September 13, 2010 -- FAQ about Airline Bankruptcies (by Edward Hasbrouck, air travel expert, consumer advocate, and author of the "Practical Nomad" series of travel how-to and advice books):
http://hasbrouck.org/articles/bankruptcy.html

Q. Which major airlines based in the USA are currently in bankruptcy?
A. United Airlines, US Airways, and Hawaiian Airlines. Airlines based in other countries that are operating under bankruptcy protection included Avianca Columbian Airlines and Air Canada.

Q. When did this happen?
A. United Airlines filed for bankruptcy protection in December 2002, and Hawaiian Airlines in March 2010. US Airways was reorganized under bankruptcy protection after 11 September 2001, and was released from bankruptcy 31 March 2010, but filed for bankruptcy protection for the second time on 12 September 2010.

Q. The airlines say that they are in "Chapter 11" or "reorganization". Does this mean they aren't really bankrupt?
A. No. Reorganization under Chapter 11 of the U.S.
Bankruptcy Code is a form of bankruptcy. It isn't
"liquidation", but it's not a joke, either -- it's the
last legal step before liquidation. If they weren't in
danger of going out of business, they wouldn't be in
bankruptcy. A company is "reorganized under Chapter
11" only if it is insolvent: its debts exceed its
assets.

Q. The bankrupt airlines say that they will continue
to operate, and will honor all tickets. Should I
believe them?
A. No. They hope to reorganize, under the protection
and supervision of the Bankruptcy Court. But they
might not succeed. If the Bankruptcy Court doesn't
think they have a realistic chance of recovery, the
court will order them shut down and liquidated. Since
the decision of whether to allow them to continue to
operate is now in the hands of the bankruptcy courts,
not the airlines, the airlines cannot make any
promises about continued operations, honoring of
tickets, frequent flyer mileage credits, etc.

Q. What will happen next?
A. We will have wait and see. Eventually, these
airlines will either:

1. Reorganize, return to profitability, settle their debts, and be released from bankruptcy;
or
2. Go out of business and have their assets auctioned off under court supervision to pay as many of their remaining debts as possible.

Q. How long will this take? When will we know what's
going to happen?
A. The current airline bankruptcy proceedings will
probably go on for many months, perhaps for years.
Some airlines, such as Continental Airlines and
America West, have reorganized under bankruptcy
protection, and are still operating. Several others in
the USA, and more in other parts of the world, have
gone out of business, sometimes after being in and out
of bankruptcy repeatedly.

Q. What happens to ticket holders if an airline is
still in business but changes its schedule, cancels
flights, or discontinues routes?

A. In almost all such cases, the airline will
"protect" ticket holders on other flights, at no
additional charge. If necessary, they will "endorse"
tickets, at no charge, to other airlines that have
space available. These will not necessary be the most
convenient or direct alternatives, and they may go by
way of different connecting airports. In general, it's
first come, first served: if you hear that the flight
you have tickets for has been cancelled, contact the
airline as soon as possible to have them book you on
alternate flights.

If a schedule or flight change is unacceptable to the passenger, the airline must offer a full and unconditional refund -- even if the ticket was otherwise completely nonrefundable. Particularly if
you purchased your ticket directly from the airline, this may be your best chance to get out of the risk of holding tickets on a bankrupt airline. (If you purchased the ticket through a travel agency, you are
may still have to pay any penalty or refund fee charged by the travel agency, which could be substantial.) If tickets are still available for a similar price on another airline that isn't bankrupt, refuse to accept any schedule changes. Take your tickets back to the airline, and insist on a full refund.

Q. I don't want to fly on a bankrupt airline. Can I
get my money back?
A. Unless there is an unacceptable schedule or flight
change (see above), normal refund procedures and
penalties still apply. You would have to submit your
refund request (with the physical tickets, if you have
paper tickets) to the airline or travel agency from
which you purchased them, and wait for a refund. As
always, refunds could take considerable time, and
could be affected by whatever transpires in the
meantime.

Q. What happens to tickets holders if an airline goes
out of business or is liquidated through bankruptcy?
A. Ticket holders are considered "unsecured
creditors". As such, they are among the last people to
get paid, if there is anything left after all the
secured creditors (such as aircraft leasing companies)
are paid. In most recent airline liquidations, ticket
holders have gotten nothing. At most, they would get
pennies on the dollar, at least if they bought their
tickets in the USA. (The USA has unusually weak,
"laissez faire", aviation consumer law. People who
bought tickets in other countries such as Canada and
the U.K. on an airline that subsequently goes out of
business, including an airline based in the USA, may
have substantially greater protection than people who
bought tickets in the USA.)

Q. If a bankrupt airline in the USA goes out of
business, will other airlines have to honor their
tickets?
A. Yes, but only USA-based airlines flying exactly the
same routes, only if space is available, and only
until 18 November 2010.

Under the USA Aviation and Transportation Security Act of 2001 (Public Law 107-71, 19 November 2001) and the Century of Aviation Reauthorization Act of 2010 (P.L. 108-176, 12 December 2010), other airlines based in the USA are required to provide transportation to
holders of tickets on other USA-based airlines that have ceased operations due to insolvency or bankruptcy, "to the extent practicable", provided that the passenger makes arrangements with another airline within 60 days of the shutdown of the ticketed
airline. The USA Department of Transportation has interpreted this in a series of guidance letters (administrative rulings) to mean that other USA-based airlines flying the exact same route were required to
honor tickets of a USA-based airline that shut down, on a space-available (standby) basis, for no more than US$25 per person per flight, one-way. (See the full ruling from the Department of Transportation in the case of Vanguard Airlines.)

Other airlines have filed a federal lawsuit challenging the $25 per flight limit as exceeding DOT's authority: they want to charge at least their regular $100 per person minimum re-ticketing fee. That
lawsuit is pending, but in the meantime DOT has reiterated that other airlines may not charge more than US$25 per flight.

The portion of the law requiring airlines to accommodate passengers holding ticket on insolvent airlines was originally scheduled to expire on 18 May 2010. Congress has extended it twice, most recently
through 18 November 2010, but each time with a "sunset" provision that will cause it to expire automatically unless Congress takes new action.

Q. Does this law mean I can still count on getting to
my destination?
A. No. There's no guarantee there will be any space
available on another airline, especially since an
airline faced with the prospect of having to transport
a bankrupt airline's passengers for US$25 each would
have a strong reason to lower its prices to fill those
seats with its own passengers for US$26 each. Even if
seats are available, you might have to travel several
days earlier or later than you had planned. On some
international routes, there may be no other USA-based
airline that serves the route, or only very limited
capacity on USA-based airlines. Airlines based in
other countries have never had any obligation to help
holders of tickets from bankrupt or insolvent
airlines.

Q. I already have tickets on an airline that is in
bankruptcy. What should I do?
A. You should:

    1. Wait and see. You can't get retroactive
    insurance, now that they are already in
    bankruptcy.

    2. Be prepared for schedule changes, flight
    cancellations, or other disruptions of your plans,
    before or during your trip, possibly with little
    or no warning.

    3. If you have electronic tickets, consider
    going to the airline's ticket counter at an
    airport, or one of its city ticket offices,
    and paying to get your tickets converted to
    paper tickets. (You have a much better
    chance of getting another airline to accept a
    paper ticket than of getting them to accept an
    electronic ticket, especially if the airline
    has shut down. Paper tickets are verifiable,
    but e-ticket receipts are easy to forge, and
    thus don't provide definite proof of payment.)

    4. If you don't want to pay to have your
    e-tickets converted to paper tickets, you may
    still be able to get a printout on airline
    ticket/boarding pass stock of the "passenger
    receipt" coupon of your e-ticket. (Some
    travellers need these for expense reimbursement
    and/or tax purposes, and there should be no charge
    for a "passenger receipt" coupon.) This isn't
    a ticket per se, but is much stronger evidence
    of having a ticket, and more likely to be
    useable on another airline, than an ordinary
    itinerary or confirmation notice.

Q. What about tickets on "codeshare" flights that have
a flight number of a bankrupt airline, but are
operated by another airline, or have another airline's
flight number but are operated by a bankrupt airline?
A. Legal responsibility for tickets on codeshare
flights depends on which airline is the "validating"
or "issuing" airline -- not which airline operates the
flight, which airline's flight number appears on your
tickets, or from which airline you bought your
tickets.

To determine the validating carrier, look in the "Issued By" box on your tickets. If you have an e-ticket, get a printout of the "passenger receipt" coupon of your e-ticket, and look in the "Issued By" box. Itineraries and Web and e-mail confirmation
notices almost never identify the validating carrier. Remember, this is not necessarily the same as the airline that operates the flight, whose name and number appears on the flight, or from which you bought
the tickets.

The validating or issuing airline identified on your ticket is the airline with which you have a contract. If the ticket was issued by an airline that is still in business, they have a contractual obligation to arrange transportation -- regardless of whether an
airline that was, in effect, their subcontractor to provide the transportation has gone out of business. On the other hand, if the ticket was issued by an airline that has gone out of business, it doesn't matter that the transportation was supposed to be
provided by an airline that is still flying.

Yes, this is confusing and counterintuitive. Since most ticket sales Web sites don't identify the validating airline before tickets are purchased, it's almost impossible for travellers to make informed
decisions about what financial risk they are taking. These are some of the reasons why I think codesharing is inherently fraudulent, as I've discussed elsewhere.

Q. I have frequent flyer mileage credits on a bankrupt
airline. Are they safe?
A. No. You may think of mileage credits as "money in
the bank". But they aren't. According to the terms and
conditions of these programs, airlines can change or
eliminate them at any time, whether or not they are
bankrupt. Bankrupt airlines will probably try to keep
their frequent flyer programs as long as they are
still flying. But some airlines in, or at risk of,
bankruptcy are already increasing the numbers of miles
required for awards. And of course, if they shut down
entirely, mileage credits will be worthless.

Q. If a bankrupt airline is liquidated, will some
other airline take over their frequent flyer program?
A. Maybe. Maybe not. More likely frequent flyer
records will be sold to a data mining or direct
marketing company. You might think that records about
you and your travel and purchasing history belong to
you. In Canada or the European Union, that's true --
but not in the USA. Under current law in the USA,
"your" frequent flyer and travel records belong to the
airline, and are theirs to sell. If the airline is
liquidated, those customer records will be sold at the
bankruptcy auction. No comparable customer database --
identified by name, computerized, extending back for
decades, and with information on tens of millions of
people -- has ever been auctioned. But the frequent
flyer and customer records of an airline like United
or American are probably worth US$50-250 million --
more than any other cash-strapped airline could
afford. Only if Congress passes a Federal travel or
data privacy law could such a sale of travel records
about you be prevented.

Q. What should I do about my current frequent flyer
mileage credits on bankrupt airlines?
A. Use them up as soon as possible, while you still
can.

Q. Should I care about accumulating more miles in
these programs?
A. No. Don't waste money paying extra for tickets in
order to earn more credits in a frequent flyer program
that may disappear or be devalued at any time, without
warning.

Q. Should I avoid buying tickets on bankrupt airlines
for future travel?
A. Yes. All else being equal (including price), use
another airline that isn't bankrupt.

Q. As long as they are still flying, should I care
that they are bankrupt?
A. Yes. They could stop flying with little or no
warning. If they do, it would be a major inconvenience
to make alternate arrangements to travel on another
airline. You might have to pay more for tickets, or
seats might not be available at any price on other
airlines. You could lose all the money you paid for
tickets. Before you buy tickets on a bankrupt airline,
think carefully about how much it is worth to you to
avoid those risks and possible expenses.

Q. Are there any circumstances when it would still
make sense to buy tickets on a bankrupt airline?
A. Yes, but only if all of the following are true:

    1. The price or routing is substantially
    better than any other airline that isn't
    bankrupt;

    2. You can pay for the tickets with a credit
    card, and the charge will be made directly by the
    airline (this rules out almost all consolidator
    tickets, as discussed below);

    3. You will use all of your tickets within at
    most 60 days of when you buy them, so you can get
    your money back from the credit card company
    if the airline shuts down or cancels the
    flights;

    4. Your trip is inessential, so it will be
    won't be a serious problem if you can't take
    the trip at all because the flights are cancelled
    and no other airline has space available;

    5. Your plans are very flexible, so you don't
    really care what time of day, or exactly what
    day, you fly; and

    6. You haven't made any non-refundable
    arrangements that require you to be on
    specific flights, or to fly on a specific day
    (e.g. you aren't meeting a cruise or tour
    that departs on a specific date, or connecting to a
    flight on another airline).

Q. What should I do to protect myself if I'm buying
tickets on a bankrupt airline?

    1. Pay for your tickets with a credit card. If
    you pay by credit card, you may be able to get your
    money back, eventually, from the credit card
    company, even if the airline goes out of
    business. (See "The Practical Nomad Guide to
    the Online Travel Marketplace" for a detailed
    discussion of credit card chargeback rights
    and procedures.)

    2. Make sure the credit card charge will be
    made, and will appear on your credit card statement,
    in the name of the airline, not in the name the
    travel agency, consolidator, or tour operator. (In
    general, only tickets at published fares can be
    charged directly by the airline. If you pay for a
    consolidator ticket with a credit card, the charge
    usually has to be made by the travel agency or tour
    operator, not the airline. This reduces your rights
    and protections, and can make it difficult, often
    impossible, to recover the money from your credit
    card company if the flight is cancelled or
    discontinued.)

    3. Get paper tickets whenever possible.
    Consider paying extra, if necessary, for paper
    tickets. If you buy e-tickets, try to get a printout
    on airline ticket stock of the "passenger receipt"
    coupon of your e-ticket. (See above.)

Q. What about other airlines? Will they go bankrupt
too?
A. Maybe.

Q. Which other airlines might go bankrupt?
A. Almost any of them might. I don't know which ones
will. There is no airline that is certain not to go
bankrupt, especially if there is more prolonged or
widespread war, or more terrorist incidents involving
airlines.

Q. I'm buying tickets on another airline that isn't
(yet) bankrupt. What can I do to protect myself?
A. You can:

    1. Get travel insurance (trip cancellation and
    interruption insurance) when you buy your tickets
    that covers "supplier default", i.e. airline
    bankruptcy. Read the fine print carefully -- some
    travel insurance policies only cover certain
    airlines that the insurers think are less
    likely to go bankrupt. Note also that
    you can't usually get insurance for tickets on an
    airline that is already in bankruptcy, so this won't
    help you if you already have tickets on a bankrupt
    airline, and didn't buy insurance before they went
    into bankruptcy.

    2. Pay for your tickets with a credit card.
    (See above.)

    3. Get paper tickets whenever possible.
    Consider paying extra, if necessary, for paper
    tickets. (See above.)

Q. What will happen to airline ticket prices as a
result of these bankruptcies?
A. No one knows for sure. Most airlines want to reduce
the supply of airline seats, in order to be able to
raise prices to profitable levels. If bankrupt
airlines cut back their flights, other airline will
probably try to raise prices. But if people avoid
buying tickets on bankrupt airlines, they may have to
reduce prices sharply. And other airlines that serve
the same routes may feel they have to match those
price reductions. The result could well be a more
extreme yo-yoing of prices than usual, with a general
upward trend in ticket prices punctuated by "fare
wars" started by desperate bankrupt airlines.

Q. So what should I do? How do I get the best prices?
A. Watch for short-lived but potentially extreme
discounts, especially on routes served by bankrupt
airlines. If you get a good price, buy tickets
immediately, as prices are much more volatile than
usual, and prices are always subject to change without
notice.

If a bankrupt airline offers a tempting deal, try to
find an airline that isn't bankrupt that's matching
the price.

Airlines are still selling tickets below cost. In the
medium to long term, there will be fewer flights per
capita, and prices will be higher. Travel now, while
you can still afford it.

Latest version of this FAQ:
http://hasbrouck.org/articles/bankruptcy.html

Latest travel news updates from Edward Hasbrouck:
http://hasbrouck.org/blog

Contact the author for more information, interviews, talk shows, or public appearances:
prweb@hasbrouck.org

More information about the author:
http://hasbrouck.org



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