For anyone struggling to get a refund from an airline, cruise line, or travel agent this year, this sounds appealing. The model is sure to become much more common as regulators begin to understand the benefits. It’s time.
If UK tour operators renew their licenses to operate in the coming weeks, some may be asked to keep customer prepayments in a segregated account, the Telegraph reported recently. Currently, tour operators and airlines are often free to spend the prepayments for any purpose and long in advance of travel.
Given the immediate need to ensure that the travel industry remains solvent, a swift regulatory crackdown on this business model would currently be counterproductive. The bigger current concern is that tour groups are barely seeing new bookings. The German airline Lufthansa AG plans to offer up to 25% of last year’s flight capacity in the fourth quarter.
However, following the financial crisis, UK banks were forced to separate their core retail banking services from riskier investment banking. Someday there must be a similar billing of how tour groups protect customer money.
From a tour operator perspective, getting customers to raise funds months in advance of travel is great – it’s like getting a big interest-free loan. Lufthansa, the cruise operator Carnival Corp. and the travel company TUI AG had billions of dollars in customer money, according to their latest full financial results.
When Covid-19 stopped traveling worldwide, consumers found they were getting a raw deal. Many experienced a Kafkaesque struggle with corporate bureaucracies to get their money back, and they often had to get by with vouchers.
Some travel agents are better at protecting their customers’ money and they are the loudest ones calling for change. “It is scandalous that the money innocently paid for travel arrangements at some point in the future does not have to be trustingly put aside and only spent on contract performance,” said Trailfinders. The current system is referred to as a “protective bat”.
Theoretically, customer prepayments are safe even without a fence. When booking a flight with a credit card, it is usually possible to get a refund if the travel company goes bankrupt. But not everyone books this way and you only load the risk on the lending company. Because of this, the latter withhold customer funds from tour operators, which they consider a financial concern.
Britons who book a flight including flight with what is known as ATOL protection can also receive a refund from the Air Travel Trust Fund if their travel company breaks down. However, following the death of Thomas Cook, the fund was cleared of cash.
Setting up an escrow account does not guarantee that refunds for bulk cancellations will be processed quickly like this year. However, by preventing companies from spending the money until customers have traveled, the money should at least be safe. (3)
Tour groups are also beginning to see the benefits of dedicated accounts. Saga Plc believes that the decision to set up an escrow account will bring a marketing advantage to its vacation customer, who is over 50.
However, separating customer prepayments would increase a travel company’s cash needs that most can barely afford at the moment. For example, UBS analyst Cristian Nedelcu estimates that up to 250 million euros (296 million US dollars) of Tui’s cash could be “restricted” if regulators tightened ring fencing. Tui had nearly € 6 billion net debt, including lease liabilities, at the end of June and had to turn to the federal government twice this year for help.
TUI CEO Fritz Joussen said in May that the delimitation of customer deposits would “more or less destroy the industry”. The impact on cash flow could spill over into the travel sector, killing hotels and other ailing money providers.
There is still little evidence that the UK or any other government will force airlines to set up trust accounts as some travel agents are asking, and this may not come as a surprise given the fragile financial situation of aviation and the need to protect jobs.
“While I think there would likely be public support for restricting airline customer funds as well, at least in the current situation, there is a risk that governments will pay the bill for large older airlines, so you can see that Falling may not be their top priority, ”says Daniel Roeska, an analyst at Bernstein Research.
Once there is a vaccine and we are all flying again, we shouldn’t forget how carefree some airlines have been with customer money. Better protection of that cash is the least that companies could do.
(1) Thomas Cook is still able to transfer part of the package holiday money received to the airline to cover the cost of the flight ticket.
(2) Some escrow accounts may use a portion of the customer booking funds to pay suppliers.
This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist specializing in industrial companies. He previously worked for the Financial Times.