HC Deb 10 February 1984 vol 53 cc1188-94

Motion made, and Question proposed, That this House do now adjourn. —[Mr. Garel-Jones.]

2.30 pm
Mr. Dick Douglas (Dunfermline, West)

I raise the subject of the future of the Air Travel Reserve Fund Agency. It will not go amiss if, in my introductory remarks, I say a little about the agency's formation. One of the reasons for raising the matter is that I was a founder member when the agency was formed in 1975. I was not in the House. I pay tribute to Sir Kenneth Selby, Vera de Palma, and Reg Pycroft who have been members of the agency since its inception, and to Mr. Dickinson the agency's secretary. The agency was founded by Act of Parliament in the wake of the collapse of Court Line and the attendant tour operators, Clarksons and Halcyon Holidays, among others.

The fund's concept was to make payments to or for customers of air travel organisers in respect of losses or liabilities incurred by them. In support of that concept is the licence administered by the Civil Aviation Authority, given to air travel organisers after having been assessed as being financially able to meet their commitments. Part of the licence assessment relates to the ability to meet a bond laid down by the CAA. There is also another bond for members of the Association of British Travel Agents, which costs about one third less than the average 10 per cent. bond administered by the CAA.

Parliament initially voted the fund a £15 million loan. In addition, there was a 2 per cent. levy on licence holders. The loan has been repaid, and currently the fund has a balance of £16.6 million. The agency's first reserve is the bond and its second is the fund.

If we did not have Adjournment debates it is highly unlikely that the Air Travel Reserve Fund Agency's report would be discussed in the House. The fund's latest report and the chairman's remarks give rise to the debate. Sir Kenneth Selby says in that report that he is surprised at the risk that so many … holidaymakers take in paying for their holidays so far in advance … thereby leaving vast sums of money at the disposal of the air travel organisers without security of any form. That is a fairly stringent stricture on the organisers. Holidaymakers should take it on board. What is the magnitude of the fund? What might we expect to be available at the peak, in 1984? I am reliably told that about 8 million holidaymakers will book holidays from tour operators for the coming season. We are talking about a sum of about £2 billion. Therefore, by any standard, such a sum is of considerable magnitude and import.

I am a great believer in not looking at the crystal ball if one can read the book. The promotion of the fund goes back to 1975, when we saw what the failure of Clarksons, the Halcyon group and others did to a vast number of people who lost their holidays. We can see from the agency's report that hundreds of thousands of individuals put their money at risk and were considerably inconvenienced by the failure of those companies.

Within recent memory we have seen the failure of organisations associated with the Laker enterprise. The failure of Laker and Arrowsmith resulted in 52,000 claims on the bonds. The number of claims on the fund amounted to more than the bonds. According to the report, if one includes administration, the calls on the fund were likely to exceed £6 million. At that time the amount of bond money available was £5.2 million.

I have had discussions with represenatives of ABTA. It claimed that the reason why its bonds were less than those of the CAA was that collectively the agents can provide services that are of considerable benefit. I do not dispute that. When a company crashes, ABTA members give assistance. The argument was that in the case of Laker the value of the rescue operation was about £75,000. The Air Travel Reserve Fund Agency felt that the bond would have been £2.5 million larger if the CAA rate had been used rather than the ABTA rate. The fund had to bear more than would have been the case if the CAA rate had prevailed rather than the ABTA rate. Some £2.5 million was given by customers to Laker. It was used by that enterprise, through the network of its organisation, to finance operations such as Skytrain rather than for holiday purposes.

That leads me to the area of agreement between ABTA and the Air Travel Reserve Fund Agency. I hope that the Minister will tell me the Government's thinking on the matter. There should be complete segregation between the financial affairs of any licensed organiser and any other group of companies. The practice that I referred to earlier involving holiday companies such as Court Line and the practices of the Laker holiday organisation going back to Skytrain should be prohibited. I want an assurance that money given for holiday purposes, because of the interlocking nature of the concerns, will not go to finance engineering or other enterprises. In my opinion, that money should be devoted exclusively to holiday purposes.

There is disagreement between ABTA, CAA and the agency about the adequacy or otherwise of protection offered by the bonds and the agency's fund in relation to the level of turnover. I wrote to the Secretary of State for Transport on the matter on 19 January. Perhaps I shall get an answer today. It has taken a long time for him to answer a Member's query. Perhaps the Minister was himself on a tour and could not answer. In my letter I gave the view expressed in the report by the chairman: In 1978 tour operator turnover was £548 million. The Fund stood at just over £14 million, representing 2.6 per cent. of that turnover. In 1983, however, turnover for the industry had risen to £1,800 million —the fund, at £16.6 million, has fallen to less than 1 per cent. Had it been kept to its original level of turnover it should now stand at £52 million. The chairman's assertion is that the fund is not keeping abreast of developments.

It could be argued, of course, that if a company were to crash or fail, we could embark on another levy and start the cycle again. I suggest that that is not a good way to tackle the problem, because it means that future holidaymakers are paying, in their bills, for the misadventures of present holidaymakers and the misdemeanours of the holiday organisers.

On Monday this week, in answer to a question, not from me but from a Conservative Member, the hon. Member for Brentwood and Ongar (Mr. McCrindle), the Minister said that it would be altogether better if individuals insured themselves rather than have the matter organised centrally." — [Official Report, 6 February 1984; Vol. 53, c. 595.] I dispute that. In my opinion, the matter should be organised centrally.

If we are to assess the adequacy of the bond and the fund, it is the responsibility of the tour operators—and of the CAA, for that matter—to organise the insurance cover centrally, and to make sure that the companies have insurance to cover all expectation of losses that might be incurred by their customers. We cannot leave it to the individuals who are going on holiday. This is not on all fours with the business man who is travelling, perhaps on his own account or perhaps on his company's account, to the United States or elsewhere. We are talking about people who have saved up for some time. For them it is a large expenditure, and if they give their money to companies, they expect to be almost completely sure that the companies will deliver.

I expect that the CAA and other organisations will say that if we impose additional charges we shall force marginal companies out of the business or inhibit new companies. However, companies operate on small margins, sometimes much less than 2 per cent., so both companies and holidaymakers are at risk. Unfortunately, the holidaymaker does not always understand the risk.

The report also mentions the use of credit cards when paying for holidays, and at page 8 it states: There is some inconsistency between the Consumer Credit Act, 1974 which controls the use of credit cards and the Air Travel Reserve Fund Act, 1975 under which the Agency was established. The Agency has no power under the 1975 Act to reimburse a customer of a failed air travel organiser unless the customer has suffered a loss. If a credit card has been used to pay for a holiday and at the time of the failure the customer has not paid the credit card company, he has suffered no loss. In such cases, therefore, the Agency is precluded by statute from making any payment from the Fund. That is a serious matter that requires clarification by the Government. If the agency is statutorily banned from making payments, holidaymakers might believe wrongly that they could recover their losses.

I have tried to be moderate and careful in my remarks, because I do not wish to be a scaremonger, telling all holidaymakers that they face an enormous risk. However, there is a risk, and it is the Government's responsibility to respond to the views expressed by the chairman and, through him, the agency about how it approaches consumer protection. I know that many leaflets are issued by ABTA and the CAA in an attempt to educate the public about such matters, but we must know what the Government believe so that the cycle does not begin again.

I have mentioned the segregation of funds, the adequacy of the bond and the need to emphasise to companies that they must have full insurance cover. I could also have mentioned the adequate monitoring of the cost of administration, but I hope that the Minister will respond positively to what I have said.

2.48 pm
The Under-Secretary of State for Transport (Mr. David Mitchell)

I am grateful to the hon. Member for Dunfermline, West (Mr. Douglas) for providing us with an opportunity to discuss the air travel reserve fund. As he said, foreign holidays are one of the most expensive purchases that a family makes, next to buying a house or a car, yet, unlike other goods and services, those holidays must be paid for in advance. The failure of a tour operator is a time of great worry for those who have booked holidays with it and for those who are already abroad at the time of the failure.

Since 1975, when the fund was set up, holidaymakers buying packages have had the reassurance that, harrowing though the failure might be, ultimately their money will be safe. Thanks to the system of bonds required by the CAA as a condition for gaining an air travel organiser's licence, coupled with the fund, package holidaymakers have been certain of recompense no matter how big a failure.

Since its inception, the fund has paid out over £10 million to holidaymakers. I pay tribute to the chairman of the Air Travel Reserve Fund Agency, Sir Kenneth Selby, and to the agency's members past and present — including the hon. Member — for the work that they have done in bringing financial peace of mind to so many holidaymakers.

However, the agency's recent annual report has perhaps cast something of a cloud over the travel trade. I am concerned that in some quarters there may be a fear that holidaymakers are once again threatened with financial loss because of the collapse of an air tour operator. Those fears were clearly in the mind of the hon. Member in this Adjournment debate. I hope now to set those fears at rest.

As its name implies, the fund is a reserve mechanism against the financial failure of a tour operator. The very first line of defence for the holidaymaker is the Civil Aviation Authority's licensing system. Any applicant for an ATOL who is financially unsound or simply unfit to hold a licence will be refused one by the authority. Those who aspire to a licence are expected by the CAA to have sufficient financial resources to withstand one year's adverse trading conditions. Should a company's finances cease to be sufficient, its licence will be revoked.

No system can be 100 per cent. watertight—at least not without also threatening to strangle to death the industry it regulates — so there is a second line of defence. These are the bonds which must be posted by holders. Only when a holder fails and the bond proves insufficient does the fund come into play as the final line of defence for the holidaymaker's money.

Mr. Douglas

The Minister is being good about this, but how does he answer the stricture in the body of the report, on page 6, where a failure is clearly identified? It says: In one of these failures, claims amounting to £75,000 are being processed although the company was bonded for no more than £2,000. That does not protect the individual.

Mr. Mitchell

If the hon. Gentleman will allow me to continue, I may be able to reassure him, if I can get the thin to do so.

In its annual report, the agency suggests that—partly because of the effects of the Laker failure—the fund may no longer be large enough to withstand another major failure, particularly if one were to occur at the wrong time of the year, when customer pre-payments are at their maximum. The chairman has therefore made a number of recommendations in his report designed to protect the fund. It must be a matter of judgment whether the fund is potentially inadequate in terms of the task it faces. I respect the views of the agency's chairman in this matter, but I see no immediate cause for alarm.

Tie fund stood at over £16 million at the end of the last financial year. This is over twice as big as the largest sum it has ever had to pay out as a result of a failure. Indeed, since the fund was set up there has only been one major failure. The impact of all others since 1975 on the fund has been relatively slight.

It has been suggested that, compared with the 1970s, the fund has fallen dangerously low in relation to the turnover of ATOL holders. The ratio of the fund to licensed turnover has certainly fallen, but we cannot be sure that the ratio established in the 1970s was the correct one or that because it has fallen the adequacy of the fund has been undermined. What is more certain is that the travel industry itself is more mature and stable than it was 10 years ago. In the last three years, 30 ATOL holders out of nearly 700 have failed financially. In 1974 alone, when we last had a significant recession in the travel business 26 holders failed out of less than 400. The proportion is substantially different, and one cannot necessarily apply the ratios of 10 years ago to the situation today.

I believe, too, that the industry may now be coming out of recession. It is true that margins have slipped in recent years, as the hon. Member said. There have been fears, echoed in the agency's report, that, with many package holidays being offered at lower prices than last year, the industry is in for another bad summer. In fact, the signs suggest the opposite. Many of this year's price cuts simply reflect lower fuel costs and sterling's appreciation against European currencies. Price cuts may often be costing the tour operators little or nothing. Furthermore, bookings so far this year appear to be running at higher levels than for two or three years.

I am cautiously optimistic about the prospects for the industry and there is certainly no reason to fear a significant failure this year. Nevertheless, a return to healthier levels of bookings and profitability cannot guarantee that we shall never again see a major tour operator fail. I accept that in that eventuality the fund could, at least in theory, be faced with very substantial claims.

For that reason, I am grateful to the agency's chairman for the recommendations he has made. I cannot this afternoon comment in detail on all of them. They deserve close and careful study. But I think it is fair to say—as I am sure the hon. Member recognises—that many of the recommendations carry a cost of one kind or another. Nor are they a panacea which will guarantee that claims are never again made on the fund.

It may be difficult for the authority to insist on the complete segregation of an air travel organiser's finances from the finances of others in the same group of companies, as requested by the hon. Member. Segregation could have serious effects on the borrowing capacity of the company concerned, and might even threaten the existence of the sort of integrated airline and tour operator companies which are such a successful feature of the British holiday industry.

However, as I have said, Sir Kenneth's recommendations merit the very closest attention, as does his suggestion that the insurance market might take up some of the strain. As my right hon. Friend indicated on Monday, insurance may have its attractions. We are, therefore, setting in hand a special review which will consider the level of the fund, its future, whether changes should be made to the present system of licences and bonds, and whether insurance has a part to play. The present arrangements form an integrated system, and it would not be sensible to review the fund without also asking how it is affected by the licensing requirements and by bonding levels. I hope that the hon. Gentleman will feel that the specific points he put to me will be well catered for in this significant review.

We are now considering who might be suitably qualified to undertake the review, and we hope to approach someone shortly. I expect the review to be completed speedily.

As a Government, we hope wherever possible to lift the burden of regulation on industry. There is no doubt that the present system for protecting air package holidaymakers is one such burden. Nevertheless, it has to date worked well from the holidaymaker's point of view. In view of the doubts which the agency has expressed about whether the fund is adequate in size, we want the review to consider whether the fund needs to be increased; whether it is adequate as it stands but in need of added protection—perhaps by way of tighter licensing and bonding requirements — and, indeed, whether some entirely different set of arrangements might serve the holidaymaker just as well.

We would also like the review to consider whether—if the fund is to continue—it should apply to scheduled air services. That is something which from time to time has been pressed upon us by hon. Members, although I have to gay that it is not an idea to which we instinctively warm, given that the private sector seems already capable of affording protection to such travellers. Indeed, the Department of Trade announced in December 1982 that, having looked at the matter, it had concluded that there was no justification for introducing mandatory levies or insurance schemes to protect the scheduled airline passenger. Nevertheless, there is no logical reason why those who buy air package holidays should he in a more privileged position than others who travel in other ways by air.

I obviously cannot predict what conclusions will emerge from the review, but I can say that the Government recognise the special position of those who pay in advance for expensive overseas holidays. Whatever changes might be made to the present system, we must be sure that some arrangements exist whereby holidaymakers can be certain that their deposits are safe. Therefore, it has been very fruitful that the hon. Member should have raised the matter this afternoon and given me the opportunity of telling the House the way that we propose to proceed.

The air travel reserve fund was born out of the Court Line collapse because of the financial suffering it threatened to cause holidaymakers. I am sure that the hon. Member and I are at one in agreeing that, whatever the future may hold for the fund, we do not want to see holidaymakers left with no means by which they can be protected.

The hon. Member mentioned credit cards. That is a complex matter. Both Access and Barclaycard have said that they will reimburse people who lost through Laker. We are giving that question very careful study and I shall write to the hon. Member.

Question put and agreed to.

Adjourned accordingly at one minute to Three o'clock.