Advertisement

Archive for Saturday, April 12, 2008

Airline pushed into bankruptcy by worried credit card processor

A Frontier Airlines customer service agent works the ticket counter Friday at Denver International Airport. Frontier filed for Chapter 11 bankruptcy. The airline sought bankruptcy protection Friday, the fourth carrier to do so over the past several weeks as exorbitant fuel prices eat into earnings and a weak U.S. economy keeps more people grounded.

A Frontier Airlines customer service agent works the ticket counter Friday at Denver International Airport. Frontier filed for Chapter 11 bankruptcy. The airline sought bankruptcy protection Friday, the fourth carrier to do so over the past several weeks as exorbitant fuel prices eat into earnings and a weak U.S. economy keeps more people grounded.

April 12, 2008

Advertisement

— Frontier Airlines, the latest airline to file for bankruptcy, was pushed over the brink by a problem that could spread to other carriers: credit card troubles.

The carrier on Friday blamed its Chapter 11 bankruptcy protection on a cash squeeze caused by its credit card processing company, which has decided to keep a larger chunk of the Denver airline's ticket revenue.

The move ends a policy under which the processor, First Data Corp, passed on most money from ticket sales to Frontier. The change is intended to protect First Data, which would be on the hook for ticket refunds if Frontier stops flying. Frontier plans to continue operating while in bankruptcy.

First Data's decision represents a new threat to an industry facing jet fuel prices that have soared 74 percent in one year, a new government focus on safety that has grounded thousands of flights in recent days and tight competition and falling demand that, combined, have limited carriers' ability to raise prices.

"It's just a god-awful time for this industry," said Bob Mann, an independent airline consultant based in Port Washington, N.Y. "This illustrates the uncertainty of capital markets to a T."

ATA Airlines, Skybus Airlines and Aloha Airlines all have filed for bankruptcy in recent weeks. Champion Air plans to shut down and MAXjet Airways went bankrupt in December. All cited some combination of high fuel prices and falling demand, among other factors.

While it's not uncommon that banks processing airline credit card transactions hold a certain amount of a carrier's proceeds in their own accounts until a passenger completes his or her travel, it is unusual for a processor to suddenly change its cash withholding policy, analysts say.

In the case of Frontier, the new requirement - known in industry speak as a holdback - was the proverbial straw that broke the camel's back.

"We believe that we currently have adequate cash on hand to meet our operating needs," Frontier Chief Executive Sean Menke said in a statement. "Unfortunately, our principal credit card processor very recently and unexpectedly informed us that, beginning on April 11, it intended to start withholding significant proceeds received from the sale of Frontier tickets."

Such a "change in established practices" would throw a serious wrench into Frontier's cash forecasts and business plan, Menke said. The bankruptcy filing prevents First Data from imposing the new cash withholding requirement, he said. The airline also threatened to sue First Data.

"The terms of our agreement with Frontier Airlines are not unique; they are considered standard industry practice and terms originally agreed upon by Frontier," First Data said in a statement.

Comments

igby 6 years, 6 months ago

Where's the beef?Is the world gone totally mad. Don't these airlines keep enough cash on hand to operate until you land.There's more to this airline trouble than meets the eye.It's the fuel cost thats killing the flights not the faulty wiring smoke screen.

0

Commenting has been disabled for this item.