What do you do if your airline goes bankrupt? I hear this question a lot lately, and if some big-name financial gurus are right, we’ll all be hearing it more often in the future. Despite widespread attention in the press, however, lots of consumers still seem to think that bankruptcy means total shutdown and failure. It doesn’t, and two new examples graphically illustrate the difference.
Bankruptcy doesn’t necessarily mean immediate failure. Alitalia, the Italian “flag” carrier, filed for bankruptcy this month, using what appears to be the European equivalent of Chapter 11. This was strictly a paper event: The airline keeps flying while it tries to arrange additional financing or a bailout acquisition by a “white knight” such as Air France or Lufthansa. Almost all flights continue to operate as scheduled.
Over the last 10 years, several big U.S. airlines, including Delta, Northwest, United, and US Airways, have gone through that same process at least once, and they, too, kept flying, honoring their tickets and frequent-flier obligations. No travelers lost their money; the main losers were the pre-bankruptcy investors and workers who lost jobs and saw their wages shrink and retirement funds disappear. Even when a big carrier went under — as did TWA — an acquiring airline kept it flying, honored its tickets and reservations, and accepted its frequent fliers with their mileage balances.
Failure — actual shutdown or default — is a different story. This month’s total failure was Zoom Airlines: The low-cost line based in Canada just stopped flying. Several other lines failed similarly within the last year, including Aloha, Eos, MaxJet and Silverjet. In these cases, company officials were unable to find either additional financing or another airline willing to acquire them. Travelers who hadn’t yet started their trips found their tickets worthless, and travelers already at their destinations had to find other ways to get home.
The one-time federal requirement for surviving lines to carry failed-line travelers standby, for no more than $50, expired a couple of years ago, with no replacement. Since then, competing lines generally tried to help by easing restrictions on cheaper tickets and providing stranded travelers a variety of discounts, but that’s about it.
Many airline financial experts predict that the combination of high fuel prices and a weak economy will force more U.S. lines — big and small — to file or re-file bankruptcy within a year. Speculation has touched just about every airline except still-profitable Southwest and Allegiant. For the most part, however, that speculation has focused on paper bankruptcy filings, not outright failure.
Obviously, the big question for consumers is which track future bankruptcies will follow. In the Alitalia (and TWA) pattern, travelers with tickets and travelers at their destinations are still relatively safe — at worst, they’ll face some schedule cutbacks. In the Zoom pattern, on the other hand, travelers will be stuck with worthless tickets.
CONSUMER TIPS
In a future bankruptcy, a big, well-established airline is more likely to keep flying or find a white knight than a small, low-fare line. If you’re concerned — especially if you buy your tickets well in advance — you might want to avoid smaller lines.
Make sure you buy your tickets with a credit card. In a case of airline failure, you have a much better chance of getting your payment credited back to your account.
