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The Price of Protection - Thoughts on the CAA ATOL Consultation

Updated: Jan 25, 2022

Last week, the CAA entered into a major, and many would say long overdue, consultation on the future of ATOL. This news will most likely come as no surprise to anyone in the travel industry. The failures of Monarch and Thomas Cook, followed by the COVID pandemic have made it impossible for the CAA to avoid making changes.


Refund issues have stalked travel businesses throughout the pandemic. The drip drip of stories detailing unpaid refunds, cancellation fees and court battles have done nothing for the industry’s reputation (the comments sections of such articles make customer sentiment abundantly clear). Fundamentally, the crisis has exposed the extent to which tour operators of all sizes have been dependent on customer monies for future holidays as a source of working capital. Understandably the CAA is concerned.


So, what are the proposed solutions? Throughout the 46 page consultation document, the CAA makes no secret of the fact that its objective is to ‘encourage and incentivise’ companies to rely less on customer prepayments. There is a distinct impression that this ‘encouragement’ will involve rather more stick than carrot. Essentially, the CAA considers two areas in detail:

  • The segregation or partial segregation of customer monies through a push towards trust account type arrangements or a hybrid of trust accounts and bonding.

  • Individualised pricing of the APC to more accurately reflect consumer risk. APC charges might move to reflect the value of the holiday being sold or the perceived risk of the operating business.

Pipeline monies, i.e. funds held by an agent post booking, are also being looked at. Tour operators are currently exposed to agent failures as they may be obliged to provide travel arrangements where they have not received payments.


There is an interplay between these areas. For example, it is proposed that businesses which entirely ringfence deposits may pay a lower APC charge than those opting to only partially segregate - reflecting the differing risk to consumers.


Beyond the CAA, merchant services providers and insurers are also reacting to the increased liabilities associated with international travel. Naturally, these providers are keen to screw their risk into the ground and many merchant services providers are pushing companies towards a trust account model anyway. All in all travel businesses look likely to carry an even greater burden of responsibility.


The CAA proposal is, of course, a consultation, and ATOL holders are being invited to contribute. It must be hoped that the industry can impress upon the CAA the fact that many business models, contractual arrangements and payment terms are involved and complex.


I am by no means dismissing the rights of consumers - indeed it is paramount that the industry rebuilds customer confidence post-COVID. However, not everything can be reduced to an ‘us vs them’ narrative of consumer champions and unscrupulous businesses.


Instant outrage may generate clicks, but the challenge for travel is to convey the intricacies of a supply chain which may involve airlines, multiple currencies, and varying sets of international business practices and banking regulations. It is inescapable that, for some tour operators, fulfilling holidays involves significant upfront costs. If no customer money can be used in advance of a holiday then cash requirements for such businesses would change significantly.


This all comes at a time when, for many travel businesses, cash reserves have never been lower. This fact, and the potential impact of these changes is acknowledged by the CAA, albeit in rather vague terms with a reference to an “appropriate implementation timetable” - appropriate for whom and for what one might ask.


We must remember that the driver for the CAA is always going to be consumer protection rather than facilitating an industry. If I was a cynic, I might ask if these proposals are necessary because the CAA have failed to adequately assess risks and their exposure in the past. Looking at the bigger picture, the key question is whether these changes will result in the wholesale improvements for consumers which are in all our interests … or will there be unintended consequences?


One can see multiple small operators considering carefully whether they wish to continue offering flights, or potentially seeking to unpackage entirely. Consumer awareness of protection has never been great and it could become even murkier. Furthermore, segregation, increased APC charges and higher bonding requirements will inevitably deter new entrants to the industry - potentially leading to decreased innovation and competition.


There is currently an appetite from investors for travel, but how many will be keen to fund working capital as well as or instead of investment in innovation and growth? It could limit the options available.


Whatever the eventual outcome of the CAA consultation, it is clear that travel firms are going to need support and advice. Many may need to make significant changes to their current models, (re)financing and cash flow forecasting.


Here at Firebird we will certainly be advising clients to prepare now and work with us to formulate a strategy which can be put into action - potentially even before any regulatory changes come into force.


To quote Darwin:

It is not the strongest of the species that survive, not the most intelligent, but the one most responsive to change.
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