Ministers threatened Virgin over compulsory passenger levy

The Department for Transport warned the company to ignore a call from the Civil Aviation Authority (CAA) for a compulsory £1 levy on all 50 million passengers leaving British airports every year. The call for the levy caused a dispute with the Treasury, which opposed the idea.

The company was told that if it failed to endorse a voluntary approach, Virgin's backing of compulsion would be exposed to senior MPs at the Commons Transport Select Committee.

A minister subsequently explained to MPs that in a discussion between the company and officials "the impression was given that the department would highlight - as opposed to omit - the names of airlines which had not signed up".

A report from the committee yesterday said that while the incident might have reflected a misunderstanding, it indicated a "very disappointing level of trust and communication between the departments and some parts of the industry''.

A report by the committee, called Financial Protection for Air Travellers, urged the Government to rethink its rejection of a levy. The document pointed out that many travellers did not realise 90 per cent of travel insurance policies failed to cover the insolvency of airlines. The report also said the number of "leisure flights'' protected by the so-called Air Travel Organisers Licence (Atol) was in "freefall''. In 1996, 96 per cent of UK international leisure passengers were protected by Atol, but by 2004 the proportion was 66 per cent. By 2010 coverage could fall to less than 20 per cent, the report said. In 2004 more than 14 million travellers were without protection, up from 5.5 million in 2005.

MPs said the collapse of EUjet in July 2005, which stranded thousands of passengers, exposed the gap in protection, according to the document. The CAA estimates the total average cost for passengers to return to Britain was £100 each, with some having to pay up to £200.

The report points out that the levy on flights abroad recommended by the authority was a means of ensuring stranded passengers could be brought home when an airline collapses. Those who had booked their tickets would also have their money refunded.

Gwyneth Dunwoody MP, the chairman of the committee, said the Government's decision to rely on voluntarism was wrong. "Plans for voluntary arrangements for repatriation are amateurish. Millions of air travellers continue to fly unprotected against the risk of an airline collapse," she said.

It is understood that supporters of the levy have begun to gather support among Conservative and Liberal Democrat peers in the House of Lords and that an amendment to the Civil Aviation Bill will have to be discussed by MPs.