The Travel Adviser: When an airline goes bankrupt

When an airline says they’re running out of money or the controlling interest cuts off the pipeline, wise consumers had best be prepared.

SEPTEMBER 11, 2017 12:54

Updated: SEPTEMBER 11, 2017 13:03

An American Airlines plane in flight (photo credit: REUTERS) — An American Airlines plane in flight

(photo credit: REUTERS)

Airlines go bankrupt more often than the US elects a president.

Airlines go bankrupt when challenged by creditors, threatened by labor unions or simply because their pension plans are bloated. For the most part, airlines do not go bankrupt because they have run out of money. When the airline wants to get rid of something or some arrangement drastically this is often the only “legal” way. Do not confuse bankruptcy with insolvency. When an airline says they’re running out of money or the controlling interest cuts off the pipeline, wise consumers had best be prepared.

American Airlines allegedly filed bankruptcy because its pension plans had become too big a burden to fund. So file for bankruptcy, eliminate the pensions as much as legally possible without killing the airline totally and keep on flying. In fact the list of North American carriers who used the bankruptcy procedure to reorganize their bottom line, runs the gamut from Aloha Airlines to United Airlines.

On that list appear such stellar airlines who today are making a profit, such as Air Canada and Delta Airlines. It also includes such names as TWA and Pan American, whose cash flow was so perilous that they simply ceased to fly overnight.

Airline aficionados appreciate the European and Asian airlines that after flying for a short period ceased to exist for the simple reason that these government-owned airlines refused to pad the pockets of the inept bureaucrats running these airlines. Be it Malev Airlines, the Hungarian airline, or Ghana Air, which flew out of Accra, these airlines flew too close to the sun and melted away.

One needs to differentiate between those carriers that canceled or delayed flights due to a myriad of reasons. In the United States, the airline lobby has successfully stymied consumer demands for legislation, and whether your plane has been delayed or canceled, your only form of compensation is beholden upon the airline. Most airline passenger rights are established by government regulation, and, for that reason, they’re the same for all scheduled airlines. But you might be surprised to find that in the US, no federal law or regulation specifies what, if any, rights you have when an airline cancels your flight.

With cancellations, your rights derive solely from the airlines’ contracts of carriage, plus relevant principles of general contract law.

And because no federal regulations apply, those rights are not uniform but instead vary from airline to airline.

Europe has a far more pro-consumer policy.

The European Union mandates more extensive traveler benefits in a cancellation than US lines promise in their contracts. Travelers on flights within the European Union, on flights departing from any EU airport, or on flights to an EU/EEA airport on an airline based in the EU are entitled to alternative means of transport, including transport on other airlines, or refund, including full refund and no-charge return to origin where appropriate.

Except in cases of cancellation due to extraordinary conditions, financial compensation if a replacement seat delays you by three hours or more or if you get a refund, ranges from €350 to €600, depending on flight length (most flights to/from the US and Canada fall into the top category).

EU regulations are vague about meals and accommodations. Other than if extraordinary circumstances occurred, such as a strike or general grounding of flights by authorities, the airline will be exempt from paying the refund. Additionally, if passengers are informed of the flight cancellation 14 days or more in advance, they will not be entitled to canceled-flight compensation.

For example, if an Air France flight from Chicago to Paris is delayed more than three hours for non-extraordinary circumstances, each passenger is entitled to €600 cash – not a credit toward a future flight, but cash.

However if it’s a Delta plane from Chicago to Paris, there is zero compensation proffered.

On the reverse leg, though from Paris to Chicago, and you have the bad luck to be delayed more than three hours, no matter what airline you are flying on, €600 cash is your compensation.

On flights to and from Israel to any destination in the world, compensation only kicks in after an eight-hour delay; getting that legislation through the Knesset required overcoming severe objections from El Al, which tried to quash any such legislation. El Al has proven quite adept in her flight delays to stay under that eight-hour rule, much to the chagrin of passengers who correctly feel exploited when their requests for some form of compensation when delayed more than seven hours are summarily dismissed by El Al, stating they owe no remuneration.

A cluster of companies have sprung up dealing with airline compensation ranging from www.airhelp.com to www.travelrefunded.com The more serious issue is when an airline declares bankruptcy due to a projected lack of hard cash. This year there are three carriers that run the risk of joining Spanair in the annals of airlines no longer in business. Alitalia, Air Berlin and South African Airways are the lucky trio whose continued existence is under daily debate among the financial wizards in the aviation world. The next step after bankruptcy is liquidation; a stage where there are no winners and zero chance of recovery.

South African Airways has been in a terrible financial situation for a long time. The airline has been losing money for seven years, and there are no signs of that changing.

While South Africa should be a big aviation market, the airline has an inefficient fleet, an inefficient route network, and there are also reports of a lot of corruption. The airline has gone through seven CEOs in the past five years, which gives you a sense of the situation they’re in.

SAA missed several payments to creditors, including an $18m. loan that a bank wanted immediate repayment on. On top of that, Hong Kong’s registrar of companies wanted SAA’s financial documents, but they knew that if they submitted those, their rights to serve Hong Kong would be withdrawn. Yeah, it’s that bad. Last month, the Treasury paid out £125m. to settle a loan from Standard Chartered Bank‚ which the bank had refused to extend. South Africa’s Finance Minister, Malusi Gigaba, disclosed that SAA asked the Treasury in March for a £560m. recapitalization.

He is expected to give an answer by October. Essentially they are insolvent and should have filed for liquidation.

On top of that, the cabin crew and mechanic unions are threatening to strike over pay, which could cause even further issues for the airline.

We’ll see how this all plays out, but it seems that South African Airways is basically having the same issues as Alitalia. On one hand the country needs a global airline, but on the other hand, in its current form the airline will just keep losing money. I’m not sure they’ll be able to make any radical changes without failing fully and starting over. For now I’d feel pretty comfortable still booking tickets on SAA. It seems that the government hasn’t totally given up yet, and for the time being will keep supporting the airline, even if it isn’t going anywhere.

I’m afraid South African Airways’ path to profitability is probably very similar to that of Malaysia Airlines. If they’re not going to liquidate, the airline needs to shrink its way to profitability, rather than grow. It seems like they’re best off forming a joint venture with a Gulf carrier and focusing on a strong regional route network, rather than trying to compete on long-haul flights, where they have a significant disadvantage. This is similar to what Emirates and Qantas have done, which has worked out brilliantly for both airlines.

Can Alitalia ever be a good-news story? It appears not in the eyes of Etihad Airways, the Abu Dhabi-based airline that has become the latest in a line of companies to see potential in the Italian flag carrier but for whom good news seems an increasingly distant prospect.

The Etihad equity partnership strategy focused on smaller airlines such as Air Seychelles, Air Serbia, Air Berlin, Virgin Australia and India’s Jet Airways (now India’s second largest carrier after Indigo) that could provide feed to Etihad and allow it to grow more rapidly and compete against its much larger UAE neighbor, Dubai-based Emirates.

Alitalia was different for significant reasons.

Etihad took a 49% stake – worth some $470 million – in December 2014 in what was a major flag carrier brand, but one with a long history of loss making, labor disputes, bailouts and bankruptcies. Indeed, just a year before the deal was finalized; Alitalia was teetering once more on the edge of bankruptcy and was bailed out – only to be close to running out of cash again just six months later.

This time, however, there was a plan. Etihad would invest in, restructure and turn around Alitalia so that it would be profitable by 2017.

Etihad’s team invested significant money, effort, resources and passion in that turnaround.

This was probably the best chance Alitalia ever had.

But as we pivot toward the last quarter of 2017, Alitalia looks financially very much like the airline it has always been – a disaster.

Etihad has turned off the spigot. Alitalia entered the Italian equivalent of Chapter 11 bankruptcy proceedings back in May after staff blocked a deal that would have allowed a fresh injection of funds. The Italian government has injected cash to keep the carrier afloat until the end of the year and a team of receivers are busy accepting bids selling off pieces of the airline.

Ireland-based low-cost carrier Ryanair is bidding to buy around 90 aircraft. Speaking in London last month, Ryanair CEO Michael O’Leary said his company would be submitting a bid for Alitalia’s aircraft, their crews and engineering staff to the Italian flag carrier’s administrators. Ryanair would operate the 90 leased planes using existing staff, but the offer would be dependent on some redundancies, changes to staff conditions and renegotiation of the leases, he said. As Ryanair exclusively uses Boeing planes, Alitalia staff would be required to maintain the 90 Airbus planes, he said. Ryanair, which currently only operates short-haul routes, would also take on longhaul routes under the deal, O‘Leary said.

“I think one of the aspects of Alitalia that is really attractive is the long-haul fleet. There is the capacity to grow very strongly.”

His last comment, though, may prove ominous.

O‘Leary said Alitalia would likely be broken up by whoever buys it and that any takeover would include competition remedies.

So how far in the future should you book on Alitalia? This year seems safe, but I’d be very cautious about making any reservations for 2018, as the Italian receivers have been adamant that a hard decision on Alitalia’s assets will be decided in October.

Air Berlin, Germany’s second-largest carrier, filed for insolvency in August after its main shareholder, Etihad, declared it would not be providing further financial support.

The airline, which has accumulated debt for almost a decade, reported a record loss of €782m. in 2016. Flights will continue to operate thanks to a transitional loan of €150m. from the German government. Its main rival, Lufthansa, is in talks to buy part of the Air Berlin Group. Air Berlin’s passenger numbers have been in freefall; in July, the airline lost a quarter of its customers compared with the previous year. The carrier has also been plagued by delays and cancellations, for which it has been forced to pay millions of euros in compensation.

While eager to absorb Alitalia, Ryanair announced it will not bid for any assets of Air Berlin. In fact, the fiery head of Ryanair has complained that the insolvency process was designed to help strengthen leading German airline Lufthansa. Taking his argument directly to Berlin, he said Ryanair had asked German and European anti-trust authorities to investigate what he said was a “conspiracy” between Air Berlin, Lufthansa and the German government that would lead to higher prices for consumers. Potential buyers of Air Berlin have until September 15 to submit their offers, the carrier has confirmed. Since then a number of airlines have either expressed an interest in acquiring all or part of Air Berlin, or submitted a formal bid – including Lufthansa, Germania, TUI and German turnaround specialist Intro Group. EasyJet has also been linked with the process.

As bullish as I am on making reservations on Alitalia for the next few months, I’m exceedingly cautious about applying that to Air Berlin. If the German authorities do acquiesce to Lufthansa’s purchase, I’d expect a drastic reduction in Air Berlin’s flight schedules.

The airline has already announced a radical retrenchment of their long-haul routes and it makes sense to wait until the dust settles.

No doubt the competitors of both Air Berlin and Alitalia are enjoying these difficulties; El Al in particular will see a short-term uptick on flights to both Berlin and Rome as many consumers will eschew any risk and avoid both carriers.

Let’s go further, though, and imagine you have purchased a ticket on either Air Berlin or Alitalia and are having second thoughts about wanting to risk your trip to the whims of a bankrupt airline that may cease to fly without any advance warning. Sadly, canceling your ticket today means paying any and all cancellation fees. For both airlines continue to fly; management of both airlines tout their belief that a palliative remedy will be found. You may bellow all you want, but until they cease to fly, the risk is all yours.

Let’s delve deeper into the scenario and imagine they ceased to exist. What are your remedies? If you bought directly from the airline, your chances of finding an alternate form of transportation will be severely limited.

Past experience has shown that when an airline is liquidated; sites and offices are shuttered quickly with few human resources available to solve problems. Air Berlin is a member of the One World Airline alliance, while Alitalia belongs to the Sky Team group. Would one of their partner airlines step up and assist stranded customers? Perhaps. We’ve seen in the past, acts of charity by airlines when passengers are stranded in the middle of the trip.

Usually with a nominal fee and a wait of a few days, those grounded travelers find their way home.

Using a travel consultant will be a far more productive method. Their ability to cajole an airline to honor your existing ticket far exceeds that of any Internet site or airline representative. Making sure you have an agency with a 24-hour service is mandatory and finding out what their procedures are ahead of time if you’re booked on Alitalia or Air Berlin is paramount in you having peace of mind. Many top-tier travel agencies will ensure a full reimbursement of your air ticket if the airline is liquidated before you start to fly. In fact the reputation of such travel agencies has been stellar over the years; their policy of full reimbursement when Tower Air or TWA or Malev ceased flying is a testimony to their success.

Most credit card companies offer trip protection if the airline you charged went out of business; this would only be the case if you used a credit card and not a debit card. If you were sensibly in the black when you booked, you could get the money back for your flight using “chargeback.” This is a system used by Visa, Master Card and American Express – just as long as you have proof of purchase.

Will your traveler insurance cover you? Unfortunately, airline financial failure or insolvency is rarely included on most travel insurance policies. However, there is no single rule for this and you should consult your own travel insurance provider to check their approach to airline failure.

Some trip cancellation insurance policies would also provide coverage.

In conclusion, don’t forget the Latin saying: Praemonitus, praemunitus (forewarned is forearmed).

The writer is CEO of Ziontours, Jerusalem. For questions and comments email him at mark.feldman@ziontours.co.il