A hybrid model for the Atol Protection Contribution (APC) emerged as preferred course for reform on Wednesday (25 May), with a mix of risk and value taken into account to determine the amount paid.

The current £2.50 flat rate, which is levied per person on all Atol-protected bookings, was deemed inappropriate by the industry “as it does not deal with risk in an acceptable way”.

The CAA’s Atol Reform document, the result of a consultation process that began in April 2021, said some respondents considered this a fairer system because financially-sound Atol holders “are not, in effect, subsidising riskier financial practices by others”.

It added: “These respondents considered that a variable rate APC should be used to reflect the residual risk not covered by other financial protection measures.”

The solution found support from all sizes and types of Atol holders except integrated groups, which expressed a preference for a risk-based model.

The CAA’s report added that it was "notable" that most Small Business Atol holders were also in favour of the hybrid model, with views among Standard Licence holders more mixed.

Those that backed a hybrid APC stated it would ensure Atol holders pay an amount “more reflective of their risk”, noting it would provide a more appropriate contribution to the Air Travel Trust (ATT), which refunds consumers after a collapse.

“However, concerns were raised by some around the complexity of such a model, and whether the CAA could create a sufficiently clear, transparent, and fair hybrid model," said the CAA.

Respondents in favour of a value-priced APC argued risk is linked to trip value through the size of refunds, and that holiday value would be “a simpler and more transparent means” of pricing.

However, other respondents strongly rejected this, saying it could unfairly penalise high-margin operators in favour of low-cost, low-margin brands.

Other means of reform also drew unfavourable responses. A suggestion customer money be subject to mandatory segregation was rejected by a majority, which considered this “overly complex, interventionist and unworkable”.

The report said: “One of the main concerns was around the significant cost of pre-departure payments (especially for more expensive trips), that should not be borne by the tour operator for the duration of the booking.

"There were also concerns around pre-payments, especially those to major airlines who, respondents stated, are generally not responsive in the cases where refunds are required.”

Another issue, the report said, was the cost and administrative burden on smaller Atol holders.

The CAA also proposed bonds could become the mainstay of the financial framework, as they were prior to the introduction of the APC in 2008. However, more Atol holders were opposed to this than mandatory segregation.

Several argued it would not be appropriate due to lack of competition in the bonding market, which meant higher prices. The additional capital needed to bond was also seen as being potentially "restrictive and damaging” after the pandemic.

Most also expressed doubts that mandatory bonding or segregation of customer monies would help negotiations with merchant acquirers.

A majority were against providing financial protection through the insurance market “with most expressing concern over insurers paying out” following past experiences. There were fears this would dilute the Atol brand, with many saying the government was best placed to govern consumer protection.

There was also disagreement as to what the Air Travel Trust Fund should be used for. Some said if funds were for repatriation only, a flat-rate APC would be more appropriate “as repatriation costs should not be related to business risk or holiday value”.

Others said if funds were also for consumer refunds, a hybrid or risk-based model would be more appropriate.

A second consultation is due to get under way later this year, which will be informed by this initial round of findings.