Government scheme must be backed by cash pledge

Comment by Jeremy Skidmore

The plan to replace the outdated air travel organiser’s licensing (ATOL) bonds is a step in the right direction but we need Government assurances on key issues if this is not to be another wasted opportunity.

I’m sure I don’t need to remind you that last month the Government rejected an across-the-board consumer levy, or around £1, for all air travellers. The issue was thrown out for reasons you won’t read about: it wasn’t seen as vote winner and it would antagonise the airlines. The latter was always going to be a sticking point for ministers who enjoy their upgrades.

However, it now appears package operators will be able to repalace burdensome bonds, which cost them a fortune, with a consumer levy. This is a welcome move because the cost of protection for even a small operator can be as high as £50,000.

Secondly, the new system will be a single per-customer transparent levy to build up a fund. This is further good news, because it means that holidaymakers will see it on their invoice and know they have bought financial protection. Also, tour operators will not be able to gain a competitive advantage by offering to include the fee in the cost of a package.

So far, so good. But if we are going to move to this new system within the next six months, as stated, it is absolutely vital that the Government underwrites the scheme until a substantial fund is built up.

The Air Travel Trust Fund is around £10 million in debt, so if you switch to a consumer levy overnight without a safety net, what happens if there’s a substantial failure? To protect holidaymakers, you would need to have an interim period – perhaps of several years – of both a levy and bonding until sufficient money is in the fund. That would be the worst of both worlds.

Also, by focussing only on atol holders, it will take many years to build up a fund of around £250 million (a figure that many experts have said is a sensible ceiling). Part of the thinking behind this scheme is to reduce the burden on operators, but if they have to continue bonding during this transitional period, many will go to the wall. Either that or they will restructure their businesses to try to get around the atol rules and consequently leave many more holidaymakers exposed.

There’s another consideration in all this, too. Underwriters tend to prop up failing companies and allow them to limp along until we hit the quiet shoulder season, when the call on the bond is relatively small. Financially stable operators hate this practice because it allows the failing company to take peak-season bookings that others could have had. Also, like US airlines that hide behind Chapter 11 bankruptcy, these insolvent operators trash the market by cutting prices to try to get some cash into the business before it folds. Under a new levy system, that wouldn’t happen. An operator that could not pay its bills in July or August would fail, which might lead to a huge call on the new fund.

This levy is a step in the right direction, but as the Civil Aviation Authority points out in its press release, there are plenty of issues to iron out.

What’s your view?