Air passenger levy of £1 rejected by Government

The Aviation minister Karen Buck said the disadvantages of such a supplement, aimed at protecting travellers from airline bankruptcy, outweighed the advantages. The decision represents a victory for the Treasury over the Civil Aviation Authority (CAA) and the Department for Transport, both of which said an existing statutory scheme protected a declining proportion of passengers.

Those who book their flights through tour operators are repatriated free of charge under the Air Travel Organisers' Licence (Atol), but passengers who book direct with airlines or organise DIY holidays can find themselves without cover. In a written statement to Parliament, Ms Buck said: "The Government does not believe it should compel citizens to protect themselves against the failure of an airline.

"It is not compulsory, for example, to take out medical insurance or an E111 European health form. And the Government doesn't force householders to insure their house contents, although most of us think it's wise to do so. Even in car insurance, the legal requirement is limited to third-party liabilities."

The CAA said it was disappointed by the decision but acknowledged the Government had asked it to investigate whether Atol bonds could be replaced with a less burdensome scheme.

Andy Cooper, the director-general of the Federation of Tour Operators, said ministers had accepted the arguments of the big airlines "wholesale" and had failed to act in the interests of millions of passengers who did not realise they were not covered by insurance. He said the decision flew in the face of a coalition of 100 MPs of all parties, major consumer groups and the CAA.

But British Airways said: "We are a well-established airline and it would be unfair if our customers had to fund compensation for those who choose to travel on less-established airlines," a spokesman said. Jan Skeels, of The European Low Fares Airline Association, said passengers had a number of options for protecting themselves in the unlikely event of a scheduled airline failure.