The Airline Refund $35B Tidal Wave Is Complicated By Credit Card Markets

Airlines are pushing back on calls to refund up to $35 billion in tickets sold but not flown. While governments in the U.S. and EU have confirmed consumers rights to obtain a refund for their tickets, it’s not a straight-forward transaction. In fact, some airlines may not yet have received the cash they are required to refund from the credit card markets that process airline payments.

IATA was unable to confirm, when asked, what portion of the $35 billion in refund liability is held by credit card markets and yet to be paid to airlines.

“We know it is a major source of concerns for many airlines and some of our members have shared that the imposition of such measures is severely constricting their cash flow to the point of threatening the continuation of their operations, as evidenced in past airline bankruptcies,” Chris Goater, Assistant Director, Corporate Communications at IATA tells me.

As Goater says, a number of airlines have already suffered financial distress and even gone bankrupt due to the extended cash holds that credit card banks place on their sales—which can last anywhere from days to months. The settlement terms depend on the level of confidence that credit card markets have in the long-term survival of an airline, but they can be a self-fulfilling prophecy. If an airline gets into trouble, and has no access to the bulk of capital generated by its sales, then it will fail.

Norwegian, for example, had been working on a recovery plan prior to the coronavirus crisis which included renegotiating substantial hold terms with the credit card market. In September of last year, the airline reported that holds on credit card settlement had negatively impacted its working capital by approximately NOK 4 billion ($390 million) for Q2 2019, compared to the same quarter of the previous year. The airline had recorded NOK 9 billion ($878 million) in sold but not flown tickets for Q2 2019. Norwegian made other adjustments to its business, to work around the crash crunch, including deferring lease payments, selling aircraft and issuing bonds. But sometimes airlines can’t make these adjustments in time.

Flybe, which was the first airline victim of the coronavirus crisis, had also been grappling with access to capital generated by its sold tickets. As Skynews reported in March of this year, credit card companies held almost £50 million ($61 million) in cash owed to Flybe for tickets sold when the airline failed. Having access to that cash might have been enough to keep the regional airline flying a while longer. At the time, Flybe had £5.7 million ($7 million) in cash reserves, and faced around £10 million ($12 million) in bills coming due.

Ostensibly, credit card markets hold back payments to risky airlines in order to ensure the cash is still available to protect purchases in case the airline fails, but that doesn’t always work out. Thomas Cook also faced a credit card cash squeeze before it failed last year, and yet consumers were still waiting for refunds to be reflected on their credit cards months after Thomas Cook ceased operations.

“The execution of a refund is not directly related to a credit card hold back,” Goater explains. “Normally, a refund transaction is deducted by the acquirer from the settlement of the next batch of card sales. If there are no new card sales, the acquirer may delay the execution of the refund transaction and its settlement to the card scheme until the airline has transferred the necessary amount of funds to the acquirer.”

Not all card acquirers have credit card hold back arrangements with the airlines for which they process payments, and some of the $35 billion in sold but not flown tickets may already have been used to sustain airline operations to date. But even for airlines which have no extended holds on capital, there is a threat of bankruptcy if refunds requirements exceed new bookings.

This is also bad news for consumers, unless the airline recovery is a sharp V-curve. If the recovery takes an extended U-curve, then it might be a prolonged wait for airlines to book enough sales to recover a massive refund pay-out. Consumers may face a much more severe delay on refunds from the credit card market than they experienced with Thomas Cook.

The situation that some airlines and that credit card markets currently face, given the magnitude of sales to refund, is similar to a run on the banks during the Great Depression. Everyone needs access to the capital—especially the consumer who may have the least ability to weather the financial crisis caused by the coronavirus pandemic—but the money is not in a single place to be paid out to everyone in one lump sum. Everyone has been working on capital in flux. Now the stream is frozen and everyone is naturally slipping.

As there is no ability to predict when air service will resume and no real figure available for the level of sales that they can expect when service resumes, there is also a crisis of confidence as much as a crisis of cash.

That crisis of confidence can result in some credit markets extending payment settlement windows for whatever airlines they believe are least resilient under the new market circumstances. That would mean that at the end of the coronavirus crisis, as has previously been the case, the fate of certain airlines around the world may be decided by credit card markets themselves, unless government intervention is sufficient to sustain liquidity through this tidal wave of refunds.

“Credit card hold backs have always been a feature of the airline industry,” Goater says. “However, each airline situation is unique. Naturally, if the acquirer maintains credit card hold backs on new sales, this will represent a continued constriction of the airline’s cash flow.”

Some airlines have been trying to get ahead of this refund tidal wave, even offering bonuses to passengers to entice them to hold their tickets longer. And there may be some support available in the credit card space too, from credit card companies who partner with airlines.

“The card issuers who have loyalty programs based on airline miles have a vested interest in the safe continuation of the airline’s operations, as the unredeemed miles represent a significant value of the card product offer in the eyes of the cardholder,” Goater says.

But with many consumers facing financial uncertainty as a result of the economic downturn, airlines and credit card markets will have to find other creative ways to ride through the $35 billion wave and hope they don’t all crash out on the shore.