Airlines’ Shaky Credit Could Cost Consumers

Consumers have been getting great deals on travel and trips but the price is being paid by airlines and tour operators.
Airlines’ Shaky Credit Could Cost Consumers
Matthew Little
8/12/2009
Updated:
8/27/2009
Consumers have been getting great deals on travel and trips but the price is being paid by airlines and tour operators. With credit getting tight, that price might be coming back to consumers in the form of higher fees, suggests an industry expert.

With major airlines in the United States and Canada floating in an out of bankruptcy protection, the companies that handle credit card transactions for the airlines are finding themselves exposed to tremendous risk.

That’s because when travellers ask for refunds for trips cancelled due to a bankruptcy, the credit card processing company has to give it to them. This is a requirement credit card companies place on processors.

In effect, the processing company handles the order on behalf of the credit card company. Airlines use the processor to handle all seat sales paid for by credit card. If that airline goes under and all the passengers want refunds, it is the credit card processor that has to pay them and then try to recoup that money from the airline in bankruptcy proceedings.

This means companies like Moneris, which handled credit card transactions for now defunct Jetsgo, can be left paying out millions in chargebacks.

In the Jetsgo bankruptcy, Moneris became the single largest creditor to the airline when it was left with $30 million worth of chargebacks from customers who bought tickets from the Montreal-based discount airline just before it went bankrupt in 2005.

A spokesperson for WestJet said its processor, Moneris, is not asking it to hold deposits because of the carriers continued success as the most profitable airline in North America. Air Canada provided a statement saying the airline had recently reached an agreement with its processor that lowered the amount of unrestricted cash the airline was required to hold to avoid additional cash deposits to $800 million.

To protect themselves, some credit card processors are asking airlines and tour operators to keep massive deposits on hand to cover chargebacks should an airline or tour operator go under.

But the deposits have presented major cash flow problems for some companies, such as Canadian tour operator Conquest Vacations which cited the demands of credit card processors in its bankruptcy in April this year.

“They mainly went under because they had to keep such a large amount of cash on hand. It’s very, very expensive to do that obviously, so it’s very expensive to run any travel company nowadays,” says Nina Slawek with TakeOffeh.com, a travel industry intelligence company based in Toronto.

Slawek said most of the remaining travel companies are very large and can handle the deposits, but the requirement is particularly difficult for smaller operators. And it could get worse.

While Conquest was the merchant of record for its operations, meaning it dealt with the credit card processor directly, in most cases it is the airlines that deal with the credit card processors. Most travel agents and tour operators buy their tickets through the airlines transaction system, so as far as the credit card processing company is concerned, it was the airline that asked the credit card processor for the funds from the ticket sale.

“The credit card goes through the airlines’ processing merchant account. So the travel agent is the third party,” explains Slawek.

But that could all change if the industry follows an experiment being tested by United Airlines in the U.S. United has issued a statement saying that it will require 20 or 30 travel agents in the U.S. to be their own merchants, meaning they will work directly with the credit card processing companies.

“That means that the travel agent has to hold hundreds of thousands or millions of dollars in reserve as well which is completely untenable for these small businesses,” says Slawek.

If other airlines follow United’s lead, Slawek predicts major changes in the industry. It also leaves companies selling secondary products responsible when a primary vendor goes under, she says.

“So the consumer has paid the travel agent through their credit card, the travel agent has paid the airline cash and should the airline go down, they’ve got their money from the travel agent—they’re free and clear. So the travel agent is then left holding the bag, but the travel agent is not the one who controls the product, they have nothing to do with the air carrier.”

This passing of the buck, she says, is not the best solution and likely only a temporary fix.

“The only answer is that consumers need to pay what the product is worth, because you can’t keep running airlines like Zoom and charging only $90 to the U.K. It’s untenable financially—you can’t run a business that way.”

Zoom Airlines, another Canadian air carrier, filed for bankruptcy protection in August 2008 when it ceased operations due to mounting losses.

“It’s important for consumers to understand that this can come down to them paying more eventually.”