A new fund to protect airline passengers if a carrier goes bust has been proposed by the Civil Aviation Authority. The fund, based on a flat rate of £1 per passenger, would probably be added to airfares.

At the moment, if you book with a scheduled airline such as EasyJet or British Airways, no money is refunded if the company fails.

But a reservation with a charter airline such as Airtours or First Choice Airways, which carry the Air Travel Organisers' Licensing (ATOL) logo, is protected.

The CAA's report was put to the Government yesterday. It believes that ATOL, which gives protection for air holidays and flights bought from tour operators, should be extended to cover flights sold direct by scheduled airlines.

'We need a change because ATOL has become less effective, and coverage is declining because people are booking with low-cost airlines and over the internet. The public doesn't know what to expect, and thinks there's coverage when there isn't,' said Helen Simpson, the CAA's consumer protection director.

The CAA believes the protection scheme should apply when payment is made in advance, when the sale is made in the UK and the outbound flight originates from the UK.

The CAA will consult the industry before presenting the final report to the Government in two months, and if passed it could become law in 15 months.

· You can see the paper at www.atol.org.uk.