‘Different business models can have totally different risk models.’ Ian Taylor reports
The CAA has signalled it will maintain “a risk-based focus” in licensing Atol holders in forthcoming Atol reforms and will likely introduce a variable rate of Atol Protection Contribution (APC) “based on the degree to which each Atol holder provides for their risk of failure”.
However, industry experts have queried the regulator’s approach to risk.
Travel Trade Consultancy director Martin Alcock, who previously worked at the CAA, told the recent Travel Weekly Future of Travel conference: “Risk-based can mean very different things. Different business models can have totally different risk profiles.
“The CAA has said it’s going to make the APC risk based, but we don’t know what its interpretation of that is.”
White Hart Associates head of travel Chris Photi argued: “Looking at the Atol scheme, the real risk is with the integrated groups that sell through agents.”
He noted that since the introduction of the Atol Protection Contribution on bookings in 2008 to provide funds for the Air Travel Trust, “the fund has processed claims worth about £800 million. Of that, 62% were on three integrated groups – XL, Monarch and Thomas Cook.”
Photi argued: “If you look at the other claims, about 25% of them related to traditional whole-plane charter-type business. There are no charters available for those types of businesses now. Running your own airline, ships and hotels is where the real risk is.”
He suggested: “What the CAA is trying to do with this regulatory reshaping is to build something that would withstand a £700-million failure. There is no insurance [to back up the Air Travel Trust]. That was blown in relation to Thomas Cook.”
Photi asked: “Is it fair to have one scheme for all travel businesses when the real risk exists in just a handful of businesses?
“A risk-based approach should be based on the business model of the Atol holder. My view is the CAA only refers to a risk-based approach when it comes to the provision of security.”
Alcock agreed the costs of repatriation following a failure are generally not as high as in the past, saying: “When I worked at the CAA [in 2008-12] there was a whole bunch of charter suppliers to the trade. That market has almost entirely disappeared.
“Repatriation when everybody is booked on pre-paid flights isn’t what it was.”
Time running short
Photi, Alcock and Themis Advisory director Jo Kolatsis agreed time is running out for the CAA and Department for Transport to introduce a revised Atol scheme by next April.
The CAA noted in a call for evidence on reform in January that it would “look to introduce any new arrangements potentially from April 2024”.
The Atol specialists believe reforms could be in place by that date but not in operation.
Photi suggested: “There has been confusing messaging. ‘It’s going to begin on April 1, but it won’t affect March renewals, and you can choose what option you like in the September renewals.’ It won’t really begin on April 1. It might begin in September 2024.”
Kolatsis noted: “They’re cutting it fine. We’re still waiting on the detailed proposals. The CAA has said it will launch this on a transitionary basis, so I expect something in April. But they’re not giving people enough time to prepare.”
Alcock agreed, saying: “The CAA has consistently said there will be sensible transition arrangements but hasn’t defined what it means by that. If they mean it will be on the statute books by April 1, it’s tight but still achievable. But there is going to be nothing in operation by then.”
A consultation on the proposals is expected this autumn. CAA head of Atol Michael Budge has said the target start date of April 2024 would be a “commence-from date, not a cut-off date”.
He has also confirmed Atol renewals next March will be under the current regime and this flexibility could extend to the September 2024 renewals, suggesting: “There may be the option to sit under one regime or the other.”
Segregation remains the CAA’s “preferred option” for reform, but Budge has insisted: “We’re not saying anything will be mandated. Segregation may be as simple as separating customer money and demonstrating how you use it.
“That doesn’t necessarily mean trust accounts. It doesn’t necessarily mean segregation will be costly. It doesn’t necessarily mean businesses can’t pay suppliers in advance [from segregated funds].”
The CAA has noted a “diversity of opinion remains” in industry responses to its ‘Request for Information’ in January.
Even on the issue of a variable APC rate, for which Budge has said “there is strong support”, there is limited agreement on the basis for this variation.
Trust accounts ‘present some advantages’
Despite his criticisms of aspects of the reforms, Photi argued trust arrangements present some advantages to businesses.
He told the conference: “I understand why trust accounts aren’t popular, [but] there are some positives. There is a clear differentiation of customer money. Merchant acquirers favour trusts.
“The fees are cheaper than bond insurance premiums, and it’s a powerful consumer-protection message – more powerful than bonding.”
Photi explained: “I’m a shareholder in a company which had a bond for £4 million.” During Covid, he said, the bond provider withdrew, “there were no insurers to take over” and merchant acquirers demanded increased security.
He said: “What did we do? We used the government lending scheme to move all customer monies into a gold standard trust.
“Our bonding and trade association costs were £200,000 a year. Our trustee fees are 20% of that. Our merchant acquirers backed off with the money in a trust.
“I’m not saying that works for anyone, but it gives you independence. I’m not worried about insurers pulling out. I’m not worried about regulators. I’m not worried about my merchant acquirers.”