Authority rules companies have right to cover cancellation losses. Ian Taylor reports.

The Competition and Markets Authority (CMA) has confirmed travel firms can include an element of profit margin in calculating charges for cancelled bookings.

Andrew Hadley, CMA assistant director of policy, told a Travel Weekly Business Breakfast in London: “Broadly speaking, [when a customer cancels] you should look at what you are going to lose, how much you are going to save and where that leaves you.”

Hadley noted the margin on a cancelled booking would vary depending on the travel service and suggested firms set their cancellation charges based on the expected margin across their products and the average cancellation rates.

This would allow a pre-estimate of losses that could be used to calculate the charge when a customer cancelled.

The alternative would be to make an individual calculation of loss on every cancellation, he said, adding: “That would be unattractive because you could not say in advance [to a consumer] what your refund policy would be.”

Hadley added “one qualifier” to his confirmation that cancellation charges “can include loss of margin”, saying: “If you were hoping to sell additional services, not part of the core package, you cannot assume the profit on those.”

Abta senior solicitor Paula Macfarlane said: “This is about what you lose as a result of a consumer cancelling.”

She said the calculation should be of the revenue a business would lose offset by the money it could recoup from reselling a holiday.

Hadley conceded charges for cancelled bookings are “a complicated area”. But he argued there is a common perception among consumers that travel firms set cancellation charges too high and retain too much of deposits.

He said firms have a right to cover their losses but added: “We live in a world where there is a lot more opportunity to re-sell on online platforms and there is a little too much money being retained by companies.”

The CMA focused a ‘Small Print, Big Difference’ campaign, launched in April, on the outbound travel sector, encouraging companies to check their consumer terms are fair.

The campaign makes clear that demanding large deposits and refusing refunds if customers cancel is unfair – as is charging a cancellation fee which bears no relation to the real costs of a cancellation.

Explaining the campaign at an Abta travel law seminar in May, Hadley said: “Deposits and cancellations are often a big issue. A lot of people thought they could just impose cancellation fees. A lot thought ‘I can charge what I like’ and that is not true.”

The law on unfair terms, including on deposits and cancellation charges, derives from the Consumer Rights Act 2015.

More information: gov.uk/fairterms