A financial protection expert claims APC needs to increase to reflect the risk of a major failure. Lee Hayhurst reports
Industry contribution to Atol would have to double to £5 or higher if a central reserve fund to back financial protection is retained, a leading expert has warned.
Chris Photi, senior partner at accountancy firm White Hart Associates, claimed contributions would have to rise to £5 and maybe up to £10 to reflect risk given the expected absence of an all-flights levy.
The Department for Transport (DfT) last week closed a call for evidence on the future of Atol.
The submissions it received showed widespread support for retaining a reserve fund such as the Air Travel Trust, which backs Atol.
But Photi said the collapse of major travel company could cost £1 billion, dwarfing the funds raised by the Atol Protection Contribution (APC) at the current rate of £2.50 per person.
The ATT returned to the black this year, reporting an £18 million surplus in May, but its annual income is just £55 million before insurance and any claims are taken into account.
“If it ran claim-free for 10 years then maybe you’d have a reasonable fund,” said Photi. “I’ll be long gone, as will my children and their children, before this happens.”
Any increase in the per passenger Atol levy is likely to undermine support for a flat rate regime as currently operated, Abta admitted in its submission to the DfT.
It noted that £2.50 had already divided views in the industry, although there was a consensus when APC was £1.
However, Abta said this figure was “wrongly suggested” by the Civil Aviation Authority (CAA) as a way of funding the ATT, branding it “unsustainable”.
It has called for a variable risk-based contribution scheme, an arrangement that might conceivably favour the larger operators by assessing them as lower-risk.
However, Photi said while the big two might argue they are larger net contributors to the fund, they also pose the most risk to a government looking to take the liability of Atol off its books.
He pointed out it was the big two that benefited most from the regulatory change that brought in APC to fund the ATT by being released from £500 million of bonding obligations.
It was a resultant spending spree on acquisitions – which Thomas Cook has since admitted was a major factor in its financial crisis – that saw its share price plunge to 10p in 2011, said Photi.
“Everyone is going for a reserve fund because there is no bonding market,” Photi said. “But the contribution has to go up; it’s not going to work at £2.50.
“If you’re going to cover a £1 billion failure that’s a lot of money when you have just £50 million coming in in a year, provided you do not have any claims.”
An option of firms protecting customer money by placing it in trust, or an escrow account, is unlikely to find favour among traditional travel firms due to the impact on cashflow.
However, Photi said he believed the DfT would prefer such a solution because it offers 100% protection and no government liability.
In the event of an ATT-style fund being retained, Abta has called for a change in its constitution.
It stated it is “an unhelpful legal fiction” that the ATT is not legally obliged to pay out while trustees, also senior CAA officers, are duty-bound to make payments.