Leading article: Travel firms go bust, but the public needs protection

In just about every economic downturn, a large travel company seems to go bust. In 1974 it was Court Line, the business that pioneered "cheap and cheerful" package holidays to Spain. In the early 1990s, International Leisure Group, which at the time enjoyed a 20 per cent market share of the holiday industry, went to the wall. Yesterday it was XL, the UK's third biggest package holiday group, which called in the receivers.

The fact is that such companies are particularly vulnerable in times of recession. When the public feel the economic strain, as they are at present, holidays tend to be among the first expenditures on which they cut back. And high fuel prices and the freezing up of the global credit markets have made conditions still worse for travel companies of late.

There were specific factors in play here too. XL had expanded rapidly and perhaps recklessly in recent years. It was always likely to be vulnerable if conditions changed.

So there is nothing particularly surprising about what happened yesterday. Indeed, more budget airlines and smaller travel companies could well follow in the months ahead. But that is not to argue that it is not a serious matter. The social effects of a travel company, or an airline, going bust are not like a normal business going to the wall. First, customers are left stranded abroad; second, those at risk of being left out of pocket by a collapse are not other businesses or banks, but ordinary families who have often paid a considerable amount of money.

XL's implosion has left some 85,000 customers marooned in various countries and some 200,000 people who booked through the company have been left in a state of limbo, waiting to see if they will get their money back.

The pressing question for the Government is whether the insurance scheme governing the sector can adequately protect those customers who booked with good faith in the soundness of the company. And it has to be said that the present compensation scheme governing the holiday sector – the Air Travel Organisers' Licensing scheme – looks rather flimsy.

Those who bought XL holiday packages are fully covered and will be flown home by another provider free of charge at the end of their vacation. But those who bought XL flight tickets only will have to pay again for their return flight. There are other compensation discrepancies too. Those who booked their tickets on credit card are automatically protected but those who did so with debit cards are not. All this seems to fly in the face of natural justice – it is hard to argue that customers should have known about these discrepancies before they booked. These are anomalies that the Government should put pressure on the industry to end.

Yet it is also worth bearing in mind that protecting consumers and ensuring market efficiency is a delicate balance. As we have seen, if the insurance regulation of a sector is too light, customers end up being financially penalised when a business fails.

But if a commercial insurance scheme is too onerous and expensive, it risks impeding the functioning of the market, shutting out nimble and innovative new players. Customers end up with less choice and worse value.

It will be the last thing on the mind of those who are surveying the ruins of their holiday plans this morning, but it is still worth pointing out that a vigorous free market in the vacation industry works much better than one regulated into sclerosis.