PN 46/03     24 April 2003

Cancellation charges levied by the big four tour operators in sample periods between 1998 and 2001 have not been shown to be disproportionate says the OFT.

Following a two-year in-depth analysis, the OFT has concluded that the income generated from cancellation charges in the periods examined does not appear disproportionate to the overall losses the operators incurred from cancelled holidays and flights. The OFT examined the charges imposed by Airtours, First Choice, Thomas Cook and Thomson Holidays at various times between winter 1998/1999 and winter 2000/2001.

In the OFT's view, the effect of the Unfair Terms in Consumer Contracts Regulations 1999 is that a supplier who sets out in advance the charges to be paid by consumers who cancel (through no fault of the supplier) must base those charges on a real and fair estimate of potential losses. The OFT takes the view that the tour operators' cancellation charges in the periods examined appear to represent no more than a genuine estimate of the companies' losses overall.

The OFT has therefore decided to take no action on this matter under the Unfair Terms in Consumer Contracts Regulations at this time. However the OFT will take action in the future against any cancellation charges that appear unfair.

In March 2001 the OFT formally required the four operators to provide financial information relating to cancellation charges following complaints. The investigation was conducted in parallel with examination of other terms in the companies' standard contracts in 2002 (See PNs 64/02 and 67/02). That action secured fairer contract terms in relation to surcharging, cancellation rights and rights to compensation.

Over time the way in which cancellation charges are levied has improved for consumers. For example, before the OFT approached the tour operators in 1999, First Choice and Airtours both made a 100 percent cancellation charge within 21 days of departure. First Choice now charges 100 percent only within 3 days of departure. Airtours charges 100 percent only on the day of departure.

The OFT investigation has revealed that some consumers are unaware that they may lose their deposit or incur a cancellation charge if they cancel their holiday booking. The OFT recommends that consumers:

• Check what the cancellation charges are when they book – be aware that charges increase closer to departure date
• Shop around and compare cancellation charges between tour operators before booking
• Check whether they are covered by their travel insurance.

John Vickers, OFT Chairman, said:

'Tour operators are entitled to recover no more than a genuine advance estimate of losses when consumers cancel holiday bookings. In their quest for holidays that offer the best value for money, consumers should be sure to understand the implications of cancelling along with other elements of the deals on offer.'

ANNEXE

1. The four major tour operators who provided information to the OFT were First Choice Holidays plc, MyTravel Group (trading as Airtours Holidays), Thomas Cook Tour Operations Ltd and TUI (UK) Ltd (trading as Thomson Holidays).

2. The OFT examined the income that Airtours, First Choice, Thomas Cook and Thomson Holidays received from cancellation charges in sample periods between 1998 and 2001, covering as a minimum the peak summer period of 2000. The information was supplied on a confidential basis.

3. The test the OFT applied to the charges was that they should represent a genuine pre-estimate of the companies' losses from cancellations. The law does not allow companies whose customers cancel their contracts to reclaim losses that they could have avoided had they taken reasonable steps to do so. The main such steps tour operators can take are to try to resell cancelled holidays, to withdraw from obligations to buy transport and accommodation from suppliers (subject to contract terms), to repackage travel and accommodation elements and/or to resell travel and accommodation separately.

4. The OFT therefore considered whether the pre-estimate of loss took into account the operators' revenue from resold holidays. It is necessary to make an assumption about which holidays sold after the date of a cancellation were previously unsold holidays and which are cancelled holidays being resold. The OFT also took into account any costs the operators could save because the holiday did not go ahead – for example accommodation costs if the holiday was cancelled before the company was committed to paying for them.

5. The scope for mitigation of loss through both resale and cost reduction clearly narrows as the date of departure approaches, but by how much is an empirical issue. Therefore, how far it is fair to charge later cancellations more than earlier ones depends on careful analysis of the likelihood that the tour operators can mitigate their losses.

6. The OFT obtained the advice of Counsel on the legal aspects, together with expert accounting advice on the large volume of data received from the companies in response to formal notices sent to them in March 2001. The OFT's examination was specific to sample periods. This means that changes to the companies' cost structures could affect the subsequent validity of the charges as a genuine pre-estimate of losses. The OFT has asked the companies to keep their charges under review.

7. The issues that have arisen about the fairness of the big four tour operators' cancellation charges also arise in other industries. The OFT's general guidance on unfair contract terms covers the broad principles to be applied to assessing the fairness of such terms. The OFT will keep under review whether it would be useful to publish fuller guidance in the future.

NOTES

1. The Unfair Terms in Consumer Contracts Regulations came into force in 1999 (superseding the UTCCRs 1994) and apply to standard contract terms used with consumers in contracts made after 1 July 1995.

2. Under the UTCCRs a term may be considered unfair if it has the object or effect of 'requiring any consumer who fails to fulfil his obligation under the contract to pay a disproportionately high sum in compensation' (paragraph 1 (e) of Schedule 2).

3. Download the introduction to the Unfair Contracts Terms Guidance in pdf format (55 kb).
Download other sections of the report.