Sticking With Companies That Bond

Bonding is often mentioned in the travel industry, but how important is this financial process to travelers? Does bonding protect consumers, and if so, can it deliver total refunds when trips are cancelled?

Travel agencies need to be bonded if they are to be granted airline tickets to sell to the public. But this process is designed to protect the airline, not the consumer.

If the agency goes under, the airline is protected. But the traveler who has given deposit money to an agency may have to seek redress through other means.

“A retail travel agency is just the same as any other company that goes out of business,” according to Susan Kaplan, president of the Southern California Chapter of the American Society of Travel Agents (ASTA). “Consumers are hurt much more when suppliers such as airlines and cruise lines go out of business.”

Processing Deadlines

If the money has not already been transferred to the airline, the consumer can still try to get it back from the agency. After that, the consumer must deal with the airline. Paying by credit card can help, since the consumer then has 30 days to dispute any charges.

There is no default protection program for the airlines, despite talk of creating one to replace a version that fell apart several years ago.

If an airline folds, consumers can try to recover funds through the bankruptcy courts, but this means a long wait. Other airlines may allow ticketed passengers to fly with them, yet such flights probably will be allowed only on a limited basis, such as standby.

Consumers who have money deposited with some cruise or tour companies may have more protection. Cruise lines that take on passengers in U.S. ports and have a minimum of 50 berths must, under federal law, offer proof to the Federal Maritime Commission (FMC) that they will cover refunds to prospective passengers should trips be canceled.

This financial proof is periodically reviewed, according to an FMC spokesman. However, ships that do not pick up passengers at U.S. ports are not regulated.

Some Have Default Plans

Tour operators vary in the way they handle trip cancellations. But three industry associations each have default plans that offer some consumer protection.

ASTA has a Tour Payment and Protection Plan which requires participating companies to post a $100,000 bond. Travel agencies that are ASTA members (not all agencies are) and that book trips with these companies can get part of this money to reimburse clients.

In order to do so, the travel agency must file on behalf of the consumer, and the plan is activated only if the tour operator files for bankruptcy. Unfortunately, not all companies that go under participate in this plan.

“The way it works is that it’s determined how many ASTA agents sold that product, and then all of the $100,000 is used to satisfy the claims made on a prorated basis,” Kaplan said. Problems arise, however, when the amount involved goes over the $100,000 mark.

The United States Tour Operators Assn. (USTOA), also has a default protection plan that requires members to post a $100,000 bond. Bankruptcy isn’t necessary for this plan to be put into effect.

“The consumer has to make a claim directly with USTOA,” Kaplan said. “All of the $100,000 is used for claims, but since the plan covers everyone, not just clients of certain travel agencies, the prorated amount recovered can be even more diluted than with the ASTA plan.”

Guaranteed Bonding

The National Tour Assn. has a comparable bonding plan that guarantees consumer deposits up to $100,000 per company for more than 500-member tour operators. However, bankruptcy must first be declared by the out-of-business firm. If claims exceed $100,000, payments are made on a prorated basis.

With the rash of recent bankruptcies, the travel industry is taking a hard look at the adequacy of these bonds when companies cease operation.

For example, ASTA is studying its plan to see whether the $100,000 requirement should be raised and whether this or a higher sum could be used even without a declaration of bankruptcy. And all three trade associations are scheduled to meet jointly to discuss the bonding situation.

Even tour operators have indicated that the default plans offer incomplete protection to travel agencies and their clients.

One tour operator, a specialist in Hawaii, suggested that operators should have their financial situations periodically assessed.

“The amount of bonding is insufficient to cover the losses that happen when a big company goes out of business,” said Patty Campbell, past chairman of the Assn. of Retail Travel Agents (ARTA).

“Consumers can get back as little as a penny on a dollar. It would be hard to get a bond to really cover the extent of possible losses, and if such a bond were offered, suppliers probably wouldn’t be able to afford it. It’s a bit of a Catch-22 situation.”

Cost Might Be Passed On

The cost of acquiring higher bonds would be passed on to the consumer, Campbell said. “The whole bonding picture is a very difficult one. In California, the law calls for travel promoters to have an adequate bond, but there is no spelling out as to what this amount should be.”

In California, travel agencies and tour operators which are not bonded must either deliver tickets or vouchers to clients within two business days after full payment, or deposit consumer payments into a trust account.

When a tour operator goes under, some travel agencies may absorb the loss, with their clients traveling as scheduled. “This is strictly a voluntary act by the agency, if they feel it’s within their financial ability,” Campbell said. “It depends on how much money and how good a client is involved.”

One step uncertain consumers can take when a company goes out of business is to contact the West Coast headquarters of ASTA in San Diego.

“You may be able to find out if bankruptcy has been filed, location of the pertinent bankruptcy court, if any travel agency involved is an ASTA member, if the tour operator was part of our default plan and who the insurance carrier is for the company that went out of business,” Kaplan said.

However, consumers should remember that when matters proceed through a U.S. bankruptcy court, travelers are generally last in line for any recovery. “Secured creditors such as banks, printers and other suppliers come first,” Kaplan said.

Check Company Out

The best medicine may be preventive.

Trip cancellation insurance may be a prudent move. Some travel insurance plans also cover supplier default.

And before you make travel plans, try to determine if the company you’re working with has a proven record of financial stability.

This may not be easy, and some defaults have surprised even members of the industry. But you can find out if a company is a member of a trade association and if the company is covered by a consumer-protecting bond.

Three tip-offs to company stability are: a recent change of ownership, sudden expansion of product line and special discounts that may indicate a drive to help immediate cash flow.

The three trade associations with consumer protection plans are: The American Society of Travel Agents, 4420 Hotel Circle Court, San Diego 92108, (619) 298-5053; the United States Tour Operators Assn., 211 E. 51st St., New York 10022, (212) 944-5727 and the National Tour Assn., P.O. Box 3071, Lexington, Ky. 40596, (606) 253-1036.