Overhauling EU rules on package travel - briefing

26 November 2009
by eub2 -- last modified 26 November 2009

Millions of travellers who book holiday ‘packages’ with combinations of flights, hotels, car rentals etc on the internet or in the high-street look set to receive tougher financial protection if things go wrong, under plans put out for consultation by the European Commission today. The Commission is consulting on extending the basic cover provided by EU’s 1990 Package Travel Directive – on information, liability for sub-standard services and protection for insolvency - to the next generation of ‘dynamic packages’ where consumers make up their own packages, often online, through one website or different partner websites. 23% of EU consumers, and over 40% in countries like Ireland, Sweden are now booking "dynamic packages", many of which currently fall outside EU protection rules (67% mistakenly think they are protected). Following the recent spate of airlines going bust, the paper also considers extending basic insolvency protection for consumers beyond package and dynamic packages across the board, including for stand alone airline tickets.

Which holiday packages are covered by EU law?

The Package Travel Directive ( Council Directive 90/314/EEC) covers pre-arranged holiday packages which combine at least two of the following: (1) transport, (2) accommodation, (3) other tourist services (if they account for a significant proportion of the package).

Consumers are covered where: (a) at least two of the above elements are sold at an inclusive price and (b) the service covers more than 24 hours or includes an overnight stay.

How are consumers protected under the current Package Travel Directive?

The Package Travel Directive protects the interests of consumers buying a package holiday by defining a range of the organiser's (or retailer's) duties and some specific consumer rights. Below is the summary of the key provisions. They all represent minimum consumer rights, and EU countries have been free to add more stringent rules to protect consumers in their national laws.

1. Information requirements

The organiser/retailer is obliged to provide the consumer with information at the pre-contractual stage, in the contract and also before departure. Special requirements are laid down for brochures, in that they cannot be misleading and must contain clear and accurate information on the price, destination, transport, accommodation, meals, itinerary, documentation requirements and the payment schedule.

The brochure must also indicate whether a minimum number of people is required for the package to take place and, if so, the deadline for informing the consumer in the event of cancellation.

The details contained in the brochure are binding on the organizer (or retailer, as the case may be), unless the consumer was clearly informed of any changes before signing the contract (this must then be clearly stated in the brochure) or if the changes were agreed between the two parties later.

In addition, the consumer must be given details in good time before departure about transport arrangements (connections, type of seat/accommodation on the transport), the local representative on site (including an emergency phone number) and optional insurance offers.

2. Binding prices

The price of the package agreed in the contract cannot change except in some limited situations i.e. changes in transportation/fuel costs, taxes and fees, and currency exchange rates. In these cases, the contract must have expressly provided for a possible price change, and have stated how it was to be calculated.

No price increase is allowed during the last 20 days before departure .

3. Cancellation or change of package terms

If any of the essential elements of the package (such as the price) agreed in the contract is changed or if the organiser cancels the package, the consumer has the right to withdraw from the contract and get a full refund.

Alternatively, s/he may accept a substitute package. If the substitute is of lower quality than the original one, s/he is entitled to receive the price difference.

If the package is cancelled by the organiser, the consumer may also have the right to compensation in addition to the full refund (with some exceptions, e.g. if the package was cancelled due to a force majeure situation).

4. The organiser's responsibility and handling complaints

The organiser/retailer is liable if the contract is not properly performed, with some exceptions, e.g. when this is a case of force majeure.

They are also required to provide prompt assistance if the consumer is in difficulty, even if it is a force majeure situation or the problem is caused by a third party not connected to the package.

Consumers are entitled to compensation if the contract is not performed properly, and if the service offered on the spot does not correspond to what is in the contract, the organiser (or their local representative) must try promptly to find a satisfactory solution.

5. Insolvency protection

The organiser/retailer must provide sufficient evidence of security for the refund of the money paid and for the repatriation of the consumers in the event of insolvency. This means that the consumer must be fully protected against loss of money if any of the service providers (travel agency, airline, hotel, etc.) becomes insolvent.

SECTION 2: MAIN PROBLEMS

Why revise the Package Travel Directive?

When the Package Travel Directive was adopted in 1990, a package holiday was the most common sort of holiday in Europe. Pre-defined packages, usually including a flight and a hotel, were typically sold by travel agents in the high street at an inclusive price.

But in the last two decades we have seen rapid changes in the travel sector. The rise of the internet has made it possible for consumers to make their reservations online directly from tour operators, travel agencies/retailers, air carriers, cruise lines and hotels themselves. Nowadays, most EU citizens (56%) organise their holidays themselves, rather than purchase pre-defined packages. In some cases, these travellers might fall under the scope of the Directive, in others not. This is decided on a case-by-case basis, and the legal situation is far from clear (see especially the "dynamic packages" explained below).

As a result of these developments, the number of consumers who are protected under the Package Travel Directive when going on holiday has been falling steadily. In the UK, for example, it is estimated that less than 50% of passengers on leisure flights are protected under the Directive, compared to 98% in 1997.

For these reasons, the Directive has become outdated, and may no longer provide sufficient protection for today's consumers when they go on holidays. It also fails to provide legal certainty for businesses. This can be detrimental to consumers and burdensome for businesses and result in costly and unnecessary legal proceedings.

Below is an overview of the areas which the Commission says need clarifying and updating in the Package Travel Directive.

What is a "dynamic package"?

A "dynamic package" is when two or more services for a single holiday or trip (such as flights, hotel or car rental) are bought at the same time and from the same supplier, or from different suppliers that are commercially linked (such as airlines, hotel chains and car rental companies), and are put together according to the consumer's specific needs.

For example, a consumer may book a flight and then be redirected to a partner website offering a hotel and /or a car rental.

The popularity of dynamic packages is on the rise, especially online. Table 1 below shows the use of dynamic packages within the last two years in 17 EU countries, based on the findings of the Consumer Detriment Study (see below for more details of the study). The data show that 24% of the citizens in the 17 countries have used a dynamic package (23% when extrapolated to the whole EU), but the figures are substantially above average for Ireland, Sweden, Italy and Slovenia.

What is the problem with dynamic packages?

If the different services booked are subject to separate contracts and separate payments to distinct companies, the package is most likely not covered by the Package Travel Directive. However, whether a "dynamic package" falls under the Directive has to be determined on a case-by-case basis and will often lead to complex judicial interpretation. This leads to legal grey zones, which create problems for both businesses and consumers.

Results of the Commission's consumer detriment study show that, for dynamic packages where the consumer has experienced problems, the average loss they face is €600 (which is 80% of the average cost of the package). For the 17 countries covered by the study, this translates into €1 billion annually.

What is the problem with the information requirements?

The Package Travel Directive only sets minimum information requirements. As a result, many Member States have added additional obligations for the organisers/retailer in their national laws. This results in a patchwork of national laws, which can be problematic for organisers who provide (or want to provide) services in several EU countries. For example, tour operators may find it difficult to produce brochures that can be used in several EU countries. Fragmented national laws drive up the cost of setting up business in another EU country, which may discourage traders from offering their service in some countries. This may create cross-border barriers on the internal market and therefore limit the choice for consumers.

Another problem is that the Directive focuses on brochures as the main way of providing the consumer with the required information before the contract is signed. This may have reflected market reality in the 1980s, but the popularity of the internet among consumers has changed that.

What is the problem with the professional parties' responsibility?

Under the Directive, the liability for performing the contract properly lies with "the retailer and/or organiser". Based on this, EU countries have divided the responsibilities of the retailer and the organiser in many different ways in their respective national laws. In most cases, it is the organiser (e.g. the tour operator) who is liable, with the retailer's responsibility being more limited.

But the situation varies across national borders. This can be problematic and confusing for the consumer if there is a problem with the package holiday and, for example, the tour operator and the travel agency are based in two different EU countries with different laws (which is now by far more common than in 1990, since many consumers book their holidays online).

Another major issue is that tourist services today are provided by a wide range of businesses and the traditional distinctions between air carriers, organisers and retailers have been blurred. Twenty years ago, the "organiser" normally meant the tour operator, and the "retailer" was the travel agent who sold the holiday package in the high street. But business models in the leisure industry have greatly changed since then. Nowadays, it is not rare for a travel agency itself to put together its own packages, or for an airline to offer inclusive weekend packages.

As a result, it is not always clear who exactly is liable for executing the travel contract properly. Again, this may mean uncertainty for consumers and require complex legal interpretation.

What is the problem with the rule on protection for insolvency?

Liberalisation of Community air transport markets in the 1990s has led to an explosion of new services operated by new operators that have provided consumers an enormous increase in service alternatives with less rigid conditions often offered at much lower prices. Competition between legacy carriers and new entrant low cost carriers has sharply intensified and multiplied the number of market exits as well as market entries as uncompetitive airlines were liquidated or reorganised. The number of bankruptcies since January 2000 is at least 79, and a higher rate than that reported in the 1990s.

The Directive requires the organiser/retailer to provide sufficient evidence of security, so that, in the case of insolvency, the consumer can be fully refunded and repatriated. This is a very important provision in protecting consumers, especially given that the risk of insolvency has grown recently. In France, for example, there were 125 bankruptcies of tour operators in 2008, affecting over 9,000 consumers, compared with 95 bankruptcies (affecting just over 2,500 consumers) in 2006 . Between November 2005 and September 2008, 29 airlines went bankrupt. Their effects on holidaymakers varied depending whether tickets were bought as part of a package holiday.

Case Study: Study on Consumer Protection Against Aviation Bankruptcy , European Commission January 2009

A number of recent bankruptcies can put these issues in perspective:

XL Airways

XL Airways was a charter carrier based in the United Kingdom which went into administration on 12th September 2008. Its bankruptcy left 80,000 to 85,000 passengers stranded, with another 240,000 booked for the coming months. The vast majority of XL's passengers were booked on a package deal, which meant they were covered under the UK's Air Travel Organisers' Licensing (ATOL) Scheme. Some 8,000 to 10,000 passengers were holders of flight-only tickets. The UK Civil Aviation Authority initiated an airlift under the ATOL Scheme to repatriate stranded package passengers; flight-only passengers were able to participate on payment of a fee. A proportion (but not all) chose to do so.

Air Madrid

Air Madrid was Europe's only long haul low cost carrier. It suspended its flights in December 2006 after threats by the Spanish authorities to revoke its aircraft operator certificate (AOC) due to continuous maintenance issues and poor service. It left more than 100,000 people stranded, mainly in Spain, Latin America and Romania. The majority were immigrants heading home for the holidays. Spain's transport ministry was able to charter flights to help around 8,000 travellers get home and Air Comet took over some of Air Madrid's assets and routes, but thousands were still left stranded. It also promised to help passengers win compensation for cancelled flights.

After the cessation of the operations, the Spanish authorities and the Spanish Airport administration (AENA) helped frustrated and stranded passengers as a matter of courtesy, ex gratia. The Spanish public authorities do not have legal or other remedies at their disposal in order to solve the problems of the passengers.

EUJet

A similar situation occurred after the demise of Irish low cost carrier, EUJet. Passengers holding tickets could file a claim with the administrator. The bankruptcy left some 5,000 passengers stranded on several European destinations. The industry response in this case was good, with several other airlines offering return flights at low costs. EUJet apparently refunded the tickets booked in advance.

Sabena

The Sabena bankruptcy in November 2001 left surprisingly few people stranded, since many passengers were aware of the financial problems of the Belgian carrier, leading to considerably less bookings in the final stages of the carrier's history. All aircraft were repatriated. Sabena's subsidiary airline DAT quickly resumed part the former destinations under a bridge loan of the Belgian government and eventually evolved into Brussels Airlines. This was in contrast to the demise of Sabena's parent company, Swissair, which left numerous people stranded, although most of these passengers were repatriated on an ad hoc basis.

SECTION 3: NEXT STEPS

What are the next steps that will be taken towards revising the Directive?

Through the consultation launched today, the Commission will gather feedback from a wide variety of stakeholders on possible ways to solve the main problems in the Package Directive. The consultation is open until 7 February 2010.. The Commission will then carefully consider the feedback before considering specific solutions, also taking into account the impact of any measures on consumers, businesses and the internal market. The aim is to present a proposal in autumn 2010. Then it will be up to the European Parliament and the Council to see how fast the new proposal can be voted into law.

The Commission is also in the process of preparing a review on air passenger rights which will deal with a wide range of consumer issues, including the insolvency of airlines.

Source: European Commission