Mainstream news has been filled with stories of customers battling tour operators for reimbursements on vacations and flights that they probably won’t be able to take because of the coronavirus
This is not surprising given the abundance of publications focusing on consumer rights on the net, which clearly set out the rules and regulations that tour operators must follow.
Consumers know their rights and claim them.
One rule that gives them a lot is the Package Travel Directive. This was revised in 2018 to ensure that all operators must honor refund requests within 14 days of cancellation. The United Kingdom, like most other member countries, has adopted the rule under its own Package Travel Regulations Act.
But tour operators who rely on deposits to finance working capital, especially during low seasonal periods, say the need to comply with the law on refunds could collapse the entire industry if not overturned.
These times are extraordinary and even the European Commission has recognized that compliance with its directives is not realistic under the current circumstances.
Thursday, the Commission issued an official recommendation so that tour operators are allowed to offer vouchers to customers, but only if passengers accept these conditions. The authority noted that the travel and tourism sectors in the Union have reported a reduction in reservations of around 60 to 90% compared to the same period last year, and requests for reimbursement from travelers due to cancellations now far exceed the level of new bookings.
From the recommendation:
Directive (EU) 2015/2302 of the European Parliament and of the Council12 (“the Package Travel Directive”) provides that, if a package trip is canceled due to “unavoidable and extraordinary circumstances”, travelers have the right obtain a full refund of any payment made for the package, without undue delay and in any event within 14 days after the termination of the contract. In this context, the organizer can offer the traveler a refund in the form of a voucher. However, this possibility does not deprive travelers of their right to reimbursement in cash.
Although the recommendation has been well received by the tourism industry and its associative groups, tour operators are still facing a difficult battle on two fronts.
First, until national governments recognize the recommendation in existing laws that still apply, it will remain illegal to try to persuade customers to accept alternatives. Many European members have, however, taken steps to rectify legal contradictions or, at the very least, have taken authoritative steps to approve vouchers, but the UK has so far delayed this for its credit equivalent reimbursement (RCN).
Mark Tanzer, Managing Director of the Association of British Travel Agents (ABTA), stressed Thursday the need for the British government to do more to legitimize RCMs.
The fact that the European Commission has approved the correct use of financially protected reimbursement credit notes should help give UK holidaymakers an extra confidence that they can trust to provide the same protection as the original vacation booking. We now need the UK government and the CAA to speak out and confirm their status, which the industry has been waiting for.
But it is not the only fight.
The commission’s recommendation focuses on the voluntary acceptance of credit notes. While government approval can help customers accept these credit scores, there is no guarantee that a sufficient number of customers will choose this option to make a difference. And customers still don’t seem to understand that the problem is in many cases existential.
Sean Tipton, ABTA’s director of media, told FT Alphaville that in many cases, tour operators were simply unable to reimburse their customers, they simply did not have the money.
Operators have expressed concern about how this is interpreted by some consumer rights groups as evidence that they are operating mismanaged or even fraudulent businesses. This revealed a major misunderstanding about how the tour operator business model works.
Graham Simpson, whose company Simpson Travel specializes in holidays in Greece and the Mediterranean, said that his company was among the small and medium-sized operators hardest hit by this misunderstanding by consumers. He said:
When a stay is booked, the operators make deposits on the accommodation and buy services such as flights. When the world locks up almost overnight, we cannot get all that money from suppliers instantly. In addition, we have already incurred many costs in marketing and selling these vacations which will no longer be covered as we are prevented from making a margin. We had our legs cut.
The above implies something significant.
There is now an underlying expectation that every penny put by a customer should be recoverable on request within a very short time.
Whether intended or not, this means that the enactment of the Package Travel Directive has transformed tour operators into effective deposit-taking institutions – even without any of the proportional capitalization regulations that generally apply to banks. In turn, this exposed the industry to a monumental level of execution risk which now threatens a system-wide collapse.
To combat racing, banks have the ability to liquefy their asset books with a lender of last resort. However, tour operators do not have this option. Their “assets” represent claims on the underlying properties and services that they have pre-booked using customer deposits. And while the ability to issue repayment credit notes can help close the cash gap to some extent, the voluntary nature of their use offers no guarantees.
This ambiguity will have enormous repercussions on the tour operator industry, but also on the underlying economies of the most popular tourist destinations, including the peripheral states of the European Union already in financial difficulty: Spain, Portugal and of course Greece.
As Simpson pointed out to us:
The impact is not only on consumers here in the UK. Our owners of villas and hotels in the Mediterranean do not face any season; they call me to tell me they need money. We desperately want to support them. I feel so torn apart but it is ultimately a matter of survival and we will survive.
It is no secret that Europe’s peripheral economies depend on tourism, and British tourism in particular.
According to ING’s monthly economic update, although tourism is particularly important in Italy and Spain – accounting for at least 13% of GDP and around 15% of employment – it is in fact Cyprus, Greece and Portugal which have the largest tourism and travel sectors in the euro area. All are particularly dependent on foreign tourism. The following, via Eurostat, confirms this.
The prospect of this season’s cancellation was a sufficient crisis in terms of lost income and livelihoods for many island economies in Europe. Any additional effort by tour operators to recover supplier deposits may well turn things into a humanitarian crisis in many of these precarious regions.
A bailout of the UK tour operator sector may well be needed in time. For now, the ability to honor claims with credit scores, whether or not customers accept them, is desperately needed to save the industry. Customers who are financially stressed themselves and who cannot afford to defer their repayments should in turn be offered some sort of facility where CRMs can be exchanged, possibly as a form of collateral, for cash .
The only alternative is for the RCMs to be transformed into an informal parallel currency in itself or used as a mechanism to offset the vacant British tourist demand with the vacant foreign tourist demand at national level.
Operators suffocated by an inability to recover airline deposits, for their part, could consider using airline miles as a form of temporary alternative currency solution. The airlines themselves could consider strengthening their balance sheets by suspending frequent flyer reward programs and using airline miles programs to allow for speculative forward sales. Especially if these airline miles could be honored universally, across the airline industry.