Of Credit and Airlines
We all know that rising oil prices are hurting the airlines. Of course, they’re hurting all of us, but the very fact that consumers are hurting means that airlines can’t really pass all their higher costs onto passengers.
But something I hadn’t realized until recently is that consumer protections have also changed the picture. If you’re over 30, you probably remember when credit cards didn’t automatically protect you against bad sales. Today that’s pretty standard stuff, and as a result most people buy their plane tickets with credit cards exactly for that reason (among others)–if the airline goes out of business, the credit card company gives you your money back.
The credit card companies do not, however, do this entirely out of the kindness of their hearts–or, more precisely, with their own money. Because an airline folding–like Eos did today–leaves the credit card companies with a lot of exposure, they require what is called “holdbacks” from the airlines, i.e. upfront money the airline escrows with the credit card company to mitigate against loss.
Frontier, which filed for bankruptcy not long ago, cited holdbacks as a primary reason. Because their financial picture looked wobbly, at least one credit card provider asked them to put more money “down,” and to make a long story short, they didn’t have the cash to do it.
Today’s set-up is of course a benefit to travelers. If you have a ticket on a bankrupt airline, your credit card company will give you your money back; you don’t have to get in a cue of creditors and get pennies on the dollar.
That is, of course, as long as the credit card companies hold up–which they seem to be doing for now. Visa went public this year, which means losses will be shared among investors.
The moral of this story is, I guess, use your most reliable credit card to buy tickets and have a backup travel plan. These days, you almost need to read airlines’ financial reports before you can count on getting where you want to go.
–Mary Hunt, editor, eFlyer
