What Happens to You If Your Tour Operator Fails?

Last week, British-based Goldtrail Travel folded, leaving thousands of travelers stranded in Greece and Turkey and causing thousands of others to lose their holiday trips. As is usual in such cases, the operator failed leaving almost no resources either to fulfill its outstanding obligations or to provide compensation. All in all, U.K. trade sources indicate that in the remaining summer months, the collapse will affect about 50,000 travelers. And although hardly any Americans are likely to suffer from this particular failure, in today’s weak economy, operators here could fail, too. This failure raises some important questions about prepaid tour packages:

Why do tour operators fail? Usually, they simply run out of money. When a tour operator hits a rough patch, it may continue to accept new bookings and prepayments but start to stretch out payments to airlines and hotels, hoping to catch up later. If they can’t catch up, they have no choice but to stop paying airlines and hotels. {{{SmarterBuddy|align=left}}}Why can’t tour operators weather spells of bad business? Typically, tour operators are packagers, not direct providers, and they operate on slim margins: Almost everything they take in goes out again to airlines, hotels, bus lines, and such. Any unforeseen costs or revenue decreases throw them into a loss. Moreover, they usually have meager assets, in comparison to their cash flow: About all they need in the way of tangible assets are desks and computers.
What happens to you if your operator fails? That depends on where you are in the travel cycle:

• If you haven’t started your trip yet, you lose any money you’ve deposited or prepaid and, of course, you don’t get the trip.
• If you’re already at your destination, and the operator hasn’t fully prepaid your hotel or your return airfare, the hotel may well demand that you pay, yourself, in addition to what you paid the operator, and your airline may ask you to buy a new return ticket.

In the British case, many hotels demanded second payments from travelers whose bills had not been prepaid by the operator. Airlines, however, tried to return travelers without extra charges.

How likely are U.S. operators to fail? To my knowledge, the United States hasn’t had a major failure for at least a decade. But that’s no guarantee about what might happen next week. Small and budget operators appear to be most vulnerable, but some of the biggest ones have failed in years past.

How can you protect yourself against operator failure? Although you can’t completely protect yourself from a ruined vacation, you can at least make sure you don’t lose a lot of money in a possible operator failure.

• The best overall protection is to put any major travel purchase on a credit card. That way, in most failures, you can take advantage of federal credit card chargeback requirements. Those federal regulations don’t cover debit cards, but many large banks offer some protection on debit card purchases.
• The large operators belonging to the USTOA trade association are required to post financial surety against possible failure. However, that may not be enough to cover a large failure.
• Several states provide some consumer protections: California, Florida, Hawaii, Illinois, Iowa, Louisiana, Massachusetts, Michigan, Nevada, New York, Pennsylvania, Virginia, and Washington. In general, these protections are limited to residents of the state.
• Many travel insurance policies protect against operator failure, provided you don’t buy the insurance from that operator. Make sure to get a policy that covers “default” or “failure,” not just “bankruptcy,” because some failing operators never get around to filing formal bankruptcy.
• A good travel agency should keep tabs on its suppliers—and avoid any that seem shaky—so buying through an agency is an added safeguard. But even then, always use a credit card—some of the most supposedly “reliable” operators have folded.

Your Turn

How do you protect yourself from possible tour operator failures? Share your thoughts, experiences, and advice by submitting a comment below!