Are recent developments likely to see the end of dynamic packaging?

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I read with interest Steve Endacott’s recent view that HMRC may have flight plus providers in their sights as a target for TOMS. When this is coupled with other recent developments, I begin to wonder whether we are seeing the death throes of dynamic packaging by travel agents, and indeed, whether it is sensible for travel agents to re-consider whether they should be creating packages themselves in any event.

 

There is no doubt that over the past 10 years, dynamic packaging, or whatever you choose to call it has grown and thrived in the marketplace. From a travel agent perspective, it made sense to reduce their reliance on traditional tour operators. Commissions were being cut, some operators were looking to exercise greater control over their distribution, and the increased capacity in the market from the no frills carriers presented a great opportunity to offer a wider choice to consumers…and potentially a better financial return to the agent.

 

Likewise, for customers dynamic packaging provided more flexibility on routes and durations, as well as sometimes offering better value for money. Part of the reason for lower prices has been, quite simply, that many of the costs of regulation and compliance were simply not incurred. The biggest one, VAT on the margin has been largely avoided, and most dynamic packages have historically been sold on the basis that the retailer is selling the components as an agent, and not therefore responsible for the delivery of the service. The introduction of Flight Plus ATOLs introduced an additional regulatory cost, albeit a relatively small one, of £2.50 per passenger.

 

To my slightly jaundiced eye, this development allowed travel agents to take all the financial benefit of being a tour operator without incurring all the costs and risk – and frankly, why wouldn’t a business choose to do that?

 

However, developments over the past few weeks should make anyone putting together such dynamic packages pause for reflection, and perhaps reconsider their business model.

 

The first of the issues is undoubtedly the question of VAT. Whilst I do not necessarily share Steve’s conviction that HMRC have travel agents in their sights, there has to be a very real risk that a government looking to raise extra revenue will look at every opportunity, and an apparent gap which means that no VAT is paid on hotel sales either in the destination or in the selling market looks like an obvious target.

 

Within the next week, we are also likely to see the emergence of the final text of the revised Package Travel Directive. Until we get that text, we don’t know exactly what is in or out of scope, but certainly all the earlier drafts have had the effect of turning what is currently a Flight Plus in the UK into a full package, and there is no reason to believe that the final draft will say anything different. The new Directive will not take effect until 2017, or possibly even 2018, but at that point, any holiday put together by an agent will be a package, and the agent will be responsible in the same way as a tour operator for provision of the components of the holiday, and this will include in particular, responsibility for the acts of the suppliers of services forming part of the package.

 

The most onerous of these responsibilities is undoubtedly taking steps to ensure that the holiday is safe. Whilst lawyers have questioned just how far that responsibility goes, the publicity given to the Corfu inquest should cause all travel businesses to stop and think about what might happen if things do go wrong during a holiday.

 

One of the biggest challenges faced by the large operators in recent years has been how they address the safety conundrum. No-one wants to put their customers at any risk of death or personal injury, but at the same time, how far can any travel business really go to understand and manage their safety risks? Do we need to inspect every hotel we sell or offer for sale? How comprehensive should that inspection be? At the moment, the court of public opinion appears to be telling us that holidaymakers seem to expect that their holiday will be safe. If you are a travel agent putting together a dynamic package, how are you going to fulfil those expectations? You are a long way removed from the final accommodation supplier, and don’t have sufficient commercial clout to influence their behaviours.

 

A few years ago, we had a similar debate, and the answer seemed to be that travel agents would buy their beds from bed banks who agreed to act as a Principal, in the belief that by so doing, the bed bank would have carried out appropriate auditing of the safety of what they sell. I, for one, am not convinced that this is always the case.

 

I suspect that many travel businesses will now sitting back and considering their liability position, and in any event, anyone selling holidays should be doing so.

 

Personally, I am not convinced that trying to introduce comprehensive auditing for everything you sell is reasonable, proportionate or appropriate, but every travel business will need to have a position that they can justify or defend if appropriate. Putting together a dynamic package, where you are responsible for what you sell may well fall into the category of things that you would really rather not do. It certainly makes sense to get some good advice about where you may stand.

 

All of this brings me back to my opening question. If it were me, I would now be reflecting carefully whether I wanted to be putting together holidays myself, and I suspect that we may yet see another shake up in our market. Dynamic packaging may just have had its day.