By: Todd Knode

Frontier Airlines last week filed for Chapter 11 bankruptcy .  The reason was because the company that processes Frontier’s customer’s credit card transactions, First Data, raised the amount of ticket-purchase proceeds that it temporarily withholds from the company. First Data was withholding up to 45% of the transaction until the passenger’s flight took off, now, First Data wants to withhold up to 100%.  This sudden change evidently so severely impinges Frontier’s ability to make money that the company had to file for bankruptcy protection.

When a company files for bankruptcy an automatic hold is placed on any actions by creditors to collect on debts owed by the person who filed.  In Frontier’s case this includes First Data’s attempt to withhold a higher percentage of credit card transactions.  First Data has said their action to implement the higher withholding is included in the contract and that their contract with Frontier is standard across the airline industry.

If the passenger ends up flying Frontier will get its money.  So, you may ask, what is the problem with when Frontier gets its money?  The problem arises because of what Frontier can do with the money.  If First Data withholds 100%, Frontier cannot do anything with the money.

If a customer in April buys a ticket for a flight in June Frontier immediately receives 55% of the ticket price, under the new terms Frontier will not see a penny until June.  Simple math shows that First Data holds onto a sizeable amount of money from Frontier customers over a short period of time, and wants to increase that amount.  Because First Data has possession of the money they also have the ability to invest it, and earn a profit on it, before turning it over to Frontier.  Even if First Data only puts the money into a savings account, how much interest do you think a few million dollars will make over one or two weeks?  Frontier can do the same thing, unless First Data withholds it all.

As we have seen with the housing bust, poor judgment is not confined to airlines.  Many home buyers bought homes they could not afford or entered into loan agreements they did not understand.  Many of these homeowners are now in Bankruptcy court and Congress is now working on a plan to allow Bankruptcy judges the power to rewrite some mortgages, thus allowing homeowners to escape from mortgages they should not have signed in the first place.

As we have seen over the past decade the airline industry is a mess and many airlines are failing.  Frontier is not the first one to file bankruptcy; they join three other airlines who filed for bankruptcy this month.  Families being summarily kicked out of their homes made enough bad PR images that Congress took the drastic step of allowing judges to rewrite mortgage contracts.  If the airlines lobby enough maybe Congress will grant judges the same ability to rewrite the airlines’ bad labor, fuel and credit processing contracts.