Ev­ery­one loses if the air­lines go un­der

Toronto Star - - BUSINESS - David Olive

One of the world’s most ag­grieved groups to­day is air­line cus­tomers de­nied re­funds for hun­dreds of thou­sands of can­celled flights due to the COVID-19 pan­demic.

Re­fund-seek­ers have joined at­tempted class-ac­tion law­suits against air­lines in Canada and the U.S. and a to­tal of 74,000 Cana­di­ans have signed at least three pe­ti­tions de­mand­ing that any Cana­dian fed­eral as­sis­tance to air­lines be tied to pay­ment of re­funds.

But the air­lines sim­ply don’t have the money to pro­vide im­me­di­ate cash re­funds to cus­tomers who paid in ad­vance for flights and va­ca­tions that were not pro­vided.

Much like a bank run, im­me­di­ate cash pay­ment of all re­funds owed could drive the global avi­a­tion in­dus­try into in­sol­vency.

Most of the ma­jor world air­lines are suf­fi­ciently well-cap­i­tal­ized to even­tu­ally hon­our the mas­sive num­ber of vouch­ers they have is­sued for can­celled flights. In most cases, two-year vouch­ers have been is­sued. But with prac­ti­cally no rev­enue to sup­port their enor­mous fixed costs, even the big­gest air­lines don’t have ad­di­tional cash to make re­funds.

If forced to do so, they could be­come in­sol­vent.

The air­line in­dus­try doesn’t face mere bank­ruptcy. Bank­ruptcy is an or­derly,

court-ad­min­is­tered process from which a trou­bled com­pany hopes to emerge in good health.

By con­trast, in­sol­vency — run­ning out of cap­i­tal with which to op­er­ate the busi­ness — is fa­tal.

Air Canada is a prime ex­am­ple of the un­der­stated na­ture of the pre­car­i­ous state of the in­dus­try.

Canada’s flag­ship car­rier has re­ported a huge first-quar­ter loss of $1.05 bil­lion. But Air Canada’s losses re­lated to COVID-19 didn’t be­gin un­til late in that quar­ter, in March. The air­line’s sec­ond-quar­ter re­sults will be far worse.

Air Canada says it has about $7.3 bil­lion in liq­uid­ity to with­stand the pan­demic. But at least $2.5 bil­lion of that was hastily raised in draw­ing down re­volv­ing credit fa­cil­i­ties and se­cur­ing short-term loans — emer­gency fi­nanc­ing that swells Air Canada’s al­ready large debt load and is among the costli­est forms of cap­i­tal.

Of ne­ces­sity, Air Canada is con­tin­u­ing to scare up as much ad­di­tional liq­uid­ity as pos­si­ble for a cri­sis of in­de­ter­mi­nate length, on terms that will heav­ily favour lenders, given the high risk.

Air Canada will burn through those cash re­serves over the next two years on its air­craft fi­nanc­ing and other high fixed ex­penses. Air Canada also has its voucher li­a­bil­ity to work off and is spend­ing mil­lions of dol­lars retrofitti­ng its air­craft for the new era of ul­tra-hy­gienic fly­ing.

Air Canada’s predica­ment is shared by ev­ery ma­jor car­rier world­wide.

The global air­line in­dus­try is fore­cast to lose a colos­sal $442 bil­lion in rev­enue this year. And its re­fund li­a­bil­ity is gi­gan­tic, es­ti­mated at $50 bil­lion by the In­ter­na­tional Air Trans­port As­so­ci­a­tion, the in­dus­try’s chief trade group.

The cur­rent, par­lous state of af­fairs has no prece­dent in avi­a­tion his­tory. Sev­eral ma­jor air­lines failed in the af­ter­math of the Sept. 11, 2001, ter­ror­ist at­tacks. But the COVID-19 pan­demic threat­ens the en­tire in­dus­try with in­sol­vency.

For­tu­nately, sev­eral ma­jor air­lines are still fly­ing, though at only 10 per cent to 15 per cent of ca­pac­ity. Amid fi­nan­cial dis­tress, Cana­dian air­lines have repa­tri­ated Cana­di­ans from abroad. And Air Canada is op­er­at­ing up to 150 all-cargo flights per week to trans­port med­i­cal sup­plies.

The Cana­dian in­dus­try has re­ceived lit­tle sup­port from Ot­tawa. And the roughly $70 bil­lion in res­cue funds the U.S. in­dus­try has re­ceived from Wash­ing­ton do not cover the U.S. air­lines’ huge re­fund li­a­bil­ity.

This is an ex­pla­na­tion for the air­lines’ non-re­fund prac­tices, not an apol­ogy for them.

Com­mer­cial avi­a­tion is an es­sen­tial ser­vice that can­not be al­lowed to per­ish. But govern­ments have not been trans­par­ent about their ef­forts to keep the in­dus­try vi­able.

When he fi­nally ac­knowl­edged the re­fund is­sue in more than a cur­sory way on Fri­day, Prime Min­is­ter Justin Trudeau stuck to his govern­ment’s po­si­tion of cal­cu­lated am­bi­gu­ity. “We need to … en­sure that Cana­di­ans are treated fairly and our in­dus­try re­mains there for when our econ­omy picks up again,” Trudeau said. That could mean any­thing. What is clear is that ag­grieved air­line re­fund-seek­ers have been sub­jected to some­thing akin to a con­spir­acy of si­lence by govern­ments and air­lines. Nei­ther have ac­knowl­edged what they are do­ing to keep the in­dus­try sol­vent at the in­con­ve­nience of cus­tomers de­nied a re­fund.

For in­stance, the Cana­dian Trans­porta­tion Agency en­cour­aged air­lines to of­fer waivers rather than re­funds. It then re­stated the air­lines’ le­gal obli­ga­tion to pro­vide re­funds. But it left the un­spo­ken waiver from the law in place.

For its part, the U.S. Depart­ment of Trans­porta­tion in March re­minded air­lines of their le­gal obli­ga­tion to pay re­funds. But nei­ther the depart­ment nor Amer­ica’s con­sumer-rights reg­u­la­tors have en­forced that di­rec­tive. And so, priz­ing re­funds out of Delta, United, Amer­i­can and South­west is prov­ing al­most im­pos­si­ble.

Govern­ments are play­ing a cruel game with air­line cus­tomers in tak­ing the un­ten­able po­si­tion that cus­tomers are en­ti­tled to re­funds — a le­gal en­ti­tle­ment in most ju­ris­dic­tions, in­clud­ing Canada — but air­lines won’t be cen­sured for with­hold­ing them.

Some air­lines are play­ing the game too. Ryanair, one of the world’s big­gest dis­count car­ri­ers, has told re­fund-seek­ers it doesn’t have the staff to process re­funds. Which makes you won­der what its thou­sands of idled em­ploy­ees are do­ing.

And Lufthansa, in a seem­ing re­ver­sal of pol­icy, be­gan of­fer­ing re­funds this month. But only, as it turns out, on flights can­celled in May and be­yond. The vast ma­jor­ity of flight can­cel­la­tions were in March and April, of course. And for those un­lucky cus­tomers Lufthansa con­tin­ues to of­fer only vouch­ers.

But ev­ery­one loses if the air­lines go un­der. An in­sol­vent air­line won’t be of­fer­ing ei­ther re­funds or vouch­ers. And there is no hope of re­open­ing world economies with a de­funct air­line sec­tor.

So far, the only can­dour on this is­sue has come from the 12 Euro­pean Union coun­tries, which this month called on the Euro­pean Com­mis­sion to waive its rules re­quir­ing air­lines to promptly pay re­funds.

Govern­ments on their own, in­clud­ing Ot­tawa and Wash­ing­ton, aren’t will­ing to take the flak for re­fusal of re­funds. Nei­ther are Paris, Ber­lin and Madrid, which pre­fer that the EU be the heavy in con­don­ing the with­hold­ing of re­funds.

It has been widely re­ported that Canada is an out­lier on this is­sue, that the U.S. and the EU are re­quir­ing air­lines to pay prompt cash re­funds. As noted above, that’s not true. With very few ex­cep­tions, air­lines world­wide are hold­ing out against pay­ing re­funds and govern­ments are not en­forc­ing laws re­quir­ing them to do so.

Strictly speak­ing, a re­fund is owed by a busi­ness that is to blame for its fail­ure to sat­isfy the cus­tomer. The air­line busi­ness is not to blame for its in­abil­ity to de­liver.

Govern­ments world­wide shut down the avi­a­tion in­dus­try with the se­vere air-travel re­stric­tions they im­posed ear­lier this year, at the same time that they were shut­ting down en­tire economies as the only means of stop­ping COVID-19 spread.

Ot­tawa could write a cheque to the air­lines to cover cash re­funds. But that would un­fairly bur­den all Cana­di­ans, many of whom can­not af­ford air travel.

By the logic of the most ag­grieved re­fund-seek­ers, we should be de­mand­ing re­bates on our taxes for govern­ment ser­vices that have been with­held from us dur­ing the pan­demic. That in­cludes the elec­tive surg­eries and tra­di­tional class­room ed­u­ca­tion for which we’ve pre­paid with our taxes.

As it hap­pens, the ma­jor­ity of air­line cus­tomers whose flights were can­celled have ac­cepted vouch­ers.

In do­ing so, they have joined 37 mil­lion Cana­di­ans en­dur­ing COVID-19-re­lated sac­ri­fices and in­con­ve­niences in all walks of life. Be well. And thank you for so­cial dis­tanc­ing.

GRA­HAM HUGHES THE CANA­DIAN PRESS

The global air­line in­dus­try is fore­cast to lose a colos­sal $442 bil­lion in rev­enue this year, and the COVID-19 pan­demic threat­ens the en­tire in­dus­try with in­sol­vency, David Olive writes.

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