Acquirers Get Tough on Airlines

  Merchant acquirers worried about getting paid have gotten tough with troubled airline customers.
  Collateral conditions are now heavily negotiated upfront in airline acquiring agreements, says card processing consultant C. Marc Abbey, a partner at First Annapolis Consulting Inc., Linthicum, Md.
  "Any airline that changed acquirers in the last three to four years has a contract with collateral requirements," he says. "It's safe to assume that 100% of airline contracts have substantial collateral arrangements. It's very hard to get a deal done without it being collateralized."
  American Express Co., which operates a closed-loop system in which it issues cards and is the merchant acquirer for them, says in a recent quarterly financial statement to the Securities and Exchange Commission that its goal is to hold sufficient cash reserves, or collateral, so that if the airline liquidates, the reserve will equal the credit exposure of any unused tickets.
  In 2004's third quarter, U.S. Airways set aside an additional $64 million in collateral required under an agreement with AmEx. The payment was triggered after U.S. Airways, which in September filed for bankruptcy for the second time in two years, failed to meet certain conditions of its contract to accept AmEx cards.
  A U.S. Airways spokesperson says, "We cannot afford not to have a relationship with American Express."
  The spokesperson adds that the reason the airline emerged in March 2003 from its first bankruptcy after only seven months was because of the possibility of losing its ability to accept Visa and MasterCard payments, which would have put it out of business. At the time, U.S. Airways' acquirer was National Processing Inc. (NPC), which wanted out of the arrangement in the wake of 9/11. The NPC contract was set to expire in August 2002, but NPC gave the carrier an extension until March 31, 2003. In the meantime, U.S. Airways had to find a new acquirer. NPC's replacement was Bank of America Corp., which happens to issue the U.S. Airways Dividend Miles Visa card.
  Ironically, BofA bought NPC in 2004.