Taylor on Travel

The proposed Atol reform is in line with expectations. A flight-plus Atol will be required by retailers selling separate flights, accommodation, transfers and other components as part of a single holiday.

The Atol requirement for flight-only sales will remain as now - with cover required for third-party sales but not for seats booked direct.

It's hard to believe anyone genuinely believed scheduled airlines might be brought in, as the Department for Transport ruled this out in 2007 and the CAA consistently made clear nothing had changed. Things won't alter in this regard unless and until Brussels acts, so no holding breathe.

Click-through sales by airlines were not likely to be included either, since aviation minister Theresa Villiers had already said they would not. We shall see whether a government promise to consider legislation on this later in the year amounts to anything. My guess is the DfT would like to act, but may not.

Villiers' statement was light on detail. The full implications of the changes won't be clear until the consultation document appears, probably in May - although the CAA will meet and/or correspond with companies in the meantime.

Here is what we do know:

Sales will be designated 'flight plus' if they comprise a flight and one or more holiday components sold at the same time or within a day of each other - probably meaning within 24 hours rather than within the next calendar day.

Flight-plus Atol-holders who have not held a licence before will have to provide financial guarantees in the form of a bond or by paying customers' money into a trust account or taking out insurance against failure. This will increase their costs at a rate reflecting the amount of flight-plus business they conduct, the period they have been trading and the level of risk attached to their business (as judged by the CAA).

Bonds will be set at a proportion of relevant business - so a company turning over £4 million a year, of which £500,000 involved flight-plus sales, might require a bond worth 10%-15% of that £500,000 for the first four years of Atol-cover. The bond would diminish over the four years. The cost of providing a bond is typically set at a percentage of its value - perhaps 5%.

Flight-plus Atol-holders will also have to add the £2.50 Atol Protection Contribution (APC) to bookings and pay it into the Air Travel Trust fund, with the admin costs that go with that. A review of this charge will wait until the fund is approaching surplus - probably in two years if there are no major failures. We can then expect the charge to be reduced, possibly to £1.

The changes will be introduced in time to cover the peak 2012 booking period - so hopefully by next January year. This will coincide with introduction of a standard Atol Certificate to be issued to all customers.

There will be sharper enforcement of regulations where companies declare themselves the 'agent of the customer' rather than the agent of the suppliers of holiday components. We don't know what this will mean in detail because it is the subject of talks at present, but the Office of Fair Trading will be involved. Villiers' statement suggested this practice leads to companies "misleading customers about their level of protection".

If an airline, hotel or other supply fails, the flight-plus Atol-holder will pick up the cost of replacing or refunding the holiday. The CAA guidance on this is clear: "If an Atol-holder's supplier becomes insolvent, the Atol-holder is required to provide the customer with a replacement or with a refund for the complete booking . . . It is proposed that flight-plus Atol holders are required to provide this protection."

Companies are entitled to have concerns about the proposed Atol reform, but some of the arguments against it don't hold much water.

Travel Republic managing director Kane Pirie presents the most forceful case and puts it well. But how strong are his arguments?

Kane argues: "The existing scheme has not been well run and is estimated to be over £50 million in the red." In fact, the deficit is not that high - although it would have been without the Atol Protection Contribution (APC) introduced in 2008.

For the first time since the late 1970s there is money going into the Air Travel Trust Fund (ATTF), as well as money going out to cover failures. About £50 million will have been paid in during the current financial year. So although the Goldtrail and Kiss collapses last summer will have made big hits on the fund, the deficit should not be above the £32 million it was last March.

The reason for the deficit is that no money was paid in for three decades. The CAA and industry recognised this was going to be a problem at some point. Successive governments declined to act until 2008, only for the financial crisis to serve up the most costly travel failure in history - XL Leisure.

"The tour operators have successfully lobbied for this deficit to be cleared by a new holiday tax on their competitors," Kane writes. This is partially correct. The tour operators have lobbied. But the APC is not a tax - it's a payment by consumers into a fund to protect their purchases. And tour operators did not lobby to clear the deficit - it is the government that demands the deficit be cleared. The tour operators lobbied for the extension of protection and the cost of providing it.

Kane says the deficit "by rights belongs to them" (the tour operators). How exactly? The deficit stems from payments to consumers whose holiday companies failed. The companies whose customers now pay in to it have not failed.

He also argues: "Customers already have good cover against the failure of their holiday provider through the protection on card payments."

This is questionable on four counts. First, card companies will not pay for repatriation. Second, card companies will only consider refunds on payments of £100 and above. Third, card companies consider each item in a claim separately, so claims for a flight, hotel, transfers, car hire would each have to be more than £100. Fourth, card companies frequently do not refund payments - as I know to my own cost.

But let's return to the deficit and who is responsible for it. The big two groups, Tui Travel UK and Thomas Cook, might account for nine to ten million Atol-protected sales a year. Let's say nine million at £2.50 a time - that is £22.5 million in payments to the fund in the current financial year, on top of payments of perhaps £16 million (some at £1 and some at £2.50) in 2009-10 and £9 million (all at £1) in 2008-09. Other tour operators will have made similar pro-rata payments. It does not look like the deficit belongs to the tour operators, does it?

So who is responsible? Well XL Leisure cost the fund £27 million. (The CAA's requirement that XL have a £42-million bond ensured it was not a lot more.) We await figures from the CAA and fund trustees on the impact of Goldtrail and Kiss. But if Goldtrail's failure cost anything like the £34 million I guesstimated last year, that pretty much answers the question of responsibility.

Of course, Travel Republic was a retailer of Goldtrail, Kiss and XL holidays. One estimate I've seen puts the cost of payments from the fund to Travel Republic customers at £6 million for XL, £3 million for Goldtrail and £3 million for Kiss, or £12 million in total.

So, while Tui and Thomas Cook customers paid in perhaps £47 million over three years, Travel Republic paid in nothing but played a part in £12 million flowing the other way.

Who does the deficit belong to again?

Today's inflation figures, assuming the headline rate hits the 4% economists forecast, are not good news.

The government's preferred measure, the Consumer Price Index, is high enough. But the Retail Price Index that more accurately reflects the pressure on living standards, is expected to reach 5% and both are forecast to go higher through the coming months. Average incomes are rising at 2%. The three percentage points difference will be exerting a tightening squeeze on household spending, and there are no signs of this easing.

If the subsequent GDP figures confirm a slowing UK economy, following the 0.5% contraction at the end of last year, then 'stagflation' could truly be upon us. Anyone wanting a definition can cast back their mind, or read a history of, the 1970s.

The impact on holiday spending may already be showing. The latest UK market snapshot from industry analyst GfK Ascent - published in Travel Weekly - showed the average sales price (ASP) of packages for summer 2011 into the first week of February flat against the same week a year ago.

Season-to-date figures are doing better, with an ASP of +£17 and sales volume up 4% year on year. But the trend in prices since the first week of January has been down.

Not all of this will be due to consumer reluctance to pay more. The type of holidays purchased will be a factor. A shift back to the traditional destinations of the western Mediterranean, as well as to Greece, at the expense of Egypt, Tunisia and Turkey appears underway - and not solely due to political unrest.
 
Hoteliers' rates may be lower than in the past and tour operators and airlines should be well hedged on fuel and currency exchange rates. But average prices flat year on year set against an inflation rate of 4%-5% does not bode well for margins.

Then there is the price of jet fuel - up 33% year on year last month, raising the cost of hedging.

The year has generally begun well for the trade - better even than hoped, with many retailers and tour operators reporting sales on a par with pre-recession days. But the pressures piling on consumers point to more straightened times, and circumstances, ahead.

There is a simple explanation for the request to fast-track the retail merger of Thomas Cook, The Cooperative Travel and Midlands Cooperative to the Competition Commission - a desire for more haste.

But it is hard to see precisely how much more haste the request will achieve. The Office of Fair Trading (OFT) was previously due to make a decision on whether to refer the merger to the Competition Commission (CC) by March 10 - 45 working days from the date it received a referral from the European Commission.

It will now make a decision, according to its own guidance rules, within a minimum 10 working days - March 1. But that is a minimum, and the difference between March 1 and March 10 is seven working days.

However, when Thomas Cook made the request yesterday (it was Thomas Cook, let's be clear), the OFT suddenly changed the deadline date for its decision, if there is no fast-track referral, to April 4 - after suspending its deliberations leading to that deadline while in discussion with Thomas Cook and the other parties.

Presumably, it became clear during these discussions that the OFT was of a mind to refer the merger to the CC and there was nothing to be gained by waiting in the hope that it would not. Also, presumably, Thomas Cook and its prospective merger partners were aware that the discussions in themselves were pushing back the OFT deadline for a decision.

Thomas Cook chief executive Manny Fontenla-Novoa signalled he would seek a fast-track referral in a conference call with investment analysts last week. It was a surprise on two counts. No company has ever used the fast-track process or referred itself to the Competition Commission before, and it is unusual for a chief executive to share such information. The issue reportedly did not come up at the Thomas Cook annual general meeting a few days later.

Fontenla-Novoa and his counterparts at the Co-ops are clearly committed to the merger and there is little doubt it will go ahead. The only question is how much of the merged estate will they be compelled to relinquish in order to proceed.

Perhaps that certainty explains why, at each stage, there appears to have been a degree of surprise that the authorities would show very much interest at all - that the EC was likely to refer the merger to the OFT, and the OFT to the CC.

There may be a fear that the regulatory process will be complicated by government proposals to merge the CC and OFT into a single body, in a form yet to be determined but soon to be announced, as part of Cameron's bonfire of the quangos.

In the circumstances, given either the OFT or CC - or elements of both - are poised to disappear, it would make sense if neither was disposed to demonstrate they are superfluous by deciding of the merger: "You deal with it, no you handle it, but we insist - after you." That may be a complicating factor. However, it is not as though the OFT is in the throes of change at the moment. Nothing has been announced bar the intention.

An end to uncertainty about the future would, undoubtedly, be welcome to many working at the companies poised to merge. It is debilitating to wonder, 'Is there a future here?'

However, by requesting a fast-track referral to the CC, Thomas Cook has exchanged the possibility that the OFT just might OK the merger on March 10 (now postponed to April 4) for the certainty of referral to the CC and an investigation lasting up to six more months from, best hope, March 1.

From here, it is hard to see much gain in this. It looks like the simple explanation comes down to impatience.

How come a week ago the cost to the Air Travel Trust Fund of the Goldtrail Travel and Flight Options failures last summer was £25 million, and this week it is between £41 million and £45 million?

And how come both reports were brought to you first by Travel Weekly, the one contradicting the other to a degree of up to £20 million?

I would like to say it was a typo - a typographical mistake. After all, it's easy to type 25 in place of 45.

But it wasn't a typo, it was a mistake in reporting.

In my defence, and without giving anything away, I trusted the source of the £25 million figure - although I found it surprisingly low and was concerned that it referred to the likely cost of just one of the company failures - Goldtrail. My own guess at the cost was much closer to the £45 million figure now confirmed.

I tried for a week to gain confirmation or, failing that, an indication that the £25 million figure was unrealistic - maybe barking mad - and received neither one nor the other despite a series of conversations on the matter.

So what to do? Sit on the figure till May when the numbers will most likely be published as part of a consultation on Atol reform, or publish and see what happens?

Naturally, this is not the way to deal with most kinds of unconfirmed reports - allegations of wrong-doing, financial difficulties or a host of other revelations that come a journalist's way even in the saintly realms of travel.

The irony is that now we know the true picture of the deficit and people can stop repeating the line that "the fund is £50 million in debt".

Few outside the CAA, the fund trustees, the company liquidators and perhaps the members of Atipac, knew the current state of the deficit, and now we do. Perhaps it goes to show that sometimes it is better to get something wrong than not get it at all.

But, hands up, I wrote the story and it was wrong.

The rising price of oil casts a shadow over the travel industry. If it is allied to a fresh economic downturn the outlook could be as dark as any cloud from a burning oilfield.

Crude prices closed near $115 a barrel in London on Thursday - an increase of 15% on the week so far - and were at $100 and rising in the US, driven higher by the unrest sweeping the Arab-speaking world.

Forecasts of $140 a barrel now appear conservative. One analyst predicts oil could soon be $220.

The price is desperately bad for the industry. It forces the cost of other commodities higher when inflation is already 5% and squeezing household spending, leaving less money for travel. Petrol retailers warn UK drivers may be paying 140p a litre by April without even a further rise in price.

Naturally, the oil hike also pushes air fares higher - destroying margins and bankrupting carriers where fares cannot be raised sufficiently.

Willie Walsh - now head of British Airways' parent company International Airlines Group (IAG) - has previously warned airlines cannot operate profitably with the oil price above $120 a barrel.

The violent upheaval in Libya, the world's 12th-largest oil exporter, has been the biggest factor in the past few days. Before that, the popular overthrow of the regime in Egypt fuelled the price rise - not because Egypt produces much oil, but because the unrest threatens to spread to oil-producing neighbours and because 4%-5% of crude oil passes through the Suez Canal.

Bahrain is not a major producer either, but unrest in the country provoked fears the contagion might spread to its neighbour Saudi Arabia - the world's biggest oil exporter, where the merest hint of upheaval would risk sending prices into the stratosphere. Should protests resume in Iran or spread to the United Arab Emirates all but the world outside Russia - the second-biggest exporter - would be in deep trouble.

Even a week ago, before the latest surge, the price of jet fuel was 39% higher than in February 2010.

Airline association IATA's recent prediction of a profitable 2011 for carriers, with combined global profits of $9.1 billion, was based on an average oil price of $84 a barrel. Every $1 rise in the price adds $1.6 billion in costs, making for some disturbing maths.

Fares can only rise as a consequence and whingeing about surcharges won't make much difference if the alternative is bankruptcy.

Prices were last this high in August 2008 after briefly touching $147 a barrel. The global financial crisis and ensuing recession brought the price back down to earth. The problem this time could be that oil stays high because of production difficulties even as the price sends the economy into a downturn.

And if that sounds bad, bear in mind that among the leaked US diplomatic cables recently exposed by WikiLeaks was the revelation that Saudi Arabia may lack sufficient reserves to pump more oil and prevent prices from escalating because its reserves have been overstated by as much as 40%.