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When airline companies go out of business, as Aloha, Skybus and ATA did this year, the airlines' transaction processors are responsible for reimbursing consumers who used credit cards to pay for cancelled flights.
Because processors do not want to face such a potential financial risk, they have adopted a practice of withholding a portion of the ticket payments, at least from airlines thought to be at financial risk, instead of turning the full amount over to the airlines after a credit card transaction.
"It's just a question of risk," explains Seth Kaplan, managing partner of Airline Weekly. "What they want is a certain amount of collateral."
How much is set aside depends on the processor and how it views the financial health of the air carrier. Asking for collateral on a healthy airline such as Southwest is not as much of a concern for issuers as seeking protection on a carrier at higher risk of going under.
"No credit card processor worries about Southwest going into bankruptcy," says Kaplan.
Processors and airlines generally keep their collateral arrangements to themselves. Yet when Frontier Airlines filed for Chapter 11 bankruptcy protection in April, the collateral arrangement it had with First Data Corp. came to light in court filings.
Before the filing, First Data withheld 45% of Frontier's credit card receipts for ticket sales. Then, after the filing, First Data said it would withhold 100% of the airline's credit card receipts. Ironically, some observers believe First Data's decision to withhold 45% of receipts was one of the factors that drove Frontier to file for bankruptcy, says Kaplan. The companies struck a new processing deal in late May.
Unlike Aloha, Skybus and ATA, Frontier has staved off collapse. The airline still is operating and is reorganizing under bankruptcy protection.
What First Data did by upping the collateral on Frontier was not surprising. When an airline or any company files for bankruptcy, it greatly increases the risk that processors might be stuck with the bill if customers fail to receive the flights they purchased.
"This is not airline-specific," says Kaplan. "Credit card processors do this for all businesses if they're concerned about a specific kind of risk." CP
