A travel bond is a financial guarantee provided by a third party that protects customers' money in the event of a travel company's insolvency. Travel bonds provide a safety net for consumers, ensuring they receive a full refund, repatriation if they're already on holiday or a continuation of their trip with an alternative provider.
Travel bonds are one financial protection method travel providers use to meet legal obligations set out by the 2018 Package Travel Regulations (PTRs). The regulations mandate that any travel company selling package holidays must have financial protection in place in case of insolvency:
"The organiser must ensure that a bond is entered into by an authorised institution, under which the institution, in the event of the organiser's insolvency, agrees to pay to an approved body."
A travel bond protects customers who have booked a package holiday or linked arrangements. Here is the definition of "package" in the PTRs:
"Package means the pre-arranged combination of at least two of the following components when sold or offered for sale at an inclusive price and when the service covers a period of more than twenty-four hours or includes overnight accommodation:
Let's look at two examples to get a clearer idea of what is and isn't covered by a travel bond:
Consumers can verify if a travel company has financial protection in place in several ways, including:
It's also a good idea for customers to consider purchasing their own travel insurance. While bonds cover travel company insolvency, they don't cover circumstances that could affect the traveller, including cancellations due to personal reasons and medical emergencies.
A travel bond is a formal agreement between several parties:
The travel company that is obtaining the bond. They are obligated to operate their business in line with industry regulations, and this includes handling client funds responsibly.
The insurance company issuing the bond. They provide a financial guarantee that the travel company that took out the bond will fulfil their obligations. If they fail to do so, the insurance company compensates the consumer. Regulators and trade associations typically publish lists of accepted bond providers.
The organisation that requires the travel company to be bonded. This could be a regulator, or it could be a trade association that requires the travel company to be bonded before becoming a member. The bond protects the customers of the travel company.
The process of establishing a travel bond typically follows these steps:
The value of a travel bond varies depending on the travel company – the bond amount is typically determined as a percentage of the travel company's projected gross annual income. This figure is influenced by several factors, including:
A travel company with a healthy balance sheet and a strong credit history is considered lower risk by insurers and will likely secure a lower bond requirement. However, due to the unpredictable nature of travel, many merchants struggle with being deemed ‘high-risk.’
The specific details of the travel services the company sells also play a major role in the value of a travel bond. The bond provider will look at the company's average booking value, the destinations included and the travel lead time to determine the level of risk involved.
Generally, an established business with a stable trading history is viewed more favourably by bond providers. As a result, new travel companies with no proven track record may be required to pay a higher bond.
Customers will need to access the bond if the travel company they've booked with becomes insolvent. If it happens before the travel service is delivered, they'll receive a refund. If the insolvency occurs while travellers are abroad, they will require repatriation.
The claims process is handled by the association that holds the bond – this could be organisations such as ATOL, ABTA or ABTOT. It is this organisation that will issue claims guidance for customers affected by the company's insolvency. This typically involves submitting a claim form that contains proof of bookings and the payments made to the insolvent travel company.
There are two primary bond types: bank bonds and insurance-backed bonds. Each type has its pros and cons:
A bank bond is a financial guarantee issued by a bank on behalf of a travel company, ensuring its customers are refunded should the company go insolvent.
Pros: Bank bonds are a long-established form of financial protection that are generally viewed as secure and, as a result, are accepted by all regulatory bodies.
Cons: Bonding with banks typically requires a cash security deposit equivalent to the amount of your bond, making it an expensive financial protection option.
Insurance-backed bonds are a more flexible alternative to bank bonds. After an in-depth financial review to assess the travel business’s risk, the insurer provides the guarantee to the regulator/trade association.
Pros: Insurance-backed bonds are a cheaper option than bank bonds. Instead of the company's cash being locked away as collateral, an insurance-backed bond acts like any other insurance policy – the travel company pays a premium. This premium is typically calculated as a percentage of the total bond amount required.
Cons: Applying for an insurance-backed bond is a lengthy process that involves a thorough assessment of the travel company's financial health to determine its risk exposure. For businesses seen as higher risk, the bond premium may be high.
Feeling confused about the type of travel bond you should purchase? As a travel industry specialist with over 15 years of experience, the TMU Management team is well-placed to help you find the most suitable financial protection solution for your business.
Travel companies are legally required to hold a bond or an alternative form of financial protection to protect consumers. The PTRs enforce the need for financial protection by making it a legal requirement for any organiser of package holidays to have protection in place in case of their insolvency. The regulations state that the protection must be sufficient to cover:
A travel bond is one of the approved methods for meeting this legal obligation.
Government regulators and approved travel trade associations are responsible for overseeing the travel bonding process. The main entities in the UK are:
The Civil Aviation Authority (CAA): The CAA is the UK's aviation regulator, and it manages the ATOL scheme, where it is a legal requirement for any UK business selling flight-inclusive packages to hold an ATOL.
Approved Travel Trade Associations: For non-flight packages, oversight of bonding is usually handled by approved travel trade associations, including ABTA.
If a travel company fails, either the CAA or a travel trade association will step in to manage the claims process. Claims for companies holding an ATOL will be managed by the CAA, while a travel trade association, such as ABTA or a similar entity, will handle claims for companies selling non-flight packages.
While travel bonds are a widely used financial protection method, they aren't the only option available for travel companies. The PTRs allow for several mechanisms to protect customer funds, and the most suitable choice depends on the company’s business model and cash flow.
Let's explore the two main alternatives to travel bonds:
A travel trust account is a separate bank account managed by an independent trustee and is used by travel companies to hold client funds until the services are provided.
Pros: Trust accounts are a secure and reliable form of financial protection, as the customer's money is completely segregated from the travel company's operational funds. This travel consumer protection method is also generally favoured by merchant acquirers as it significantly reduces the risk they take on.
Cons: Travel trust accounts also have their downsides, as not giving the travel provider the option to access customer funds before they travel can restrict cash flow.
Generally, trust accounts are best suited for well-established travel companies with substantial cash reserves, as they can operate without relying on cash flow from customers' advance payments.
Financial failure insurance is a type of specialised insurance policy that protects customers from financial loss when a travel company they've purchased services from becomes insolvent.
Pros: Many FFI providers offer more flexible payment options than travel bonds, making it a suitable financial protection option for travel companies prone to cash flow challenges.
Cons: The cost of FFI typically fluctuates with sales volume, making long-term budgeting challenging.
Generally, FFI is well-suited to businesses that need flexible and lower-cost travel consumer protection solutions, such as new travel businesses and established ones with highly seasonal sales patterns.
Travel bonds and similar financial protection methods are a vital part of your travel company's toolkit, and choosing the most suitable protection for your business is a decision that should not be taken lightly. While travel bonds are a well-established method accepted by regulatory bodies, we believe that it's vital for you to be aware of all the financial protection methods available to you.
At TMU Management, we offer innovative travel insurance products that protect your business, ensure compliance with the PTRs, and provide access to travel associations.
Contact us today to discover how we can help you meet the PTRs and fulfil travel trade association requirements.
