For many years the UK had a great system for supporting a stable, vertically integrated market - the ATOL protection scheme worked like a charm.
It was administered by the UK government through the Civil Aviation Authority.
However, so many things changed. The product mix switched from fixed tour products provided by the massive tour operating companies to an import from the USA – dynamic packaging.
The emergence in the past 15 years of the low cost carriers which didn’t combine with anything, the expanding British economy and that of Europe, also made the purchase of British products not just for Brits any longer.
After the government in the UK decided to get out of the commercial business it tried to offload this licensing/consumer protection service, so far without much success in developing a different model.
The UK government also decided that the travel industry could pay more tax by putting in the duty and therefore tax it. Talk about conflict of interest!
But there is one factor which is too important not to mention...
Much of the European market, and the UK is no exception, traditionally made money from being a banker rather than being a product company. So the float is/was very important to the market.
The US players would not understand this because everything is credit card run and the big suppliers bear the fee. So few make money in the US market on the float.
The UK system started to unravel when these factors came together. One of biggest collapses in recent memory was XL Airways group.
However it was followed by others where the fragility of the flow of funds can be clearly seen as the cause.
Three players also fell around the same time - Sky Europe, Globespan, and Allbury Travel (previously known as Libra Holidays).
All were clients of credit card technology firm, eClear.
EClear itself then fell and it became clear that the funds for these dependent clients were not in fact present and had been somehow applied elsewhere. A lot of money was involved.
Court appointed administrators BDO, on initial investigation, found that the accounts were missing £100 million owed to creditors, amongst whom included the administrators of the three failed companies.
The company was also implicated in the collapse of both XL Airways and Zoom (Canada). Whether this was causal or effect has yet to be revealed.
So now the other shoe is falling. As the UK has moved to credit card provision, the bank processors have tired of waiting for ATOL reform, are under pressure to reform their own lending practices, and have decided the trickle down pain is the order of the day.
So what is happening? In essence, companies whose customers use credit cards and where they are the merchant will not have access to those funds until AFTER the customer has travelled.
As legal advisor to the Association of ATOL companies, Alan Bowen, says:
“On the basis that companies have lead-in times of three weeks, this could delay payments until after the holiday.”
Furthermore, he added the critical statement:
“Agents need the cashflow to pay for the airline seat, but this will leave them with no cashflow.”
So unless the businesses have a mix of non-ATOL product which could help it sustain the cash flow, then they would find it very hard to manage and survive, let alone thrive.
The impact would be hard and immediate, Bowen says:
“Businesses that have 90% of their customers using credit card companies will lose 90% of their cashflow overnight.”
Two of the UK’s largest credit card processing companies are Streamline (RBS Group) and Barclays Merchant Services.
They are acting as a surrogate for the credit card companies in the market. Barclays MS has set the default now to 60 days, from an average of three days.
Streamline has set its default to 42 days. Streamline says it would strive for security from an individual company, or simply hold onto the cash and defer settlement payments if it felt it was justified by the firm’s “risk profile”.
The UK Government has yet to set the reform of ATOL, despite several attempts over the past three years, including a universal head tax.
The opposition of the airlines, particularly the LCCs, to a universal tax has been a major sticking point.
This is going to end in tears and clearly the customer needs to be careful. One can expect that several companies will have to exit the market as the business model is no longer sustainable.
Ultimately this will raise prices to the business, where the trading of security for a smaller group of players will see holiday prices rise – immediately with surcharges, but also the base price.
So, who is to blame? Well that will be for you to sort out, but there is enough blame to go around.
Sadly, this will hit smaller agents hardest.