Travel Insurance: A Cautionary Word About Protection

The world is awash with airlines offering extraordinary deals to a shrinking number of passengers, and it is the time that folks the world over are looking to book their summer vacations. Buyers rarely beware, but they should give thought making a large purchase in one of the world’s largest, unregulated markets.

It seems that there is a new security blanket coddling travellers, and this is the belief that credit card companies will automatically reimburse ticket-holders who have yet to travel on bankrupt airlines. I am not altogether sure where this idea comes from and to whose benefit its promulgation lies. I am, however, fairly sure that the truth is extremely complex, and that an automatic refund is out of the question.

Some credit cards carry a variety of insurance benefits, and it may be that coverage is included in this package; it may be that credit card companies like the idea of such a masterful position and in the absence of a huge collapse have paid off customers, writing these ex-gratia payments off to goodwill.

There is a thought that reimbursement is due to the “non-provision” of service for which an intermediary company (viz: the credit card) has taken payment. Perhaps; but perhaps not.

Imagine, if you will, the potential bankruptcy of United Airlines or British Airways. Unlike Globespan and XL, each of these august carriers will have hundreds of millions of dollars of such prepaid tickets. It is unthinkable that the credit card companies will have the money to back-stop a failure of that proportion.

Part of the answer lies in the relationship between the merchant and the credit card companies; each merchant for a credit card company is obliged to post a bond, if required, that reflects the potential of default. It is from these monies that reimbursement flows. While a small tour operator (or airline) may be required to post a bond of say $1 million, it is inconceivable that giant carriers would be able to post such a bond to cover all of their unflown customers. As a case in point, however, it is said that Air Canada has approximately $1.3 billion tied up in these kinds of guarantees. Working capital that surely could be better deployed elsewhere.

It becomes ever more expensive to accept credit cards; someone has to pay for all of the points, kettles, dining vouchers and other inducements offered to cardholders, and it certainly is not the credit card companies themselves. Some years ago the airline industry, through IATA, offered their own credit card, the Universal Air Travel Plan. If the expense of credit card acceptance continues to rise, it seems logical that airlines look more closely at building the use of this card, and charging a premium to accept the other brands.

After all, the fees that airlines pay to credit card companies, excluding the enormous guarantees that are in place, are a crippling expense, and one that is at least partly avoidable. Ryanair do so, and for once, it is a fee model with which I concur.

There are insurance companies who offer “default” coverage; this protection, if it still applies to airlines, has significant limits, usually to a maximum of $2 or 3 million per occurrence. Not much on a per person basis if 15,000 passengers are caught, and absolutely no help in reimbursement of expenses other than a proportion of airline costs. Such as a lost tour program, or onward flight connection.

The whole question of consumer protection continually raises its head, and it is an subject that deserves thorough investigation. It is not a solution to simply establish a fund that will allow weak companies to sail close to the wind secure in the knowledge that strong companies will effectively bail them out. In the end, protection is the responsibility of the purchaser; they should , however, have some assurance that multi-million dollar industries like travel have some vestige of financial oversight.

Iin many jurisdictions the industry does not. It is time that it did.

In the meantime, however, it is buyer beware!