to have a UK scheme covering seat-only of airlines. In the sense that we do not have a view, that is because it is not in our purview at the moment. What we are concentrating on and where we support the DfT is that step one is to bring in the travel business that is dynamic packaging. As I say, that is pretty consistent with northern Europe. The next stage, which does require primary legislation, is to bring in airline holidays. The fact is that quite a few airlines already do. They have a licence for about a million passengers: Jet2, BA and Virgin. To the extent the rest of the industry dynamically packages as well, bring that in. We think that means the basic holidaymaker-the person who goes along to buy a holiday, which is defined as a flight plus accommodation or car hire, but not a tent, I am afraid, because that is what we think the basic holiday is-becomes effectively Flight Plus and therefore is covered by the ATOL regulations.

Q114 Mr Leech: In 2005 the view of the CAA was that airlines should be included. The option that is being taken forward is different. What circumstances are different from 2005 to 2012 that mean we have a different proposal than we did in 2005?

Richard Jackson: The Air Services Regulation. It is a European regulation on aviation that would now deal with an all-flights proposal under European law, not a national law.

Q115 Mr Leech: That is the single difference between then and now.

Richard Jackson: There is certainly further evidence of failures. John Hanlon loves quoting 0.08% and so on. There is further evidence on the economic case that we would want to consider if we were putting a proposal together now.

Q116 Chair: How many more holidays would be covered under the current proposals than there are now?

Richard Jackson: We were quoted 4 million to 6 million. We are reasonably comfortable with those figures because, in a sense, no one knows because no one wants to declare what they are doing at the moment because they might or might not be challenged on that. The sorts of discussions we are having with current ATOL holders that do some ATOL package business and then a lot of dynamic packaging give us a reasonable degree of comfort that that is the right sort of ballpark.

Dame Deirdre Hutton: The other way of looking at it is that about 50% of those who are now travelling are covered. Is that correct, Richard?

Richard Jackson: Yes.

Q117 Chair: Could you repeat that? What percentage?

Dame Deirdre Hutton: Only 50% of those who are travelling on holidays who would normally probably think they are covered are covered.

Q118 Chair: How many would be under these changes?

Dame Deirdre Hutton: If the proposals for the secondary legislation and then the DfT’s proposals for primary legislation go through, then I think the majority would be covered.

Richard Jackson: Yes, except for those who choose to do it themselves, who would not be covered. If someone wants to book their easyJet flight and their hotel-

Q119 Chair: So most people would be covered.

Dame Deirdre Hutton: Yes.

Q120 Chair: What is the percentage under the secondary legislation?

Richard Jackson: About 4 million to 6 million. These are estimates because no one knows.

Q121 Chair: These are extra holidays that would be covered.

Richard Jackson: Yes.

Q122 Chair: It is planned to implement these changes in April. Do you think the industry is ready to do that?

Richard Jackson: I think it will be very difficult for the industry to do it because they cannot move finally until the final regulations are published. DfT is promising those fairly soon. There was reference to a staged implementation and so on. From the point of view of the regulator, the DfT and the industry, there will be a sensible implementation phase. I would be very surprised if everything came in at the beginning of April. The industry would be ready to move fairly soon after that. Mark Tanzer talked about the end of April. Things which require changes to systems-and there was quite a lot of emphasis on the difficulty of changing your IT systems-could wait until 1 October.

Q123 Graham Stringer: You have obviously tried to look at how to make the current scheme better and better understood. Have you looked at how other European countries approach the implementation of the European Package Travel Directive? Is there anything to be learned from those other countries? Are there any countries doing it better than us?

Dame Deirdre Hutton: As you have heard already, there is a vast variety across Europe. Richard has some details for you.

Richard Jackson: It is fair to say that package travel is something that interests northern Europe because they go on holidays. Southern Europe stays where they are for holidays. We have more in common probably with Sweden than anyone else because Swedes tend to fly a lot. The Dutch do a lot of driving. Those are the sort of analogous ones. Ireland is pretty similar to us. They effectively adopted our system.

Q124 Graham Stringer: Ireland has an ATOL system, does it?

Richard Jackson: Yes; they have a very similar system to ATOL. If we look at scope and funding, they are two distinct issues and you need to keep them clear. Everyone does a Package Travel Directive in northern Europe. They define it as tour operators typically, which again is using the language of package travel. In Germany, the scope is that, if you think you are selling something that might or might not be a package, you are required to get legal advice. That clearly distinguishes those who are selling packages and the more common dynamic packages now. As I said, the Dutch and the Swedes treat dynamic packages as packages and there is a general consensus that that is the case.

On the funding side, typically it is bonds. Sometimes it is a fund to cover where bonds are insufficient. Sometimes there is even insurance on top of that. The Swedes and the Germans at the moment use insurance. In Germany your insurance certificate hangs on your wall. The liability of that insurer is capped to about £75 million because they have trouble getting reinsurance. In Sweden there are similar sort of arrangements. There is quite a strong lobby in Sweden at the moment saying, "We want to get rid of these insurance bonds and we would like to have a consumer levy and a fund." That is largely because, of course, the price of insurance has got considerably higher over the last few years and capacity can be hard.

We do talk to our opposite numbers a lot. All of us collectively say that everyone seems to be happy. Within Europe you could move your business somewhere else. If someone was offering a really cheap way of meeting the Package Travel Directive, business would migrate there. It has not; so we tend to think that we must be all broadly the same order of cost, otherwise regulatory arbitrage would take place.

Q125 Graham Stringer: We were told in one of the previous evidence sessions that the Italians do not bother implementing this directive at all. What would be the minimum that this country could do if it wanted to minimise the details of the implementation of that package? What lies behind that question, with the evidence coming from previous witnesses, is that having a regulated scheme that repatriates people is very 1970s and not the 21st century. If we wanted to remain within European law, what is the minimum we could do?

Richard Jackson: Just looking at financial protection issues and not at all the other elements of the Package Travel Directive such as health and safety and so on, you are required to have evidence of your ability to refund people who do not travel because you go bust and to repatriate them. The minimum solution is therefore evidence of ability to refund and to repatriate, which I think could probably be interpreted on a minimalist basis as having a pot of money set aside to pay for that-that is you would not necessarily have to physically arrange it for them. That is probably the minimalist approach.

To the extent that you do not get all the money back to people-for example, in the German system it is pro rata if there is not enough money to go round-that is being challenged in the European courts at the moment. Subject to whatever challenge there might be in a European court, that would be the minimalist Package Travel Directive solution. Whether that would be the case in x years’ time when that Package Travel Directive is reviewed-and it has been promised to be reviewed for the last five years but they might get around to it at the end of this year-certainly the intention there is to do something about dynamic packaging across Europe. As I say, the Swedes and the Dutch treat it as a package at the moment. Certainly this industry tends to support that view. My answer is also qualified by the fact that the Package Travel Directive might change in three or four years’ time.

Q126 Graham Stringer: This brings me to a point I have asked other witnesses. If the European law is going to change, would it not be sensible to wait for that to change rather than using secondary legislation to modify the scheme now, and, for that matter, to take powers in the CAA Bill that is going into Committee in a couple of weeks’ time.

Dame Deirdre Hutton: I do not think so. The position we have at the moment is profoundly unsatisfactory, both from the perspective of consumers who do not appreciate whether they are covered or not but also from the perspective of public funds, the Air Travel Trust Fund, which, as you have already heard, is in deficit and which relates absolutely back to the fact that a smaller number of consumers are covered than was previously the case.

Q127 Graham Stringer: Is the deficit in the fund the real driver of this? If there was not that deficit, would we wait for the European legislation?

Dame Deirdre Hutton: No, I do not think so. I think there are genuinely two drivers. Whatever way you look at the regulation, it seems to me profoundly unsatisfactory. First of all, it is extraordinarily difficult for us to describe who is covered and who is not covered. Secondly, it is even more difficult for consumers to know whether they are or not. There is nothing that brings regulation into disrepute so quickly as that rather chaotic position. "Chaotic" is a rather strong word. If you have those two drivers on the one hand and on the other hand you have a European package where, as Richard says, they have been talking about amending this package for five years, even if they were to start at the end of this year, it is still going to be another several years before it actually happens. I do not think the position we have is sustainable for another five years.

Q128 Chair: The airlines are very critical of these proposals. Is it going to be possible to get consensus in the travel industry?

Dame Deirdre Hutton: On the basis of this morning’s evidence I would doubt it. I think that the travel industry is very much behind these proposals and pretty keen for us and the Government to get on with it. The airlines are different. They have not been part of this before and there is a natural reluctance to want to be brought into it. The low-cost airline model is probably very focused on keeping its costs down. I suspect that consensus between all parts of the aviation industry is probably unlikely to be achieved.

Q129 Chair: Will it be possible for the airlines to opt in to ATOL so that they could decide? Is that a possibility?

Richard Jackson: Yes. We do have airlines that have subsidiary holiday companies that have ATOLs. If you want to be an airline selling holidays, you can set yourself up to do that. If it is voluntary, it is quite difficult for us as a regulator because, if they have a voluntary ATOL, misbehave under it and we come along and take their ATOL away, they can still keep doing the business because of their operating licence. We prefer them to set up their subsidiary at the moment.

Dame Deirdre Hutton: If I can just come back to the contribution, if this was a fully privatised insurance scheme, an insurance company would put up the contribution in order to match the liabilities. For us, the contribution of £2.50 is established by Parliament and has to cover all the costs regardless of how many people are paying it. We do not have the flexibility to boost the Air Travel Trust Fund by increasing the contributions that are made. I am sure that, were it a fully privatised system, that would have happened by now.

Q130 Chair: Can you quantify the drain or the cost on the fund from operators who are not in the ATOL scheme?

Dame Deirdre Hutton: I am not sure.

Q131 Chair: Could you send us some information on that?

Richard Jackson: Yes, we could certainly do that.

Chair: It would be helpful if you could send us that. Thank you very much for coming.