The Civil Aviation Authority proposes a rise to £3 in the consumer levy on ATOL-protected holidays in a consultation document published today.
The Air Travel Trust fund which underwrites consumer financial protection on package holidays will be bankrupt by October without an increase from the current £1. The proposal is sure to spark fury among tour operators.
Travel association ABTA has lobbied for the scheme to be widened rather than see a rise in the ATOL Protection Contribution (APC). But that proposal is not included in the consultation, which will run for six weeks ahead of a decision by transport secretary Geoff Hoon in July and an increase in the levy from October 1.
The only options presented to the trade are of an alternative rise to £2.50 or £3.50.
The CAA blames a combination of "exceptional factors" for the crisis in the fund - the failure of the UK's third largest travel group XL Leisure last September and a sharp fall below industry forecasts in the number of protected sales due to the recession.
Income from the levy is forecast to be £13 million down by next March on industry projections of holiday sales a year ago - owing to 10 million fewer bookings over the two years than originally forecast. The additional £3 million loss is due to the associated costs of the shortfall.
The final cost to the fund of the XL Airways failure is expected to be £37 million, out of a total bill of £89 million, taking the fund to a deficit of £59 million by March 2010.
However, the fund's credit facility was reduced from £60 million to £50 million last month in line with a government guarantee, meaning it will be bust by October if nothing is done. A £3 levy could clear the fund's deficit by July 2011, according to the CAA, without a further deterioration in trading.
The CAA does hold out the prospect of a subsequent change in the scheme, with a government consultation in the autumn on proposals to widen ATOL-protection to all flights sold with another holiday component - as suggested by ABTA.
CAA consumer protection group deputy director David Moesli said: "We hope industry respondents do not miss the fact that they are being offered a regulatory change many of them want. The government wants to hear their views. It would be a disaster if they spend all their time criticising the APC position. It is an opportunity to build a change in the protection scheme."
ABTA issued a response to the proposal, saying, "We shall be actively consulting with our members to understand the reasons for the proposed increase, and what this means for the future viability of the ATOL Scheme.
"It remains our conviction that broader reform of the ATOL Scheme is long overdue, and we shall be urging this point through the consultation process."
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