Yet another airline struggling with cash-flow issues, Frontier Airlines, based in Denver, has filed for Chapter 11 bankruptcy protection this week. Unlike the last few, Frontier plans to continue operations for the immediate future, so things aren’t all bad, but it is still a bad sign for the company’s shareholders and somewhat worrisome for passengers.
Frontier used to be profitable and is pretty well established, unlike ATA and SkyBus. Plus, the reason they cited for the filing is an interesting one. It isn’t that their expenses have spiraled out of control or other similar issues. The problem is from one of the credit card merchants. Every time an airline shuts down you hear everyone say to just go to the CC company and get the charge refunded. The reason that works is that the CC companies basically hold a sizable amount of the payments due to the airline in escrow; they don’t actually pay the airline all the money. So if the airline shuts down then the CC company has the money still and can pay the consumers back, without it hurting the CC company’s bottom line. In the case of Frontier, apparently one of the CC companies is getting a bit nervous and had asked to increase the amount held in escrow, effectively hedging their bets on Frontier ceasing operations. And that triggered the bankruptcy filing. And the filing will trigger concern from many passengers about the stability of the carrier and slow down bookings. Fewer bookings will result in less revenue and profit, and that has the potential to actually put the carrier out of business. In other words, the CC company must be right, because their actions will actually cause the effect that they were trying to act to protect themselves from. Sure, that is a bit of an over-simplification, but it is similar to runs on banks back in the Depression of the ’30s, where banks were put out of business because of rumors that they might go out of business. Watch Sneakers (a fun movie in its own right) for an entertaining conversation about the effect if you want more.
Anyways, this is certainly worrisome for a number of people, and time will tell how it plays out. I sure hope they keep operating, but competing against SouthWest and one of United’s hubs can’t be easy.
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