Collapse of Kiss shows strain on travel industry

Failure of third tour operator in a month also increases pressure for reform of Atol

The collapse of Kiss Flights, which has caused chaos for up to 70,000 holidaymakers, is reigniting criticism of the Atol consumer protection scheme.

With further travel industry bankruptcies expected over the coming months, pressure is growing for swift reform of the out-dated system.

After the failure of Kiss Flight's parent company, Flight Options, the Civil Aviation Authority (CAA) confirmed yesterday that travellers with flights booked with the bankrupt provider will be refunded or flown home by the Atol scheme. But holidaymakers with accommodation booked separately will only be refunded for their flights, leaving thousands of holidaymakers potentially ineligible for refunds.

Kiss Flights is just the latest in a string of collapsed tour operators. Last week, Birmingham-based Sun4U folded, leaving as many as 1,500 customers stranded overseas. And in July Goldtrail also went bankrupt, upsetting the plans of up to 50,000 people. It is not only budget operators that are suffering. The market leaders Thomas Cook and TUI both warned earlier this month that full-year profits would come in at the low end of expectations, blaming weak demand and pressure on prices.

Elsewhere in the economy, there are signs of recovery from recession. And even the embattled travel industry has seen significant green shoots in recent months. British Airways and the hotel group InterContinental Hotels, for example, have both reported a bounce-back in recession-hit business travel.

But British consumers facing looming public spending cuts are still paring back holiday plans. And tour operators – particularly budget operators focused solely on the UK – see little benefit from improving markets elsewhere.

The final blow for the likes of Kiss Flights came in the early summer, when the core booking season was hit by a series of events each of which sapped already-weak demand. "Although bookings were reasonably good at the start of the year, the combination of the ash cloud, the World Cup, the general election and fantastic weather led to a real drop in May and June," Deborah Griffin, a director at Deloitte, said.

Heavy discounting to lure late bookings then put unsustainable pressure on the wafer-thin margins at the budget end of the tour operator industry. "At the budget end, margins are very small and it doesn't take much to tip them over the edge," Ms Griffin said.

Experts agree that the three recent bankruptcies are unlikely to be the end of the industry's problems. Budget operators in the highly seasonal holiday industry normally hit the buffers from September onwards, as summer business peters out and there is not enough cash to tide them over the winter. The fact that some are already failing indicates real trouble in the industry, according to Bob Atkinson, an analyst at travelsupermarket.com.

And as more go under, the shortcomings of existing Atol arrangements will be under growing pressure. "These collapses have already thrown open the fact that the protection under Atol is fine if you have bought a package from a major tour operator, but where an agency has been creative and bought the best cheap flights and the best cheap accommodation and put them together then you are in hot water," Mr Atkinson said. "The agent needs its own Atol licence in order for their packages to qualify; they can't rely on a third party to provide the cover," he said.

In the wake of the Goldtrail collapse, the Transport Secretary, Philip Hammond, reiterated the Government's commitment to reviewing the Atol arrangements. But industry insiders say progress is too slow. "The Government works on government time," Mr Atkinson said.

The CAA, which administrates the scheme, is also pushing for reform. The watchdog has tried several times in recent years to secure legal agreement to paying out for all package schemes, but judges repeatedly rejected their cases. "If you go back a few years, everybody booked a package holiday and there were no such things as low-cost carriers or the internet," a spokesman for the CAA said. "But now the market is very different, and we totally agree that there needs to be reform to the Atol scheme."