The travel sector has been hard hit by the ongoing turbulence caused by the Covid-19 pandemic. Travel restrictions and social distancing rules put in place by governments across the globe to slow the spread of the virus have impacted business and leisure travel. The inconsistent roll out of Covid-19 vaccines around the world, a lack of consumer confidence in Covid-safe travel provisions and uncertainty around consumers’ ability to obtain refunds if trips are cancelled by providers have all contributed to what has been an extremely challenging period.

The travel sector itself is a topic broad in scope and includes business, leisure and domestic travel, airlines, coach holidays, cruises, etc. This article will focus in on the UK’s Air Travel Organisers' Licence ('ATOL') financial protection scheme operated and regulated by the Civil Aviation Authority ('CAA').

ATOL Scheme and Licence Renewal

The UK’s ATOL scheme covers package holidays sold by travel businesses that include flights and some flight-only bookings. Having ATOL cover means that if the ATOL holder fails (such as STA Travel in August 2020) and a consumer’s holiday can no longer go ahead, that consumer may benefit from the ATOL protection scheme. They can claim a refund of the cost of their holiday if they are yet to travel, and if they are already abroad on their holiday, the hotel costs and flights home. The Air Travel Trust ('ATT') is the primary source of funding for refund and repatriation costs and its main source of funding is the £2.50 fee charged to each ATOL holder for each traveller.

The September ATOL licence renewal period is swiftly approaching, and for those ATOL holders whose licences expire at the end of September 2021 it is not simply a case of completing a form and paying a renewal fee. In order to grant a new ATOL licence the CAA must be satisfied that the business has adequate financial resources to meet its actual and potential obligations and long with other considerations, that the licence authorisation applied for is sufficient and that the business has adequate financial resources to meet its actual and potential obligations.

If an ATOL holder’s licence is not renewed, it cannot legally transact licensable business and must immediately remove all references to the expired ATOL (including the ATOL logo) from its website and materials, make arrangements to refund all existing licensable bookings and cease offering, booking, receiving any payment (including balances for existing bookings) and fulfilling licensable business.

CAA Consultation: ATOL Reform

All ATOL holders and their advisors should be aware of the current CAA consultation (open from 29 April 2021 to 15 August 2021) in relation to proposed changes to the ATOL scheme, including how ATOL holders fund their operations and regulatory considerations as to how consumer monies should be held. The CAA’s clear aim is to improve the resilience of ATOL holders, for example, to try to ensure that on any failure of an ATOL holder, customers’ advance payments are ring-fenced and have not already been used to fund the operation of the ATOL holder’s business.

The consultation is considering four specific proposals, namely:

  1. total or partial segregation of customer monies from operational cash balances until the licensable transaction has completed
  2. mandatory bonds provided by a bank or insurer to the ATT that could be called upon in the event of a failure
  3. changes to the ATOL Protection Contribution
  4. full ATOL-equivalent consumer financial protection to be taken out from an insurer by each ATOL holder in order to provide protection to the same standard that the consumer currently receives through the ATOL scheme.

A second consultation making specific proposals is expected to be launched in early 2022.

How has the pandemic affected ATOL holders?

Even before the pandemic commenced, the travel sector was under stress with low margins, high fixed costs and new entrants to the market producing excess capacity. During Covid many operators have received UK Government support through CBILS, CLBILS, the Covid Corporate Financing Facility and the furlough scheme. Now, with travel slowly recovering, many bookings are being made with vouchers issued during the last 18 months rather than cash and operators are managing cashflows carefully should there be a further wave of Covid cancellations, postponements and refunds.

During the pandemic Burges Salmon LLP have advised many stakeholders involved in the travel sector and we have seen ATOL holders borrowing additional debt, raising further equity investment and adopting different structural approaches in order to satisfy the CAA’s liquidity and other requirements. We have also seen travel businesses face significant challenges with financial forecasting and specific increased pressures when dealing with requirements of the Competition and Markets Authority and merchant acquirers.

With travel restrictions in flux again this summer, and after a number of debt and equity raises over the last 12 months, it remains to be seen if there is sufficient appetite from investors to provide further funds to ATOL holders for them to survive or if we will see some ATOL holders fail to renew their licence in September and a consequent consolidation in the market.

What are the expectations for the travel industry’s recovery?

Across every sector in the UK economy, businesses that have taken a defensive approach during the pandemic may survive, but those businesses who have embraced innovation have the opportunity to really thrive. We have seen innovation in the travel sector in the form of increased use of contactless technologies for airport and hotel check-in procedures for a faster, more seamless service.

British consumer confidence in air travel has seen a huge decline, with 48 per cent responding to a recent YouGov survey stating that they would be relying on health guidance from experts before flying again. However, it is clear that the pandemic will not cause a permanent paradigm shift - the 'staycation' will not replace the traditional summer holiday abroad wholesale nor will building personal relationships in face-to-face overseas business meetings be comprehensively substituted for video conferences, but we are likely to see consumers embracing flexibility and seeking a more balanced, inclusive and environmentally friendly dynamic as a long-lasting result of the adjustments made due to the pandemic.

Following the tensions identified by the high profile failures of Monarch Airlines and Thomas Cook, further exacerbated by the pandemic’s pressure on the travel sector’s reliance on high volumes to maintain their thin margins, we eagerly await the results of the CAA’s consultation and any consequential reforms to the ATOL regime.