December 9, 2002
The average passenger knows most airlines are having trouble: It's been projected they'll lose $9 billion next year. However, despite massive cash hemorrhaging, it doesn't seem as though very much is changing for consumers.
Already this year National Airlines, based in Las Vegas, has gone out of business. US Airways and United Airlines, the second largest domestic airline, have filed for bankruptcy. Many of the airlines, while not in bankruptcy, still run in the red and require constant infusions of cash (which can be provided by fare sales) to remain afloat. Still the recent declarations of woe seem to have resulted in good fares for many leisure travelers who continue to enjoy cheap airfares and plentiful availability, despite a reduction in flights since September 11, 2001. Will another bankruptcy change all this? Are passengers in for headaches, or worse, are there going to be more legitimate troubles ahead?
The truth is, filing Chapter 11 may sound worse than it is. Bankruptcy can be the remedy to an airline's ailments, allowing them to restructure in order to emerge healthier, leaner, and more nimble than ever. History shows us that bankruptcy isn't necessarily a death sentence. Continental has filed twice and rebounded healthier each time. Although Pan Am and Eastern airlines didn't fare as well in the 1990s, the immediate bankruptcy of United isn't necessarily bad news for the consumer. It will be important to watch what happens next!
EFFECT ON TRAVELERS
Travelers can expect some cuts in routes and services, but there will be other airlines to step in if there is considerable slack. For now, if a route is cancelled, a passenger is legally protected by a Department of Transportation rule requiring carriers who operate the same route as a bankrupt carrier to provide transportation to passengers if necessary. (It's worth noting that, this consumer protection is only expected to last until May 19, 2003.)
In the short term the fallout from bankruptcy may reduce some "convenience" factors such as hourly flights on popular routes and short layovers. It could also cause more crowding on flights due to schedule changes that pull capacity back further.
Some changes have already taken place. There seems to be a shift in mentality among the major carriers who used to allow more flexibility for travelers at no charge. For example, they've recently begun to mirror some of the lower-cost carriers who already charge for changes made to an itinerary. The flexibility of hopping on a different flight, even on the same day, can cost $100 or more depending on the airline and flight. Another change was this summer's implementation of the "Use It or Lose It" ticket policy, which renders many non-refundable tickets worthless if you don't use them when intended. Lets not forget the new baggage fees for size and weight limitations as well.
Passengers need to be aware, not worried, right now, as there is still potential for a very hopeful and profitable outcome. Resiliency will be ruled out only if an airline files Chapter 7 (meaning they'll have to liquidate) which could result in travelers getting stuck. This typically doesn't happen overnight. Bankruptcy proceedings can take months if not years. (United expects their reorganization to take 18 months.)
TIPS FOR TRAVELERS
Review what the airline is doing to effectively cut costs and how Wall Street comments. Watch for some potential signs of liquidation: selling off a lot of gates and/or routes (especially international ones), drastically reducing their presence in many markets, closing hubs, and selling major assets. Of course doing some of these may be necessary.
In the meantime, always buy with a credit card so you are protected if there is suddenly a problem. Remember that having too many reward miles on any one carrier isn't prudent. While miles can be great for that rainy day trip, if you don't actually cash them in it's like having an umbrella in the desert. Don't get left with a stockpile of worthless points, even on a healthy carrier.
While bankruptcy isn't likely to have any major implications immediately, you can expect some much-needed changes during the coming months. Some carriers will even use this opportunity to proactively change their own situations. Ultimately competition amongst airlines is good for the consumer – so let's hope these are successful bankruptcies that are only blips on the radar in the climb to peak financial altitude.
