CAA faces crisis as Barclays shuts its purse

Airline watchdog may have to go to Treasury, cap in hand, as bank digs in heels on £60m overdraft limit

The Civil Aviation Authority (CAA) faces a growing funding crisis after Barclays Bank, the high-street lender, turned down its request for an increase in its overdraft level.

Faced with a growing mountain of debt in the wake of around 45,000 claims arising from the collapse of XL Leisure last year, it is believed CAA bosses approached Barclays to extend the overdraft beyond its estimated £60m level. It is thought that the collapse of XL Leisure added more than £12m to the CAA’s overdraft.

But Barclays, which has significant exposure to the airline and travel industry, with loans to a number of prominent companies, refused the request.

The decision means that the CAA, which regulates the airline industry, may have to go cap in hand for a state bailout. The Government underwrites the CAA.

A spokesman for the authority declined to comment.

Last month the CAA confirmed that it has paid £9m in refunds to XL Leisure customers so far. Around 4,000 claims have been rejected.

Meanwhile, speculation is growing that the CAA is set to increase the cost of its Atol Protection Contribution (APC) levy, under which travel firms selling packages are expected to collect £1 for every customer. This cash goes towards providing consumer protection and replenishes the Air Travel Trust Fund, which is deeply in the red.

A source close to the authority said: “Simple economics dictate that the CAA is going to have to increase the size of the APC. In the short term, and by that I mean the end of the year, it’s likely to be hiked to as much as £2.50 per passenger. In the longer term, I can see the levy going as high as £5. At a time when the industry is suffering, this is going to hurt very badly.”

At the end of November last year, Thomas Cook’s chief executive, Manny Fontenla-Novoa, and Peter Long, his counterpart at TUI, met with Geoff Hoon, the Secretary of State for Transport, urging an “immediate review of consumer travel protection”.

A number of large airlines, including British Airways, which unveiled disastrous results last Friday, are not part of the consumer protection scheme.

With bookings across the industry suffering in the wake of the credit crunch, the prospect of a dramatic increase in the APC is likely to be greeted with dread.

Following the collapse of XL Leisure, Zoom and others last year, the CAA is thought to be cracking down hard on companies looking to renew their licences in the March season.

A source said: “I know a number of firms that on paper clearly look like they will fail the CAA’s free asset test. They have a difficult balancing act to maintain. Come down too hard and the industry will suffer failures immediately. Wave people through and the market deteriorates. Tthe situation could get a lot worse.”

The free asset test is the basis for the CAA’s financial assessment of a licence holder. It states that an Atol holder is required to maintain an adequate ratio between its free assets and turnover.