Even ABTA chief executive Mark Tanzer admits that the industry is in a state of disarray over consumer protection. But this week’s Court of Appeal hearing may do little to resolve the situation.

ABTA would prefer not to be in court. However, Civil Aviation Authority officials believe they had little choice but to appeal against the ruling in January which ended its attempt to extend the ATOL system to agents packaging holidays for sale.

Since then, two of the big four travel groups have threatened to pull out of ATOL bonding, calling the continuance of the system into question.

All sides agree the Government needs to act, that a company outside the ATOL system is bound to fail sooner or later, and that only such a failure is likely to spur ministers into action. But there the agreement ends.

ABTA brought the original case to challenge the CAA’s interpretation of the ATOL Regulations in a guidance note the authority issued to agents in March 2005.

The source of the problem is all-too familiar, whether it’s termed dynamic packaging, contract splitting, DIY holidays or un-packaging the package. The low-cost carrier boom and online booking have driven a coach and horses through the consumer protection system.

The case

Peter Stewart, who acted for ABTA as a solicitor in the High Court in January, said the association shared the CAA’s concerns about “the mischief of contract splitting” which led to amendments of the ATOL regulations in 2003.

“ABTA viewed the regulations as having dealt with the mischief. The CAA went further in Guidance Note 26,” he said. “That guidance, directed at agents selling tailor-made or dynamic packages, stated: “In the majority of cases these sales need to be protected by an ATOL.”

The High Court ruled this interpretation of the law was wrong. “It is not in the public interest for travel agents effectively to be pressurised into obtaining ATOLs if the law manifestly does not require them to,” concluded the judge.

The fact that an agent sold a holiday in component parts did not necessarily make it a package, he said. The ruling hinged on the difference between a “total” and an “inclusive” price.

An inclusive price, offering a combination of items at a price not available if each is sold separately, constitutes a package. But a total price – the sum of the prices of each element – is similar to the bill consumers pay at a supermarket and does not constitute a package.

In his conclusion, the judge noted the existing legislation is “based upon a concept of the package which is to a significant extent out of date. It may be, as the CAA has said, that fresh legislation is needed.”

But he took the view of ABTA that, in the words of Stewart: “It’s not for the CAA to seek to legislate through the back door.”

The problem for the CAA at the appeal is that it can’t revisit the arguments about what constitutes a package. It can only appeal on the basis of the judge’s interpretation of the law.

The opposing views

“We really didn’t want to go to court with the main statutory regulator in the industry,” said ABTA head of legal services Simon Bunce. “It’s not something you do lightly.

“But it was important to get a judgement on the extent of the current financial protection regime. We worked hard to try to come up with some guidance we could both endorse, but we just could not get there. We thought the CAA guidance was wrong in law.”

Barrister Alan Saggerson, a specialist in travel law, said: “Why the CAA intervened is mysterious. We all knew ABTA was likely to win and will win the appeal. The underlying question is do we want more consumer protection?”

Richard Jackson, director of the CAA’s consumer protection group, said: “We appealed because we want clarity. Financial protection is a mess because it’s fragmented and the regulations are burdensome.

“The rise of the low-cost carriers and the Internet revolutionised the way consumers buy holidays, and the Government didn’t accept our advice to rectify this.

“With no change, the ATOL scheme will be financially unsustainable sooner rather than later. A big failure would help to put the issue in front of ministers, but policy can’t wait on events.”

David Moesli, CAA consumer protection group deputy director, added: “It’s not really about winning and losing. There is a great deal of confusion – people aren’t sure what they should bond and what not. But ultimately this is about the consumer.”

John Cox, chairman of the Air Travel Insolvency Protection Advisory Committee, pointed out: “The whole idea of consumer protection was introduced because the industry itself felt it necessary to reassure consumers their money was safe.

“The reason consumers need protection is that they pay [for holidays] months in advance.”

The current situation

The CAA is convinced there will be a company collapse at some stage that will damage public confidence in the industry.

That is also the view of the Association of Independent Tour Operators. AITO director and Sunvil Holidays managing director Noel Josephides said: “A lot of us were surprised when ABTA chose to create more confusion. It’s very dangerous.

“If the CAA loses the appeal, it will take the regulatory framework away. I don’t see how the reputation of the industry can be maintained. I don’t want to read the headlines when customers discover there is no cover.”

Pending the outcome of the appeal, expected by the end of July, agents can legally sell dynamically packaged holidays at a total, but not an inclusive price, without requiring an ATOL.

But their clients’ purchases will not be protected financially and that could rebound on the agent if something goes wrong.

Agents may also be exposed if clients on a dynamically packaged holiday are injured or fall ill due to the negligence of, for example, their hotelier, since the Package Travel Regulations lay a duty of care at the door of the person/company organising the holiday.

Meanwhile, operators selling products at a total rather than an inclusive price can place themselves outside the ATOL regime.

Everyone in the industry appears convinced consumer protection is vital. But in the words of travel lawyer Stephen Mason: “Consumers don’t necessarily think more protection is a good thing. They are buying unprotected holidays online because of the price.

“They have the option to book a protected holiday – there are millions available.”

However, a CAA survey in April suggested three out of four consumers who package their own holidays do not realise their purchases are unprotected, yet almost half rated financial protection essential.

What next?

Some in the industry have dismissed tour operators’ threats to ditch ATOL bonding as an attempt to pressure the Government to act. Others consider this view complacent.

Mason suggested: “TUI could remove the cost of bonding, but take on the cost of accepting liability in its contract terms.”

Andrew Burnham, travel and leisure principal at accountants MacIntyre Hudson, said: “The ATOL system is costing the industry in excess of £100 million a year – up to £4 per passenger.” He believes the big operators could save millions.

Bunce believes the system can survive, but needs to adapt. “If the CAA is successful [in court], you will see an expansion of the ATOL scheme and it would be much more difficult to sell components not under the scheme,” he said.

“If its appeal fails and ATOLs cover a smaller and smaller proportion of sales, the CAA has to make a decision and the scheme could change dramatically.

“The CAA has recognised the bonding requirement that underpins the ATOL scheme is a burden on tour operators and is looking to remove it. Can it adapt the rules? It needs the support of the industry and of the Government. It’s more likely to get support if there is no cost or low cost to the industry.

“It seems obvious everything should be brought together in one regulatory regime under one Government department, providing universal financial protection, built by a fund initially by a levy on consumers, but then self-financing.”

Such a levy was the subject of the industry consultation the CAA recently completed.

Moesli said the impetus came from the Government, which asked it to gauge reaction to a £1 levy on ATOL-protected package holidays – christened a Consumer Protection Charge (CPC) – after rejecting the CAA’s proposal for a £1 levy on every flight.

“This might be a way to reduce the burden on tour operators,” said Moesli. “All ATOL holders would collect £1 per passenger to put in a central pot.”

If all went well, a new system could be in place by autumn 2007. Moesli said the Civil Aviation Bill going through parliament will give the CAA the power to top up the existing – and highly indebted – Air Travel Trust Fund, and this is expected to become law later this year.

But he added: “There is no indication from the Government that it wants to repeal the ATOL regulations, which is what it would have to do.”

The risks of inaction are acute. In the words of one industry analyst: “The CAA tried a patch to cover dynamic packaging and failed. Now you could see ABTA on the door of an agency and still have no protection.

“The ABTA brand will come under threat when consumers realise. The safety net has been removed and someone is going to come a cropper.”