Credit Card Company Holdbacks

[St.Urho]

Apparently Frontier Airlines just declared bankruptcy. They blame increased holdbacks by their credit card processor.

Denver-based Frontier blamed the action on an “unexpected attempt by its principal credit-card processor to substantially increase a ‘holdback’ of customer receipts, which threatened to severely impact the airline’s liquidity.”

So what’s a holdback? Is it a common practice? Why did it affect the airline so much?

[Cerowyn]

A hold-back is money that would ordinarily be owed to the airline for credit card transactions processed that is instead held in trust against charge-backs or other money owed to the processor. Typically, it would be only raised by a card processor if the merchant was experiencing higher than expected charge-backs, the company discovered that the merchant’s policies were not in compliance with guidelines, or if there was some material risk of the company not being able to collect fees owed to them. I don’t know what the situation is in the case of this airline, though. I can’t imagine that the got a lot of charge-backs, since a flight is pretty much a “took it” or “didn’t take it” kind of affair.

[SpoilerVirgin]

There’s a good explanation in this CNNMoney article:

Typically, credit card processors turn over revenue to airlines in a couple of days, Baker said. But they can sign agreements with financially weak airlines, such as Frontier, to hold back a percentage of revenue from the time a ticket is purchased until the passenger takes the flight.

In the case of Frontier, the credit card processor unexpectedly informed the company that beginning April 11 it intended to substantially increase a " holdback" of customer receipts.

[DSYoungEsq]

If that action alone was sufficient to throw the company into a liquidity crisis, one has to think they were likely to be in one soon, anyway. :rolleyes:

[beowulff]

Is this the definition of “self-fulfilling prophecy”?

[Duckster]

The move ends a policy under which the processor, First Data Corp, passed on most money from ticket sales to Frontier. The change is intended to protect First Data, which would be on the hook for ticket refunds if Frontier stops flying. Frontier plans to continue operating while in bankruptcy.

First Data’s decision represents a new threat to an industry facing jet fuel prices that have soared 74 percent in one year, a new government focus on safety that has grounded thousands of flights in recent days and tight competition and falling demand that, combined, have limited carriers’ ability to raise prices.

Source: Yahoo Finance - Stock Market Live, Quotes, Business & Finance News

If credit card companies start do this with other airlines just to protect themselves, how many other airlines will business crash?

[D-bear]

@DSYoungEsq

If that action alone was sufficient to throw the company into a liquidity crisis, one has to think they were likely to be in one soon, anyway. :rolleyes:

@beowulff

Is this the definition of “self-fulfilling prophecy”?

Hi there. On behalf of myself, and my 6,000 fellow Frontier employees, thanks for your words of encouragement. Sentiments like yours truly make a troubling time less scary…

Here’s to hoping I can make the next 29 years of mortgage payments…

[SmackFu]

Yes, apparently if you had paid for the flight within 60 days of the airline folding, you can file a chargeback since there was non-fullfilment of service or something similar. Than the credit-card company gives you your money back, while they try to get it from the airline, but that’s obviously extremely unlikely. So it makes sense to prepare for the contingency. They don’t really care if it bankrupts the airline.

[LSLGuy]

CC holdbacks are a very big deal in the airline industry. Even for healthy carriers the card companies hold a bunch of funds. When they increas holdbacks suddenly it means essentially ZERO revenue until the new holdback level is met.

Given that the industry operates on a few percent gross margin and very often negative net margin, this means even a “healthy” airline can get into cash flow problems pretty quickly with 100% of normal expenses and zero revenue.

And like any adverse banking action, it can trigger a host of problems like where suppliers stop selling, or demand cash on delivery. That can in effect accelerate 30 to 60 days of payables to tomorrow. Compared to other big industrial entities, an airline buys a lot of stuff for immediate consumption (fuel, catering services, ground handling services to name the obvious ones) which are often sold by small companies and are utterly un-repossable by them, and utterly un-stockpile-able by the airline. And each is needed right now without disruption to keep the network moving. Having just a couple Mom-and-Pop fuel vendors in smallish stations sudenly refuse to fuel your planes & you’ve suddenly got a systemwide stability crisis going on.

It also tends to depress bookings, as everybody reads about it in the media.

Yes, it can be a largely self-fulfilling prophesy for the CC company.

[DSYoungEsq]

@LSLGuy

Yes, it can be a largely self-fulfilling prophesy for the CC company.

Given which, one has to believe that the fact that the company increased the holdback means that they were pretty convinced that Frontier was going to be declaring bankruptcy at any moment anyway. It’s not very surprising that a company that is being poorly managed and suffering from other market issues would try to create a spin that their bankruptcy declaration was forced upon them by someone else’s actions. :dubious:

D-bear, sorry to hear about your situation. The good news is that, unlike Aloha and the others recently declaring, Frontier so far intends to re-organize, not shut down.

Personally, the few times I’ve flown Frontier, I’ve enjoyed the experience. I wonder if the people who engineered the de-regulation of the airline industry really understood how long it would take for the market and the industry to figure out just how to service the flying needs of the average American? :eek: