Chapter § 5.04 TOUR OPERATORS, WHOLESALERS AND PUBLIC CHARTERS

• Jurisdiction: United States
• Publication year: 2021

§ 5.04 Tour Operators, Wholesalers and Public Charters

The marketing of travel services to the general public involves at least four distinct functional entities. These components are the suppliers, wholesalers, retailers and Internet travel sellers. Suppliers and wholesalers also sell their travel services directly to the general public, but most travel services are marketed through a large number of retailers and Internet travel sellers.

[1] Functional Definition

A travel wholesaler purchases bulk travel services such as air transportation or hotel accommodations and resells those services to individuals or groups at a much later date.¹⁸⁸ Suppliers sell in bulk to wholesalers at reduced rates in order to generate cash flow, and disputes may arise.¹⁸⁹ In return, the wholesaler assumes the risk¹⁹⁰ of selling the travel services to the general public directly or through retail travel agents. Some wholesalers such as consolidators¹⁹¹ purchase air transportation in bulk and resell it at rates lower than the retail price of the same air transportation. Consolidators are somewhat risky and consumers should be careful in purchasing air transportation from them. The largest type of wholesaler is the tour operator.

"A critical and necessary element in the travel marketing system is the tour operator. Tour operators enter into longterm contracts with air carriers, hotels and other suppliers for the delivery, on a back-to-back basis, of a certain number of airline seats per week, a certain number of twin bedded rooms per week, and so forth. As noted, these travel services are combined into one or two week units and sold to the general public as package or charter tours. The long term contracts between tour operators and suppliers, often entered into a year in advance of ultimate sale to the general public, serve three primary economic purposes. They permit tour operators to purchase bulk services at rates which, typically, cannot be matched on any other basis. They permit consumers to purchase travel services at a cost which is substantially below the sum total of the costs of each travel service were it purchased separately. And, they provide suppliers the security that comes from knowledge of future sales." ¹⁹²

[2] Tour Operators and Public Charters Distinguished

Tour operators and Public Charter operators perform the same function in the marketing of travel services. Liability analysis is different. The liability of tour operators is governed by state common law and statutory law. The liability of Public Charter operators is governed by federal law in the form of regulations.¹⁹³ Federal law as applied to Public Charter operators and charter air carriers is much more helpful to consumers by establishing consumer protection mechanisms and making tour operators and charter air carriers more liable for defaults. It is for this reason that consumers are better advised to purchase tours sold by Public Charter tour operators instead of tour operators governed only by state common and statutory law.

[3] Tour Operators as Principals

Tour operators purchase travel services in bulk and resell those services to the general public. The standard format of resale is the package tour featuring, for example, round trip air transportation, hotel accommodations for "7 Days & 8 Nights," three meals a day, day tours of local sites, and various other services.

[a] Tour Operators Distinguished from Travel Agents Unlike retail travel agents,¹⁹⁴ tour operators are themselves the principals and are directly responsible for the delivery of travel services ultimately provided by suppli- ers.¹⁹⁵ Tour operators do not earn a commission on sales as do retail travel agents. Tour operators purchase services from suppliers, add on additional price, and re-sell these services to the general public. Even if the package tour program does not sell, the tour operator is liable to pay the supplier and, under most circumstances, has paid the supplier months before the service is scheduled to be delivered. Such is not the situation with retail travel agents who bear no loss if a given service is not sold (though they may lose an unearned commission).

[b] Liability for Breach of Contract

The distinctions between tour operators as principals and travel agents as agents is important in establishing breach of contract liability on the part of tour operators. The traveler's attorney may find it necessary to explain to the Court why it is that tour operators are principals and hence, like any other wholesaler, responsible for the failure to deliver travel services. Under federal Public Charter regulations tour operators are defined specifically as principals,¹⁹⁶ thus obviating the need to explain the workings of the travel industry to the court. The reason for such explanations is that tour operator brochures contain onerous and self-servicing disclaimers¹⁹⁷ which seek to create the illusion that they are agents for disclosed principal-suppliers¹⁹⁸ and can not be held liable for a failure to deliver promised services.

[4] Common Travel Problems and Liability Considerations

Common travel problems for which tour operators should be held responsible include:

(1) mishandling of consumer deposits including theft, conversion and diversion of monies paid for specific travel services; ¹⁹⁹

(2) rendering companies insolvent and misrepresenting the ability of the tour operator to deliver travel services; ²⁰⁰

(3) physical injuries; ²⁰¹

(4) departure delays ²⁰² and cancellations; ²⁰³

(5) hotel "bait and switch" schemes; ²⁰⁴

(6) misrepresentations regarding air transportation; ²⁰⁵

(7) misrepresentations regarding the nature of the accommodations, services and facilities available at promised hotels; ²⁰⁶

(8) misrepresentations regarding the food to be served; ²⁰⁷

(9) mishandling baggage;

(10) misrepresentations about the safety of a tour; ²⁰⁸

(11) price overcharges; ²⁰⁹

(12) violation of state licensing statutes²¹⁰ and consumer protection laws;²¹¹

(13) violation of federal law and regulations ²¹² (exclusive of the Public Charter Regulations); and

(14) bad weather. ²¹³

[a] Theft, Conversion and Diversion of Consumer Deposits The tour operator business is, generally, thinly capitalized and rather speculative in the sense that tour operators must enter into long term contracts, perhaps, a year in advance of the planned tour program. As a result tour operators may misuse consumer deposits²¹⁴ or convert tickets entrusted to them by suppliers.²¹⁵ Consumers purchase tours to depart on specific dates and payments are made for those specific tours. In most cases consumer deposits are ear-marked for specific travel services and should not be used to fund current operational expenses.²¹⁶ Under federal Public Charter regulations tour operators must segregate consumer deposits by the dates defining the tours.²¹⁷ Some states follow the common law, which supports the concept that tour operators cannot use consumer deposits for purposes other than those intended by the consumer, while others do not.²¹⁸ This was made clear in Civil Aeronautics Board v. Scottish American Association,²¹⁹ a case in which an affirnity tour operator took consumer monies paid in for specific charter flights and used the money to pay current expenses. Some 2,000 consumers were stranded when the tour operator went out of business. The Court found the tour operator and its principal liable for failing to properly handle consumer deposits.

"This case is not strictly a case of piercing the corporate veil, since it also involves personal liability for misapplication of corporate funds . . . there was a common law duty in [tour operator] and its officers to apply such moneys toward purchase of the transportation for which they had been paid. . . ." ²²⁰

In asserting causes of action against a tour operator, particularly one which went out of business, it may be reasonable to allege conversion or diversion of consumer monies and breach of fiduciary duty²²¹ in failing to properly handle consumer deposits.²²²

Tour operators subject to federal public charter regulations are required to post bonds or open escrow accounts as a consumer protection measure.²²³ Other tour operators may advertise that they have obtained surety bonds provided by the National Tour Association, the United States Tour Operators Association or the American Society of Travel Agents to protect consumer deposits.

[b] Misrepresentation of Financial Health of Tour Operator

Tour operators that cease business operations and strand hundreds or thousands of consumers not only are liable for conversion or diversion of consumer monies but may also be liable for misrepresenting the financial health of the company. Implicit in the marketing of tours to be delivered weeks or months into the future is the promise that the tour operator is in good fiscal health and will be able to deliver the services in the future. More often than not a tour operator may actually be insolvent weeks or months before it goes out of business, yet this information is not revealed to the general public which continues to be solicited and which pays deposits upon the belief that the tour operator will be in business in the future.²²⁴

[c] Physical Injury Claims

Consumers who purchase tours featuring transportation, hotel and resort accommodations and food, sports activities, and tours of local sites often sustain physical injuries. The spectrum of physical injury claims while on tour can be extensive.

[i] Accidents at Hotels and Resorts

Most tour packages provide hotel accommodations. Physical injuries on hotel and resort premises²²⁵ during a tour include, among other events: slips, trips and falls,²²⁶ food poisoning,²²⁷ fishbones,²²⁸ injuries and drownings in the hotel pool,²²⁹ burns from "hot" showers,²³⁰ exploding stoves,²³¹ sinking ships,²³² heart attacks,²³³ falling through hotel windows²³⁴ or over a railing,²³⁵ injuries from bee stings,²³⁶ suicides,²³⁷ rapes and...