To be fair, the present is not the most opportune time for merchants in most verticals. For airlines and others in the travel industry, though, the bad news just seems to keep coming.
Even before the fallout of the COVID-19 crisis was fully realized, enclosed spaces packed with people became something to avoid. Since that’s basically the definition of an airliner, air travel very quickly dropped to historic lows.
While it’s easy to see what happened, it’s every bit as easy to understand the economic impact. By either canceling flights or paying to fly nearly empty planes, carriers are hemorrhaging revenue. Worse, instead of setting up flights for the future, travelers are canceling reservations they’ve already made and demanding refunds.
Coming hot on the heels of the Thomas Cook collapse, this amounts to a perfect storm for airlines. They have no cash coming in from ticket purchases, even while they’re burning through millions every day in operational costs. That cash outlay is compounded by customers wanting their money back for previous reservations.
The most ironic part? When airlines actually do have full flights, passengers are scared and complaining about the lack of social distancing. That doesn’t bode well for the future.
Can Things Get Worse for Airlines?
The fact that some passengers are seeing any full flights at all indicates that demand may be inching back up. That said, insiders insist air travel is still more than 90% lower than pre-pandemic levels.
A $50 billion dollar federal bailout package offers US airlines the option of tax-payer funded grants and/or loans. There were strings attached, though, such as being mandated to fly a certain number of “essential flights,” regardless of the passenger count. Not ideal, but do airlines really have a choice?
Actually, they have a couple. For one, they can offer customers vouchers for cancelled flights, redeemable at some time in the future. Most airlines are doing this at least to some degree, as well as extending time limitations and waiving flight-change fees.
The problem is, people don’t want vouchers. A recent study show that major carriers have distributed roughly $10 billion in vouchers in the past few weeks. That sounds like a lot…until you consider that United Airlines, just on their own, lost a reported $2.1 billion in Q1 of 2020. Customers don’t want replacement flights when no one knows how long the current situation will last, or if the carrier in question will still be in business a year from now.
That brings us to the second option available to airlines: bankruptcy.
The Empty Cookie Jar
It’s a bit of a strange analogy, but right now, I think of airlines as being like cookie jars. There are a limited number of cookies available, and unfortunately, there are far more people who have legitimate claim to a cookie than there are actual cookies in the jar.
Vouchers are basically coupons for a cookie sometime in the future, which is fine if customers agree to that. Otherwise, the Department of Transportation says a refund must be issued. So what happens when the cookie jar is empty?
I’m sure more than one airline CEO is at least considering bankruptcy protection. My guess is that when the pandemic dust settles, we’ll end up with mergers and new agreements between some airlines. A few other players—and probably at least one major carrier—will be gone.
For airlines that do file, the final terms of the bankruptcy would likely dictate whether customers can expect to see a full or partial refund, or none at all. For the ticketholder, that could boil down to either a) take what they offer and figure it’s better than nothing; or b) bring legal action.
Going the legal route seems to make sense to the customer: “I paid the money, wasn’t my fault the flight was cancelled, I’m owed a refund.” The case looks iron-clad…but is it?
How a Carrier’s Bankruptcy May Impact Refunds
Bankruptcy proceedings may help the airlines, but only at the consumers’ expense. As I mentioned earlier, bankruptcy will set terms for the distribution of any available funds; secured creditors who are owed hundreds of thousands or more will be at the top of that particular food chain, while the couple from Tucson who wants back the down payment on a flight to Aruba simply won’t be high on the priority list.
A voucher may be the best they can hope for, but how much good is a voucher issued for a future flight on an airline that no longer exists, or is merged with another carrier? Along those same lines, if a customer has frequent-flyer miles or status on an airline that ends up liquidated, those points are probably lost, too.
Also, remember that bankruptcy isn’t always an end-game. Chapter 11 bankruptcy is often used as a legal maneuver allowing a company to restructure their debt load. That means an airline that files for bankruptcy may not end up ceasing operations.
If the bankruptcy does lead to liquidation, however, consumers could fare better: FAA requirements for airlines include insurance to cover this very type of situation. On paper, this increases the odds consumers will get refunds. It could easily take months or longer, though, if it comes at all.
So are customers simply out of luck? Well they have one other recourse…and that brings us to my favorite topic: chargebacks.
A Wave to Watch For
Plane tickets purchased with a credit card—and these days, that’s almost all of them—give the customer the option of filing a chargeback if the carrier goes under. An airline filing bankruptcy is likely to trigger a wave of chargebacks; if any major carriers go under, expect that surge to become a tsunami.
Unfortunately for consumers, that means even chargebacks may not be a guaranteed avenue to a refund. Consumers as a whole don’t fully comprehend the chargeback process…and that lack of knowledge may work to their disadvantage.
Consumer advocates are already advising travelers not to worry if an airline owing them a refund goes bankrupt. They suggest simply filing a chargeback. In many countries, disputing a charge is a federally-mandated right, and credit card companies are usually happy to oblige. It satisfies the customer, while the bank will just turn around and bill the merchant.
However, we’re talking about multiple companies as large as airlines, each with tens of thousands of refund requests. Thus, the cash outlay is going to be staggering. And since some of those companies will likely not even exist by that point, there will be no one to whom the acquirer can pass along the bill.
So, while consumers may have a right to FILE a chargeback, that doesn’t mean it will be a slam-dunk. The card companies have already started legal wrangling to mitigate their risk.
What Are the Next Steps for Airlines/Travel Companies?
Airlines and other travel companies are already being flooded with chargebacks tied to COVID-19. For the merchant, the best move is to try and prevent as many chargebacks as possible by establishing flexible policies and working closely with customers to resolve situations to everyone’s satisfaction. Issuing vouchers worth 15% more than a ticket value may be a hard pill to swallow, but the chargeback will cost more in the end.
For customer disputes that do get filed, merchants should challenge all that could be proven invalid. Yes, building cases for and representing chargebacks is a complex, time-consuming process, and the sheer volume of cases will compound that exponentially. Over the long run, however, it will be worth the effort, in terms of both recovered revenue and sustainability.
Working out a system can help expedite the process, but looking at professional outside help can be the most cost-effective solution.
