Frontier Airlines' parent company has filed for Chapter 11 bankruptcy protection. The Denver-based, low-cost airline says that, as far as customers and employees are concerned, nothing will change. Bankruptcy will enable the airline to block a credit-card processor from demanding that it keep more cash on hand to cover possible refunds of customer purchases in the event it has to shut down. The airline has about as much debt as it has assets, says Bloomberg News.
In a blog post on Monday, we cited a prediction that Frontier was one of the airlines most likely to be next at risk from economic pressures. The issue of cash came up in the comments on that recent blog post. Here's the skinny: Nationwide, banks are not lending much money to airlines (or to many other businesses) right now. And credit card processors and banks are requiring airlines to have a lot of cash on hand to handle sudden spikes in the cost of doing business, such as jumps in the price of oil or sudden groundings of many of their planes. According to Fox Business, "The average amount of cash on an airline’s balance sheet to cover expenses has risen from a historical level of 12% to more than 30%." A day after our blog post, Scott McCartney, travel editor of the Wall Street Journal, also named Frontier as a shaky airline.
How to protect yourself?
In the short term, you shouldn't worry about tickets you book on Frontier. But for flights departing this summer? Keep your eye on the news. One interesting idea from AirfareWatchdog is to "buy a back up ticket" that is fully refundable on a rival airline, such as United or Southwest. You'll need to be able to afford to buy two tickets, including an admittedly expensive refundable ticket. But right before your trip is about to depart, when it's clear that Frontier is still OK to fly, you can cancel the refundable fare. You'll probably still save money, because if Frontier collapses, the last-minute fares on United or Southwest could be astronomically higher than the refundable fare you've bought in advance as a hedge.
(Update @ 11am ET:) Years ago, when an airline collapsed, other airlines would offer discounted last-minute fares for stranded fliers. But that has not been happening this year. For example, when several airlines collapsed last week, United and American said they would offer last-minute fares to stranded fliers that were below their standard full-fares at the last-minute. But the reality was different: They only handed out a limited supply of those discounted fares, and many people paid through the nose to book flights on those (and other) carriers.
How to handle upcoming cancellations.