November 
2008

Vol 8-No. 5


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Economic Turbulence affects Airlines' Credit Card Transactions

Bush's Bitter Fight with Airlines

The Bush administration escalated a bitter fight with airlines by pushing ahead with a plan to auction takeoff and landing rights at New York-area airports despite key congressional opposition and an industry threat to block the initiative in court.  

The Transportation Department said it would start selling excess slots in January to ease congestion and delays and spur competition in the most lucrative US business travel market.  "Without slot auctions, a small number of airlines will profit while travelers bear the brunt of higher fares, fewer choices and deteriorating service," Transportation Secretary Mary Peters said.

Federal transportation planners believe an orderly allocation of slots at New York's LaGuardia and John F. Kennedy airports and Newark airport in New Jersey would over time lead to more efficient operations by airlines and fewer delays.  For instance, the administration envisions carriers using bigger aircraft if they are forced to operate fewer flights. This, officials argue, would reduce the number of slots needed and free up others for new entrants.  A slot is equal to rights for one takeoff and one landing.

Continental Airlines has a hub at Newark and US Airways has major operations at LaGuardia while Delta Air Lines has invested heavily in JFK.  All three New York-area airports are notorious for congestion, which affects flights in other cities. A third of all US air traffic arrives, departs or flies over New York.  Nearly a quarter of all flights nationally arrived late in August, according to the latest government figures.  Airlines and government have for years said reducing congestion and delays are top priorities but they have not been able to agree on a common approach.

The new rules call for auctioning up to 10 percent of slots over the next five years. Transportation officials want to sell 18 slots each at Newark and JFK and 22 at LaGuardia in January.  Slots have, through the years, been awarded by the government at no cost to airlines, which consider them assets. However, the DOT considers them federal property.  The major US airlines say legal action will be necessary to stop the sale from going ahead.

"The DOT decision patently defies the recommendation of the Government Accountability Office (GAO), as well as the will of Congress, by attempting to move forward with an illegal auction of airport slots," said James May, chief executive of the Air Transport Association, a trade group for major airlines.  The GAO, the investigative arm of Congress, found last week that the administration did not have legal authority to conduct auctions.  

(Source:  Reuters)                                        

 

Economic Turbulence affects Airlines' Credit Card Processors

US airlines, struggling to find stability in a time of unprecedented economic turbulence, are bracing against possible trauma that could be inflicted by credit card processors made skittish by the credit crisis.  In recent months, American Airlines and United Airlines have topped up their cash positions or changed deals with credit card processors -- defensive moves triggered by fears that processors may demand bigger cash holdbacks.

"People are trying to get out in front of this because they don't want to be in the position that Frontier was," said airline consultant Robert Mann.  Frontier Airlines filed for bankruptcy in April after its credit card processor, First Data, surprised the low-cost carrier with higher withholding requirements that put a strain on Frontier's liquidity. Other airlines aim to avoid that fate.

Credit card processors take payment from airline customers who book travel weeks or months before a flight. Processors then pass that money to the carrier. But in doing so, they take on the risk that the airline could go under and fail to reimburse the money for travel not provided. In that event, the card processor would be left with that obligation.  To avoid or limit that risk, processors often require airlines to put a percentage of their advance booking proceeds aside for use should reimbursement be necessary.  Depending on its agreements with airlines, a processor that doubts the ability of an airline to provide travel or repay its debts may require a higher percentage of advance ticket revenue to be withheld.

In Frontier's case, First Data demanded that 50 percent of credit card funds from advance purchases be withheld.  "Most credit card processing agreements include some kind of minimum liquidity requirement," said Bill Warlick, analyst at Fitch Ratings.

Warlick noted actions by American Airlines parent AMR and United parent UAL.  Last month, AMR said it would draw down its USD$225 million revolving credit facility to add to its liquidity pool and reduce the amount of potential credit card holdback reserves. The company has said only one of its agreements gives the processor the right to hold back proceeds.

In June, UAL reached a deal with credit card processors reducing reserves that United is required to maintain under a credit card processing agreement.  In August, Delta Air Lines borrowed the full amount of its USD$1 billion revolving credit facility to bolster its cash position. The company also amended its Visa/MasterCard processing agreement, which has no cash holdback requirement.

In June, Continental Airlines amended a card processing deal to remove a minimum earnings-to-fixed-charges ratio as a trigger that could require the airline to post additional collateral. The agreement, however, requires the airline to maintain a minimum level of cash as well as a minimum rating on senior unsecured debt.

Fitch's Warlick said the US airline industry, which in recent years has gone through a massive reorganization, is somewhat insulated from the credit crisis. The companies have restructured their debt and have less need for major purchases as they downsize.  But the risk that they might face higher cash holdback requirements remains a wild card.  

[Source:  Reuters]

 

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