Late last week, Frontier Airlines filed for chapter 11 bankruptcy. Unlike some of the recent airline shutdowns, Frontier IS still flying, much like Delta, Northwest, US Airways, and United did earlier this decade. But the real news nugget is Frontier’s stated reason for the timing of their bankruptcy filing. Not fuel prices, or competition. Credit cards.
In making the announcement, Frontier CEO Sean Menke stated that the Denver-based airline “filed for very different reasons than those of other recent carriers.” Indeed, Mr. Menke blamed the airline’s descent into bankruptcy on an “unexpected attempt” by credit card processor First Data “to start withholding significant proceeds received from the sale of Frontier tickets.”
Generally, credit card vendors turn over revenue to airlines from bookings in a matter of days. But in some cases, the companies hold on to a percentage of ticket receipts until customers actually take their flights. These so-called holdback policies vary, usually depending on the financial stability of an airline.
In Frontier’s case, the holdback rate went from 45% to 100%, effective May 1. Ouch.
For travelers, though, there are longer-term implications here: If airlines’ financial viability is a dance on a razor blade, and if accepting credit cards can create a risk of survival, then travelers are likely to see cash-payment incentives (or credit-payment disincentives), going forward.
European airlines have been charging a credit card surtax for some time, to dissuade customers from charging it. And a few months ago in the U.S., discounts were floated as a way of getting customers to pay by cash. And despite the fact that every airline has an affinity credit card that generates points in their loyalty program, Frontier’s bankruptcy is going to put more pressure on airlines to reduce the reliance on credit.
Just watch.
Related:
- Is there a backlash against credit cards brewing among U.S. airlines?
- Skybus shuts down abruptly, third scheduled U.S. airline to fold this week
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April 13th, 2008 at 8:26 pm
It’s crazy that the credit card companies can change the terms of the processing agreements with such short notice. And to go from 45% to 100% holdback – no wonder Frontier declared bankruptcy.
I don’t think we want the industry switching away from credit cards though – they provide the most affordable protections for consumers. If people pay cash and then their airline goes bankrupt they become another creditor in the bankruptcy proceeding.
April 13th, 2008 at 8:32 pm
I agree, we don’t want the industry to move away from credit cards. The consumer protection! The flexibility! The miles! But I fear it’s a matter of time…
April 13th, 2008 at 8:47 pm
Well now it’s a big game of chicken. The credit card companies don’t want to push the airlines into bankruptcy but they also need to cover their risks from being so exposed in a troubled industry.
And neither wants to stop credit cards from being accepted – they allow people to buy tickets that they wouldn’t otherwise buy and they bring in a lot of business for the credit card companies too.
If the risk to the credit card companies is too high for airline transactions then they need to be charged a higher discount rate to account for the risk.
But we know that the airlines can’t afford to pay more with the thin margins and huge fuel costs.
With the current credit card policies the airlines are not allowed to pass on that risk to the consumers.
If you are right on where things may be headed, I think we are more likely to see the airlines threatening to stop accepting credit cards and switching to EFT and other payment schemes and that threat, if believed, will result in the credit card companies allowing them to charge a surcharge.
While I wouldn’t want to have to pay a surcharge, and while it certainly goes against the general credit card marketing and culture of the USA, I would gladly pay a percentage or two in order to keep my protections and other card perks.
Of course, I hope you are wrong.
April 13th, 2008 at 9:04 pm
Honestly, do you think that a credit card based consumer base is going to support a major industry walking away from that financial flexibliity. Not likely. I would expect to see some lawsuits and most likely legislation that addresses the capricious nature by which the credit card processor treated Frontier. Who is next? This isn’t an indication of the demise of credit cards, but may be a way that some reform can happen at the card processor/network that quite frankly the banking industry has been in critical need of.
April 13th, 2008 at 9:12 pm
Are credit card surcharges or cash incentives coming soon for airline ticket purchases?…
Upgrade: Travel Better has an interesting post about how he thinks the airlines may be changing the way they accept credit cards in light of the Frontier bankruptcy. I’ve posted my thoughts on the issue in the comments section of Upgrade: Travel Bette…
April 13th, 2008 at 9:33 pm
Never happen: You are SO right that the merchant banks have an incredible amount of power over businesses.
It’s not uncommon for merchant banks to screw small businesses by suddenly increasing the amount of money they hold in reserve after an unusually large transaction has been made.
Here is an example: The merchant agreements require those that accept credit cards to accept them for all transactions. So a small business that normally does $200 credit card transactions makes a huge sale to their biggest customer for $10,000 and the customer insists on using a credit card. They run the charge but they find out a few days later that only $5,000 got deposited in their bank – not even enough to cover their costs on the sale. The merchant bank decided that the transaction increased the risk profile of the small business and decided to put a $5,000 reserve on the account effective immediately and will consider refunding it in 6 months.
That is the sort of action that happens all the time in the merchant card industry. I think most sophisticated businesses understand this goes with the territory of accepting credit cards.
What the Frontier incident highlights for me is the need for the credit card industry to figure out a better way to handle dealing with changing risks without putting businesses in such a bind because of the changing risk that their only out is bankruptcy.
But I’m not sure we want the government to legislate that the credit card companies must be forced to assume risks that they are not able to cover by charging different fees as risks change.
April 14th, 2008 at 9:10 am
I think that Flying Critic’s comment above hits it on the head:
We won’t see an elimination of credit card acceptance. But we will see changes.
And if merchant rules get changed in the process, then all the better. The control over cash flow which the credit card processing bank has over the card-accepting business client is chilling.
April 14th, 2008 at 8:52 pm
Don’t forget that a move to EFT would also eliminate the transaction fees the cc cos charge the airlines…
But a definite loss for consumers if it goes that way. No automatic travel insurance!