UK: Aerospace Regulation: Future of Financial Protection

Last Updated: 1 October 2004
Article by Sue Barham

In July 2004, the UK Civil Aviation Authority published its advice to HM Government following a year-long consultation process relating to financial protection of air travellers and package holidaymakers. (We reported on this consultation in Issue 14 of BLG Aerospace News.)

Financial protection is currently available for certain travel arrangements through a patchwork of legislation and regulation. However, changing patterns in the manner in which the travelling public purchase their holidays – not least the widespread availability of cheap flights bought direct from low cost carriers, together with the increasing proportion of travel arrangements booked over the Internet – has resulted in an erosion of the proportion of holidays for which there is any measure of financial protection in place to provide reimbursement or repatriation in the event of insolvency of the holiday provider.

Broadly, financial security – commonly in the form of bonding – protects consumers if they buy an air ticket (whether on its own or as part of other holiday arrangements) through an ATOL (air travel organiser’s licence) holder or if they buy a "package" which falls within the Package Travel Regulations, Package Holidays and Package Tours Regulations 1992, i.e. a pre-arranged combination of two or more of transport, accommodation and other services sold at an inclusive price. However, with the growing tendency for consumers to book the various elements of their holidays direct with each service provider, there is an increasing proportion of travel which is not protected at all, save potentially where a credit card has been used for the purchase and a claim lies against the credit card company in the event that things go wrong, although even that remedy has been under some threat from EU legislation.

To put the scale of the issue in context, a survey summarised in the CAA’s advice paper indicates that in 1997 the proportion of ex-UK international leisure passengers protected by ATOL was 98%. The comparable percentage in 2003 had fallen to 70%. Further, from 1997 to 2003, it is estimated that ex-UK international leisure flights and holidays increased by 17.4 million or 79%. In the same period ATOL coverage increased by only 6.4 million or 30%. This suggests that in excess of an additional 11 million holidays not covered by ATOL were taken in 2003 compared to 1996.

With changing patterns in the way people buy their travel arrangements, the CAA has concluded that consumer legislation, originally aimed at providing financial protection for the majority of holidays and leisure travel, is no longer doing its job and therefore recommends significant expansion of the scope of financial protection. If adopted, the CAA’s proposals would change the law to require financial protection for all UK-originating international flights (i.e. whether of UK or overseas carriers) sold by airlines where payment is made in advance. Therefore for the first time there would be a requirement for scheduled airlines operating from the UK to have bonding or to establish some other form of financial security for their passengers. The CAA also proposes that financial protection would be required for holiday arrangements whereby the company selling the flight facilitates the sale of other holiday components, such as hotel accommodation or car hire, through, for example, linked websites. At present, the latter arrangements, provided they are structured appropriately, escape the application of the Package Travel Regulations 1992, including the obligation contained in those regulations for the establishment of adequate financial security to provide reimbursement and repatriation in the event of insolvency of the travel organiser.

In terms of legislative change, we are at the preliminary stages. The CAA expressly favours a Europe-wide approach to the issue of financial protection via new EU legislation; bonding for scheduled airlines is an issue currently being explored at EU level. The CAA does not however rule out the possibility of domestic legislation or voluntary measures in advance of any EU initiative in order to tackle what it regards as an urgent consumer protection issue. In the event of legislation, whether EU or UK, difficult questions will arise as to the funding of extended financial protection. One possibility mooted by the CAA is for a levy of £2 per passenger in order to build up a common fund to be generally available to meet the cost of tour operator or airline failure. If that route was to be adopted, some interim measures would still be required as it would be likely to take a considerable period of time to build up a fund large enough to cope with a major failure.

There is clearly a detailed debate to be had on these issues as well as the need for an assessment of the economic impact upon the industry of the changes advocated by the CAA. Opposition can be expected from a number of quarters to the idea of bonding for scheduled airlines and questions as to the justification for yet further regulation of a hard-pressed industry are likely to be raised by low cost carriers and others.

However, with the principle of financial protection for air travellers and holidaymakers firmly established, both in UK and EU law, it seems inevitable that the legislative net will ultimately be cast wider. The timetable may be uncertain but one suspects that the current impetus would become unstoppable in the event of insolvency of a major European low-cost carrier whilst holding thousands of unprotected bookings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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