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FAQ about Airline Bankruptcies

by Edward Hasbrouck, author of "The Practical Nomad"

Which airlines based in the USA are currently bankrupt?

None at present, for the first time in many years.

What about airlines based in other countries?

If an airline is in "Chapter 11" or "reorganization", or "under bankruptcy protection", does this mean they aren't really bankrupt?

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. In order to petition the bankruptcy court for protection from its creditors and reorganization under Chapter 11 of the Bankruptcy Code, a company must first certify to the court that it is insolvent: its debts exceed its assets. A bankruptcy filing protects the bankrupt company against its creditors (including people who have paid for tickets for future travel). It doesn't "protect" passengers or customers.

The bankrupt airlines say that they will continue to operate, and will honor all tickets. Should I believe them?

No.

What will happen next?

We will have wait and see. Eventually, each bankrupt airline will either:
  1. Reorganize, return to profitability, settle their debts, and be released from bankruptcy;
  2. Be taken over, with the permission of the bankruptcy court, by another airline (which may or may not take over their obligations for outstanding tickets); or
  3. Go out of business and have their assets auctioned off under court supervision to pay as many of their remaining debts as possible.

How long will this take?

Airline bankruptcy proceedings typically go on for many months, sometimes for years. Some airlines -- including United Airlines, Continental Airlines, America West, US Airways, Delta Air Lines, and Northwest Airlines (acquired by Delta after the completion of reorganization) -- have reorganized under bankruptcy protection, and are still operating, sometimes through being acquired and merged into another airline. TWA, for example, was acquired and merged into American Airlines. US Airways was acquired and merged into America West, although the merged entity kept what it thought was the more valuable name, "US Airways". Many 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.

When will we know what's going to happen?

You'll know when it happens, after the fact. Typically neither travellers, airline employees, nor travel agencies get any advance notice of when the Bankruptcy Court might order the airline to shut down. I've never heard of an airline that gave any advance notice of a planned cessation of service, and judges don't and can't give advance notice of what rulings they might issue. Typically an airline is operating one day under Bankruptcy Court supervision but otherwise seemingly normally, and the next all its planes are grounded, its offices closed, its phones unanswered, and its Web site unresponsive.

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

  1. 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.
  2. 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 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.

I don't want to fly on a bankrupt airline. Can I get my money back?

Unless there is an unacceptable schedule or flight change (see above), or unless you successfully make a claim as a creditor with the bankruptcy court and have it approved for payment, 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.

What happens to ticket holders if an airline goes out of business or is liquidated through bankruptcy?

Ticket holders (or travellers with other outstanding claims, such as for lost or damaged luggage) are generally 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. Note, however, that claims for refunds of the taxes included in the price of your tickets may have a higher priority than claims for refund of the fare. Rulings on this issue have varied from country to country, but you may be able to get a refund of taxes for unused (and unusable tickets) either from the airline or from the government, if you can figure out whether the taxes were already passed on by the airline to the government, and if so, to which government(s). It's usually impossible for consumers to tell who is supposed to be holding the taxes on unused tickets, but it's worth filing a request for refund of the taxes on unused tickets, even if the airline is completely out of business.

If I paid for tickets by credit card, and the airline goes out of business, can I get my money back from the credit card company?

In the USA, yes, but only if you paid by credit (not debit) card, the credit card bank is still solvent (in the current financial crisis, a major airline bankruptcy could push their credit card merchant bank into bankruptcy), the airline ceases service entirely, and you make a "chargeback" request in writing to the issuer of your credit card, no later than 60 days after the date that you received the first credit card billing statement that listed the charge for the tickets. If you buy tickets more than 60 days in advance, and the airline goes out of business more than 60 days after you got the bill for the tickets, it's too late to request a credit. This 60-day limitation is part of the same USA law that provides the right to a chargeback if you don't receive the goods or services, the Fair Credit Billing Act. It could be changed by Congress, but there has been no proposal in Congress to extend the 60-day chargeback request window.

Doesn't the government guarantee my tickets or my money?

No, at least not if you bought your tickets in the USA.

If a bankrupt airline in the USA goes out of business, will other airlines have to honor their tickets?

No. From 2001 until 2006, a provision of Federal law required that other USA-based airlines flying exactly the same routes (which there aren't in many cases) had to accommodate passengers holding tickets on airlines that had gone out of business, for a fee, but only if space was available (which it probably wouldn't be in most cases, especially if a larger airline shut down). This law was intended, and served, more to give travellers a false sense of security about doing business with bankrupt airlines than actually to protect them. It was enacted as a temporary measure after 11 September 2001, and after several extensions was allowed to expire in November 2006.

If a bankrupt airline gets taken over by another airline, will the new airline honor tickets for the old airline?

  1. Maybe. Maybe not. It depends on the terms of the purchase and sale of the assets of the bankrupt airline, and whether the buyer thinks that honoring those tickets is worth the cost in order to win the loyalty of potential customers from the old airline.
  2. In the past, it has gone both ways. Tickets for the "old" Pan Am were not honored by the "new" Pan Am -- the buyers had purchased the rights to the name and logo, but hadn't assumed any responsibility for the debts of the old, bankrupt Pan Am. Holders of tickets on the old Pan Am had to buy new tickets, even if they wanted to fly on the new Pan Am. When American Airlines acquired the assets of TWA from the bankruptcy court, they agreed to honor TWA tickets, as did America West when they acquired the bankrupt US Airways.

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

  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 getting a paper printout of the "virtual coupon record" or "passenger receipt coupon", which has much more information than a typical e-ticket "confirmation" or "itinerary". If possible, get this printed on airline ticket/boarding pass stock. 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. Some travellers need these receipts or coupon printouts for expense reimbursement and/or tax purposes, and US Federal regulations (14 CFR 399.83) specifically require all airlines to provide an actual "ticket". (If the airline didn't or won't give you a complete copy of your actual ticket, complain to the US Department of Transportation.) Mere confirmations or itineraries are easy to forge, and don't provide definite proof of payment or sufficient information to enable another airline to accept a ticket.
  4. If you have a major investment in a cruise, tour, business arrangements, etc. that you would lose if your flights were substantially delayed (for example, if you had to stand by for several days before space was available on another airline) consider limiting your losses by buying alternate tickets now on another airline that isn't bankrupt, while seats on alternate airlines are still available.

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?

  1. Legal responsibility for tickets on codeshare flights probably depends on which airline is the "validating" or "issuing" airline for your specific ticket -- not which airline operates the flight, which airline's flight number appears on your tickets, or from which airline you bought your tickets.
  2. 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 (whihc is one of the reasons it's so important to get the DOT to enforce the Federal regulations that require airliens to provide actual tickets). Remember, the validating carrier 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.
  3. The validating or issuing airline identified on your ticket is usually considered to be 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.
  4. The validating or issuing airline could claim that in issuing your ticket, they acted only as an "agent" of the airline that operates the flight, and thus could claim that they are not liable if the operating airline goes out of business. In the case of a codeshare flight or tickets issued by one airline for travel on another airline, there is no way you can be certain which airline is legally responsible. The courts would decide that question only after the fact.
  5. Yes, this is confusing and counterintuitive. Since most ticket sales Web sites don't identify the validating airline before tickets are purchased, and often make contradictory claims about codeshare flights and airlines' role as "agents" of other airlines, 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.

I have frequent flyer mileage credits on a bankrupt airline. Are they safe?

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.

If a bankrupt airline is liquidated, will some other airline take over their frequent flyer program?

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.

What should I do about my current frequent flyer mileage credits on bankrupt airlines?

Use them up as soon as possible, while you still can.

Should I care about accumulating more miles in these programs?

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.

Should I avoid buying tickets on bankrupt airlines for future travel?

Yes. All else being equal (including price), use another airline that isn't bankrupt.

As long as they are still flying, should I care that they are bankrupt?

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.

Are there any circumstances when it would still make sense to buy tickets on a bankrupt airline?

Maybe, 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).

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

  1. Pay for your tickets with a credit (not debit) 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. You have no protection if you pay by debit card, rather than by credit card. Debit card payments are treated like cash or check payments. Once you have paid by debit card, you have to go to court (as an unsecured creditor) to get your money back. There is no such thing as a debit card "chargeback."
  3. 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.)
  4. Insist on a printout of the complete "virtual coupon record", or at least the "passenger receipt coupon", of your e-ticket. If possible, try to get this printed on airline ticket stock (See above.)
  5. Plan for the possibility of substantial changes to routes and schedules. As long as the airline is still operating, you'll probably still arrive sometime the same day as was originally scheduled, but be prepared for a daytime flight to become an overnight flight, or vice versa, after you've bought your tickets. Allow a generous amount of extra time (at least overnight, preferably 24 hours, the more so the more important the appointment) between your scheduled flights and any time-critical events such as business meetings or the departure of a tour or cruise.

What about other airlines? Will they go bankrupt too?

Maybe.

Which other airlines might go bankrupt?

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.

What about airlines based in countries other than the USA? Is there more or less risk if I buy tickets on a foreign airline?

The law, the rules, and the risks are different in every country. This FAQ is solely concerned with bankruptcy and consumer protection rules related to airlines based in the USA. Some airlines based in other countries are operating under the protection and supervision of bankruptcy courts in the countries where they are incorporated. Some countries' laws give consumers and travellers substantially more rights than the USA, but some give less. Your rights depend both on where the airline is incorporated and where you buy your tickets. I don't know of any readily accessible comparison of consumer protection and bankruptcy laws for air ticket purchases around the world. (If you find an authoritative and reliable one, please tell me and I'll add a link.)

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

  1. If it is available, 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 as bankrupt airline, and didn't buy insurance before they went into bankruptcy.
  2. Pay for your tickets with a credit card. (See above.)
  3. Avoid buying tickets more than 60 days before your travel dates, unless seats are unlikely to be available, or are likely to be much more expensive, on shorter notice. (See above.)
  4. Insist on your a right to a complete copy (preferably printed on airline ticket and boarding pass stock) of your complete "virtual coupon record", or at least the "passenger receipt coupon" of your e-ticket. (See above.)

What will happen to airline ticket prices as a result of these bankruptcies?

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.

So what should I do? How do I get the best prices?

  1. 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.
  2. If a bankrupt airline offers a tempting deal, try to find an airline that isn't bankrupt that's matching the price.
  3. 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.

[Updates and latest news about airlines and airfares from my blog.]


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