UK Civil Aviation Authority publish initial consultation on ATOL reform

The financial resilience of the ATOL regime has been put to the test on several occasions in recent years, most notably when Thomas Cook went into administration in 2019. During the COVID-19 pandemic, it became apparent that ATOL-protected travel businesses were unable to meet their obligations to provide customer refunds due a lack of liquidity. This raised concerns around the long-standing practice of using customers’ advance payments for holidays to fund the operations of ATOL businesses, reducing the ability to make refunds and ultimately increasing the burden on the Air Travel Trust (ATT). In order to address this, the UK CAA are proposing changes to the ATOL regime to improve the financial resilience of ATOL holders.

Potential mechanisms to be mandatory across ATOL holders

In the consultation document the CAA proposes specific requirements for ATOL holders requiring one form of mandatory financial security. The proposals are as follows:

1. Segregation of customer monies: ATOL holders and agents would be required to segregate customer monies from their operational cash balances until the licensable transaction had completed. Therefore, operational activities of the ATOL holder would have to be funded from alternative sources. Customer monies would be kept segregated for the benefit of the ATT for consumers in the event of a failure. This could be required on either a total or a partial segregation basis:

a. Total segregation: all monies held in a secure segregated customer escrow or independently maintained trust account until the day after the customer returned from their holiday. This structure would cover all monies made by the customer in advance and would be accompanied by either a flat risk, value or hybrid priced ATOL Protection Contribution (APC); or

b. Partial segregation: payments for flights and other payments related to the booking could be made in advance but limited to a specified percentage of the total value of the licensable package. APC could be charged on a value, risk or hybrid priced model but the rates would be higher than for total segregation as the risk posed to consumers would be higher.

2. Mandatory bonds: this bond would constitute an irrevocable undertaking provided by a bank or insurance company in favour of the Air Travel Trust Fund (ATT) that will be called upon in the event of failure of an ATOL holder. The value required would be set to meet a mandatory minimum of customer monies collected by the ATOL holder. The value of the bond is subject to the CAA’s financial assessment of the ATOL holder, so those with a weaker financial position may be required to provide a bond of a higher value. The CAA acknowledges however that the use of mandatory bonds would not improve the financial resilience of ATOL holders or improve consumers’ ability to receive refunds in a timely manner. This approach could be accompanied by a risk, hybrid risk or value APC that would allow for increased ATOL holder risk to be priced accordingly.

While the CAA plainly favours segregation of funds as most likely to improve ATOL holders’ financial resilience, there may be a choice between the use of segregation or bonds to achieve the protection required for a given ATOL holder. This would be implemented alongside an APC which reflected the risk posed by the ATOL holder.

Changes to the ATOL Protection Contribution (APC)

The CAA acknowledges that, at £2.50 per passenger, the current APC does not account for the financial risk position of the ATOL holder or the value of the booking. The CAA proposes amendments to the APC that could constitute one of the following:

1. Flat rate APC: the flat rate could simply be increased. However this would not account for the risk of failure of individual ATOL holders nor would it account for the value of the customer bookings;
2. Risk priced APC: this variable rate would account for the risk profile of individual ATOL holders with each being assessed on factors such as (but not limited to) their financial and business risk profile, capital structure and whether advance customer monies are relied upon as working capital;
3. Value priced APC: this rate would be based on the value of the licensable booking. Higher value bookings would contribute more than low value holidays. This would not account for the increased risk some ATOL holders pose to the system; or
4. Hybrid risk and value model: this model would account for the value of the holiday and the risk profile of the ATOL holder. This formula would probably be weighted more toward risk than value to ensure that those that pose a greater probability of failure are contributing proportionately more than those of lower risk.

Other options

The CAA has also proposed a financial markets option whereby ATOL holders would be required to obtain full ATOL-equivalent consumer financial protection from third party insurance providers as a condition of taking bookings. The third-party providers would be responsible for determining the financial conditions and criteria applied to the ATOL holder as well as the costs. Such insurance policies would provide equivalent protection to that which is afforded now, and could not contain exclusions that prevent the customer from making claims. The difference form the existing structures, which fund or benefit the ATT, is that there would be no ATT or CAA involvement in dealing with failures, although the CAA would remain responsible for issuing ATOLs.

The consultation document also contains options that the CAA has considered but does not propose to consider further such as restricting when customers can pay their balances.

We have commented on a number of occasions previously that the tensions identified by the Monarch and Thomas Cook failures and exacerbated by COVID-19 would inevitably lead to reform of the traveller protection schemes. This consultation paper acknowledges the need for careful interaction with any changes the Government may make under the Airline Insolvency Review while recognising the increase in cost that funding additional working capital would entail. The CAA states that it is trying to balance appropriate consumer protection against enabling a competitive industry which provides choice and value for money.

The consultation will close on 30 July 2021 and the UK CAA are seeking initial industry responses to the proposed changes. A further consultation is expected for early 2022 on more detailed proposals.