What the APC increase means for the industry

The travel trade is understandably not happy about the coming rise in the cost of consumer financial protection. It feels it has been sold a pup. The CAA will consult on an increase in the £1 ATOL Protection Contribution – so-called because the government shied from identifying it as a duty on holidays – in…

The travel trade is understandably not happy about the coming rise in the cost of consumer financial protection. It feels it has been sold a pup.

The CAA will consult on an increase in the £1 ATOL Protection Contribution – so-called because the government shied from identifying it as a duty on holidays – in the second half of March, and secretary of state Geoff Hoon will announce his decision in the summer.

A two-stage change in rate is likely – a sharply higher levy for perhaps 18 months followed by a reduction, but maybe not to £1.

It must be maddening. The levy was supposed to be fixed for three years from its introduction last April. The financial modelling in 2007 allowed for a major company collapse and a recession in combination – they do generally occur together – so why should the failure of XL Leisure in September necessitate an increase?

The reality is the present situation was not foreseen. Consider that the larger MyTravel group could be prevented from collapse in autumn 2002 while XL could not even be nursed through to November when few people would have been away and the cost of failure considerably less. Quite simply, there was no bank to step in to keep XL flying.

The world has changed. All forecasts and financial models have been irrelevant since September-October. The financial meltdown, the near collapse of high-street banking and the deepening recession have not just moved the goal posts. The pitch has shifted. The stadium could close.

Of course, the problem is not of the trade’s making and the industry could do without the uncertainty and added price pressure that, combined with rising unemployment, threatens to depress demand or make rival, unprotected holiday offers more attractive.

But let’s be clear on one point. The confusion, disorder and under-funding of consumer protection are not due to developments in technology. This is a common assumption, repeated this week by a senior PricewaterhouseCoopers analyst who spoke of “a massive, dynamic structural shift [in the industry] driven by technology”. That shift has no more been driven by technology than cars drive people. Rather, technology facilitated a drive by businesses seeking profits from bypassing the cost and risk attached to selling ATOL-protected holidays – i.e. VAT, in the form of the Tour Operator Margin Scheme, and the liability of acting as a principal.

Is there an alternative to a rising levy? Some in the trade tout a repatriation-only ATOL scheme – essentially a return to holiday protection as conceived before the collapse of Court Line in 1974. Even if that were desirable, it would be difficult to reconcile with the Package Travel Regulations without tour operators putting alternative arrangements in place to reimburse customers. In any case, ABTA has ruled it out.

Instead, ABTA and the Federation of Tour Operators propose widening ATOL protection and thereby increasing the funds available without raising the levy. As Thomas Cook group director and ABTA board member John de Vial noted this week: “If ATOL numbers are down to 20 million out of a [holiday] market that is 45 million, there is an awful lot going on that should be part of the ATOL system.”

Details of the proposal are sketchy, but it would involve de-coupling the ATOL regulations and Package Travel Regulations so that holding an ATOL did not bring with it the additional costs and liability of being a package tour organiser. The FTO’s Andy Cooper calls it the “flight-plus” option – not a package holiday, but a flight plus one or more travel services bought at the same time.

It might work, but what would it require of the government? Which department would be responsible – Transport or the Department for Business, Enterprise and Regulatory Reform – and would the change require primary or secondary legislation? If a legislative change could be added to the Civil Aviation Bill already on parliament’s agenda, could this find its way through the house this side of a general election?

The CAA says the DfT is keen to know “where the trade wants consumer financial protection to go” after the XL failure. But does the government really consider it pressing to look again at the funding of holidaymakers’ financial protection against a background of bank bail-outs and a contracting economy, particularly when the XL rescue operation worked so well? And can anything much be accomplished before October when APC is set to rise anyway?

Might a threat to withdraw from the ATOL scheme make a difference or would it more likely damage the industry? Would it be feasible, in any case, to have credit-insurance funding of financial protection in place by the autumn – and would that be cheaper than a revised APC in the current bond market?

The best way through this mess appears to be to widen ATOL participation in the medium term while stomaching an APC rise for now and awaiting what the judges make of the CAA’s case against Travel Republic.

However, it is worth noting there is no guarantee the ABTA flight-plus proposal would settle matters. What is to stop Revenue and Customs seeking VAT on a flight-plus sale? And what is to prevent a court finding favour with a consumer’s claim for redress from a retailer offering flight-plus holidays?

More information:

* Agents attack CAA over APC move (Travel Weekly)
* Trade opposes APC rises (Travel Weekl)
* ABTA working on counter proposal over ATOL (Travel Weekly)