Everyone loses if the airlines go under
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.
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.