Credit woes cloud airlines’ prospects
Frontier Airlines says a sudden increase in cash withholding put it over the edge
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NEW YORK » Frontier Airlines, the latest airline to file for bankruptcy, was pushed over the brink by a problem that could spread to other carriers: credit card troubles.
The carrier yesterday blamed its Chapter 11 bankruptcy protection on a cash squeeze caused by its credit card processing company, which has decided to keep a larger chunk of the Denver airline's ticket revenue.
Amid all the other problems that smaller carriers are facing, a credit card company's decision to withhold more cash may, as in the case of Frontier, be all it takes to push an airline into bankruptcy.
Associated Press
Frontier Airlines is the fourth carrier to file for bankruptcy in the last two weeks. Unlike the others, however, Frontier so far has continued to operate its normal schedule.
Credit card woes could hit other airlines
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By John Wilen
Associated Press
NEW YORK »
Frontier Airlines, the latest airline to file for bankruptcy, was pushed over the brink by a problem that could spread to other carriers: credit card troubles.
The carrier yesterday blamed its Chapter 11 bankruptcy protection on a cash squeeze caused by its credit card processing company, which has decided to keep a larger chunk of the Denver airline's ticket revenue.
The move ends a policy under which the processor, First Data Corp, passed on most money from ticket sales to Frontier. The change is intended to protect First Data, which would be on the hook for ticket refunds if Frontier stops flying. Frontier said yesterday it plans to continue operating while in bankruptcy.
First Data's decision represents a new threat to an industry facing jet fuel prices that have soared 74 percent in one year, a new government focus on safety that has grounded thousands of flights in recent days and tight competition and falling demand that, combined, have limited carriers' ability to raise prices.
"It's just a god-awful time for this industry," said Bob Mann, an independent airline consultant based in Port Washington, N.Y.
ATA Airlines, Skybus Airlines and Aloha Airlines all have filed for bankruptcy and shut down in the past two weeks. Champion Air plans to shut down and MAXjet Airways went bankrupt in December. All cited some combination of high fuel prices and falling demand, among other factors.
While it's not uncommon that banks processing airline credit card transactions hold a certain amount of a carrier's proceeds in their own accounts until a passenger completes his or her travel, it is unusual for a processor to suddenly change its cash-withholding policy, analysts say.
In the case of Frontier, the new requirement -- known in industry speak as a holdback -- was the proverbial straw that broke the camel's back.
"We believe that we currently have adequate cash on hand to meet our operating needs," Frontier Chief Executive Sean Menke said in a statement. "Unfortunately, our principal credit card processor very recently and unexpectedly informed us that, beginning on April 11, it intended to start withholding significant proceeds received from the sale of Frontier tickets."
Such a "change in established practices" would throw a serious wrench into Frontier's cash forecasts and business plan, Menke said. The bankruptcy filing prevents First Data from imposing the new cash-withholding requirement, he said. The airline also threatened to sue First Data.
"The terms of our agreement with Frontier Airlines are not unique; they are considered standard industry practice and terms originally agreed upon by Frontier," First Data, of Greenwood Village, Colo., said in a statement.
"They do this because ... they're concerned that a carrier will use the proceeds in advance of travel occurring and then not have the funds to actually perform the travel," Mann said.
Companies such as First Data usually base cash-withholding decisions on their own analysis of an airline's finances -- most airlines are contractually required to provide their processors with monthly cash flow reports and forecasts.
"They're doing the same thing that I'm doing," said Ray Neidl, an analyst at Calyon Securities, who earlier this week said Frontier and AirTran Holdings Inc. were at risk of failure. At that time, both carriers denied they were considering bankruptcy. Credit card processors constantly review the credit profiles of the companies they serve, Neidl said.
But negative news reports and analyst research notes can also undermine a credit card company's confidence in an airline by contributing to fears that an airline's failure is imminent, said Mike Boyd, president of the Boyd Group consultancy in Evergreen, Colo.
"It could happen to any airline," Boyd said.
It's not the first time credit card companies have imposed cash-withholding requirements on airlines. Many did so in the months after the Sept. 11 terrorist attacks because of worries about the industry. Several airlines, in fact, declared bankruptcy in the years after the attacks, due to the downturn in business and by the recession earlier this decade. Strict cash-withholding requirements were a factor in Delta Air Lines Inc.'s 2005 bankruptcy.
Now analysts believe most larger airlines have sufficient cash to weather the current economic downturn and spike in fuel prices. The six largest airlines -- AMR Corp.'s American Airlines, Delta, UAL Corp.'s United Airlines, Northwest Airlines Corp., US Airways Group Inc. and Continental Airlines Inc. -- have a combined $20 billion in cash on their balance sheets, Mann said. Their credit card processors won't likely change withholding requirements unless there is a significant change in operating conditions.
It's the smaller companies with less cash that are more at risk of facing new cash withholding rules, analysts say.
Hawaiian Airlines, which is now in a stronger position with Aloha Airlines' shutdown of passenger operations on March 31, had $144.5 million in unrestricted cash and $38.7 million in restricted cash -- the holdbacks -- as of Dec. 31.
Mesa Air Group, which operates interisland carrier go! and flies regionally for Delta, United and US Airways, had $90.9 million in unrestricted cash and $97.3 million in restricted cash at the end of 2007. However, $90 million of Mesa's restricted cash was the $90 million bond it had to post for its appeal of a damages lawsuit it lost last October against Hawaiian.
Yesterday, Calyon's Neidl dropped coverage of Mesa, citing its small capitalization of $18.1 million. Last week, Mesa said Delta planned to end a major contract-flying agreement and Mesa sued to keep the deal intact.
Mesa has declined to comment on whether it faces bankruptcy.
Analysts have also said privately held Virgin America faces significant operating challenges. But Virgin America said it is healthy and growing.
Amid all the other problems these smaller carriers are facing, a credit card company's decision to withhold cash may, as in the case of Frontier, be all it takes to push an airline into bankruptcy.
"They live on cash like we live on blood," Boyd said.
Star-Bulletin reporter Dave Segal contributed to this article.