What to know as airlines discuss bankruptcy again

Following a half-decade of “never lose money again” financial hubris, the pandemic shutdown has again raised the dreaded “B-word” in airline circles. Many airline financial experts are openly discussing the possibility that the weakened economy will again force one or more big U.S. airlines into bankruptcy. Speculation has focused on American and United as the weakest of the big lines, but others may also be in play. And the specter of bankruptcy raises four issues you have to consider in your postpandemic planning.

1. Despite what you might think, bankruptcy does not necessarily mean outright failure. Instead, what people are thinking about now is the Chapter 11 variety of bankruptcy. That’s the kind where the company involved continues to operate — often as usual — while it restructures. “Restructure,” in turn, means that the bankrupt company sheds much if not all of the debt that is draining its cash. Stockholders generally lose their investment, and bondholders and maybe even big lenders have to exchange loans for equity. It isn’t pretty if you’re an investor, but it’s close to transparent if you’re a consumer.

2. Since deregulation, most of the current biggies — American, Delta, Hawaiian and United — went through Chapter 11 at least once. But each time, they kept flying their usual flights, honoring tickets and even honoring frequent flyer miles. Of today’s important lines, only Alaska, Allegiant, JetBlue and Southwest have avoided Chapter 11.

3. Even the former big lines that disappeared lived on as parts of the

survivors. In those cases, what was left of the failing company was valuable enough to encourage a buyout or acquisition. Thus, American acquired what was left of TWA, Continental merged with United, Delta and United divided the corpse of PanAm, Northwest and Western merged into Delta, and USAir morphed into today’s American. For their customers, it was pretty much business as usual.

4. Failure — actual shutdown or default — is a different story. It has been a while since a goodsize U.S. airline has failed and shut down completely, but several foreign lines went under recently — notably Iceland’s WOW — and passengers holding tickets were left with nothing. Other airlines offered low-fare options for travelers stranded in Iceland to get home, but the only travelers who came out whole were those who had bought trip-cancellation insurance coverage that included carrier default.

As a consumer, you need to make sure you don’t lose out in a big travel industry bankruptcy. In most Chapter 11 bankruptcies, giant companies continue to operate. You’re unlikely to lose the cost of any tickets or frequent flyer benefits with one of the giant airlines. But buying in advance with a small Asian or European low-fare line other than Easy Jet or Ryanair might be riskier.

Here’s how to minimize your risk.

To the extent practical, wait as long as you can before departure to pay for any travel service, and check the financial situation of any airline or cruise line you’re considering.

Pay as little upfront as you can. Even refundable payments are at risk if the supplier runs out of cash.

Make sure you pay by credit card. That way, you can initiate a charge back if the supplier fails.

Buy trip-cancellation insurance that specifies “default” as a covered reason, not just “bankruptcy,” and buy it from a third-party insurance agency. Companies often default without ever filing for bankruptcy.

Bankruptcy or failure risk isn’t confined to airlines. Cruise lines are also in a financial pinch. The big hotel chains generally do not own their properties, but some hotel ownership groups are hurting. The financial crunch is an equal-opportunity threat, and you can expect some failures in all sectors. Use the same low-risk strategies with any travel service.

ESTEBAN FELIX/AP South American carrier LATAM Airlines announced on May 26 it is seeking Chapter 11 bankruptcy protection.