All You Need to Know about Airline Bankruptcy

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There are things you need to know when an airline files for bankruptcy--and when one goes completely bust

With major airlines making headlines by losing billions of dollars and entering bankruptcy protection, passengers are justified in being a little concerned about their next flight.

Filing for bankruptcy doesn't mean a carrier is about to shut its doors. Heck, an airline could survive the process without inconveniencing a single passenger. But invoking Chapter 11 is not a good sign. In the early 1990s, America West, Continental, Pan Am, Midway, and TWA all filed for bankruptcy; America West and Continental are the only two still around. And while TWA was sold with little disruption to travelers, Midway went belly-up overnight, stranding customers with few options. No one knows if a major carrier will cease operations anytime soon, but at the very least a period of consolidation among airlines seems imminent.

Be aware before you buy: Airlines enter Chapter 11 to reorganize debt--and to give them leverage when it comes to agreements with creditors and labor unions. It's a more dire situation when a carrier goes into Chapter 7 bankruptcy, when planes and other assets are liquidated and routes are often canceled. There are no telltale indications that an airline will be OK, but getting concessions from labor unions is generally considered a good sign (if not for the workers). When unions refuse to budge, it often spells trouble.

Pay with a credit card: The Fair Credit Billing Act gives credit card customers the right to dispute charges for services not received. People who never get the chance to use tickets can at least get reimbursed by the bank that issued their card.

Use miles sooner rather than later: Your frequent-flier miles might be safe if your airline files for bankruptcy or is bought by a competitor. Then again, they could become worthless overnight. Airlines can change, or even eliminate, miles programs at a moment's notice, so use miles whenever you have the chance. Another safeguard: If you're a frequent flier with an airline in financial trouble, reserve through that airline but fly on one of its stable code-share partners.

Know the law: The Aviation & Transportation Security Act stated that passengers holding tickets on a defunct airline are entitled, within 60 days of cessation of services, to go standby on any U.S.-based airline that flies that route, for a $25 fee. The law was passed as a temporary measure in the aftermath of 9/11, but expired Nov. 19, 2004. Congress expects it to be reinstated, but as of December 2004 passengers with tickets on defunct airlines have little recourse than seeking reimbursement from their credit card companies. 

Have a worst-case-scenario plan: If you're at the airport when your airline ceases operations, rather than simply waiting for a standby seat on another carrier to open up, use your cell phone or laptop to research flight schedules. It's a good idea to know which airlines fly to your destination and whether alternative airports offer similar connections. Airport flight guides are usually available in booklet form, or they can be downloaded from the airport's website.

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