Date
September 25, 2019

The recent failure of the British holiday company Thomas Cook - which owned several airlines, including Thomas Cook Airlines (MT) - highlights how an airline’s financial distress and shutdown can cause serious disruptions for travelers. The scale and impacts of airline failures on travelers can vary depending on what steps the government in an airline’s home country is willing to take to assist affected travelers, but travelers can improve their chances of avoiding these challenging situations by knowing warning signs of an airline’s potential demise.  

 

Signs of Airline Financial Trouble

The exact timing of an airline’s cessation of operations is very difficult to predict, but travelers can discern some obvious signs that an airline is in serious financial trouble. While almost all airlines experience financial losses periodically, reports of missed payments to suppliers or lessors, aircraft groundings, and airlines missing payroll are all indicators that an airline is undergoing severe financial distress that exceeds normal financial issues. Other signs that an airline’s future may be in jeopardy include financial problems with an airline’s parent company, the withdrawal of a major investor, or the breakdown of an attempt to sell the airline. It should be noted, however, that such issues do not indicate that an airline’s bankruptcy is inevitable, as some airlines have experienced these issues and recovered from their precarious financial situations. 

Missed payments to suppliers, employees, lessors, and authorities are clear signs that an airline may not be able to maintain its operations. Ensuring such payments is a top priority for an airline’s leadership; missing payments can result in suppliers or airports denying service to an airline, which can cause flight cancellations and other operational disruptions. Lessors may also repossess aircraft from airlines that miss payments. If airlines fail to pay maintenance providers or become unable to afford spare parts, they may be forced to ground aircraft for safety reasons, another sign that an airline may be unable to continue operations for much longer. 

Financial problems at an airline’s parent company or the withdrawal of a major investor can also jeopardize an airline’s operations. Notable examples of this trend include the shutdown of Belgian flag carrier Sabena (SN) in 2001 after its parent company Swissair (SR) collapsed, and the shutdown of major Australian carrier Ansett Australia (AN) in the same year amid financial challenges at parent company Air New Zealand (NZ). Air New Zealand ultimately survived the crisis, but Ansett did not. More recently, several subsidiaries of Abu Dhabi’s flag carrier Etihad Airways (EY) have experienced major financial difficulties as a result of their parent company’s challenges. While Etihad itself is highly unlikely to cease operations thanks to strong financial backing from Abu Dhabi’s government, its subsidiaries Darwin Airline (F7), Air Berlin (AB), Niki (HG), and Jet Airways (9W) have all ceased operations in the last three years after Etihad withdrew funding for the carriers.  

Travelers should take special notice if an airline they are flying on stops selling tickets, or if a bid to secure a last-ditch loan or investment for the airline fails. While some airlines have gone through such situations and survived, most have ceased operations shortly afterward. Thomas Cook’s failure occurred immediately after a deal to secure additional investment in the company collapsed and the British government rejected the company’s bid for a last-second loan. French carrier XL Airways France (SE) announced Sept. 19 that it was suspending ticket sales; the carrier has indicated that it will cease operations in the coming days unless it can secure a rescue deal.  

A country’s bankruptcy laws and a government’s ability to assist financially distressed airlines can also impact airline shutdowns. US law allows bankrupt airlines to continue operating without interruption while they reorganize. Many other countries, however, do not have laws allowing bankrupt businesses to continue operating. The lack of such a law in Switzerland played a major role in Swissair’s downfall in 2001. Some struggling airlines can also turn to their countries’ governments for assistance in maintaining operations in the face of financial challenges, especially if they are one of the country’s main airlines or are state-owned. Some governments, however, are unwilling or unable to assist ailing carriers. EU laws prohibiting governments from providing unfair aid to private companies have played a direct role in multiple airline shutdowns in the past two decades.   

 

Operational and Travel Impacts of Airline Failures

The impacts of airline failures on passengers depend on how prepared authorities are for the shutdown. A well-organized civil aviation authority who is prepared for an airline to cease operations can often accommodate all passengers relatively quickly. An unexpected shutdown, however, can force passengers to fend for themselves, both for getting to their destinations and obtaining refunds for canceled flights. 

Civil aviation authorities that know in advance an airline is likely to cease operations can provide significant assistance to passengers. The UK government was aware of Thomas Cook’s likely demise several days in advance and developed a plan to immediately assign almost all Thomas Cook passengers stranded abroad to alternative flights, including special charter flights that authorities had arranged in advance. The UK government followed a similar plan when Monarch Airlines (ZB) ceased operations in 2017. The German government took even more extreme steps when Air Berlin failed in 2017; the government provided the carrier with a loan that allowed it to continue operations for another two months before shutting down in a controlled manner. In cases where governments aid passengers after an airline ceases operations, most of a government’s efforts focus on repatriating passengers stranded abroad; such operations generally do not provide flights to passengers who have yet to start their trips. 

Disorganized airline shutdowns can leave passengers on their own to arrange travel back home. When Spanish carrier Primera Air (PF) ceased operations in 2018, the carrier simply stopped all flights, withdrew all staff from airports, deactivated its email addresses and phone numbers, and told passengers to not contact the airline. Passengers who do not receive government-arranged flights after an airline shuts down should arrange alternative transportation as quickly as possible. Alternative flights tend to book quickly after an airline ceases operations, especially if the number of alternative flights is limited. In some instances, airlines will add extra flights or use larger aircraft to accommodate the surge in passengers from a competitor’s demise, but travelers should not count on this, especially in the first day or two after their carrier ceases operations.  

A traveler’s ability to get compensation or refunds for their canceled flights after an airline ceases operation depends on local laws. Some airlines will offer passengers refunds immediately after they cease operations or offer to compensate a passenger for tickets bought on a different carrier. In some countries, however, passengers will simply become creditors for the bankrupt airline. In such instances, passengers generally are among the last to receive money from the sale of the bankrupt carrier’s assets, as secured creditors such as banks and other lenders receive priority over customers in most jurisdictions. 

 

Looking Ahead

While the airline industry has experienced some of its most prosperous years, several large airlines have failed. As the global economic conditions that allowed airlines to thrive show signs of change, airline failures are likely to be more common, especially in several major markets including India, Indonesia, and Argentina. The more challenging economic environment, including rising oil costs and an increase in the number of low-cost carriers, is likely to put financial pressure on airlines. The impacts of airline failures can vary considerably depending on how authorities in the airline’s home country react.  

 

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