Passengers With Invalid Tickets May Fly Again : Airlines: When a carrier goes bankrupt, passengers holding unused tickets have had little hope of getting their money back. But a default protection plan may finally be forthcoming.

Some much-needed help for those unfortunate consumers caught with invalid tickets on a bankrupt or failed airline may be on the way.

Without an airline default protection plan, consumers are at the whim of other airlines that may or may not honor the unused tickets.

If other carriers do honor tickets, it’s generally standby and perhaps only for a limited time. Also, passengers, as unsecured creditors, are last in line for any refunds from bankruptcy court proceedings.

The Washington-based Assn. of Retail Travel Agents has proposed that Congress change the bankruptcy code to put consumers holding tickets on a bankrupt airline in a separate category, designating them as first among unsecured creditors to get refunds.


“The future will certainly see some more airline bankruptcies,” predicted Paul Bessel, president of ARTA. “So it’s time to put a system in place which really protects the consumer.”

More than 300 carriers have ceased operation since deregulation of the domestic airline industry began in 1978, including Pacific Express, Royal West, People Express, Braniff and Continental (the latter two having since restarted).

“All unsecured creditors are basically paid on the same basis,” Bessel said. “They have to wait until the bankruptcy proceedings are over to see if there will be any refunds.

“Payments, if any, would be made pro rata, regardless of the amount of claim involved. You have to make sure you file your claim by a specific date set by the bankruptcy court, and consumers don’t always know about these cutoff points for making claims.”


Secured creditors such as banks and aircraft manufacturers get first crack at the assets of bankrupt carriers. Besides ticket holders, unsecured creditors could also be fuel suppliers and maintenance and food-catering companies.

ARTA tried unsuccessfully to have its proposal tacked onto a Senate bill (SB544) that was created to prevent companies from using complex corporate structures to shield assets from creditors.

“The real solution,” Bessel said, “is for every airline to be bonded or to put consumer funds into a secured escrow account just like charter tour operators are required to do for their flights.”

Under current rules, charter tour operators can’t touch the money put into these secured escrow accounts until flights are completed.


Bessel pointed out that travel agents are bonded to protect airlines for the money consumers pay to agents who book their flights.

The consumer, however, is not protected by this bond. “By the same logic, airlines should be bonded to protect consumer money they are holding,” Bessel said.

“Every consumer under this bond or escrow account would have an absolute guarantee to get his or her money back. And the refunds would be triggered by nonperformance, so there wouldn’t be a requirement for bankruptcy to be declared.”

Bessel said ARTA would like to see airlines set up a bonding or escrow program voluntarily. “This kind of plan would create and restore a tremendous amount of public confidence in airlines,” he said.


Eastern Airlines already has created such an escrow fund for unsecured creditors, Bessel said, although it was done to allay uncertainty about the airline’s survival.

“We’re pursuing such a plan as one of ARTA’s objectives, and we may file formal action with the Department of Transportation and Congress,” Bessel said. “But it would be better if it were done without government intervention.”

Other consumer and trade groups, including the National Assn. of Attorneys General and the American Society of Travel Agents, also have urged passage of legislation to require airlines to provide alternative flights to passengers holding tickets on airlines that cease operations.

Another possible way to protect consumers from belly-up airlines is by tapping into the domestic air tax paid into the aviation trust fund. Domestic air passengers pay an 8% tax, although there’s a proposal in Congress to raise the tax to 10%.


The aviation trust fund, said to be about $7 billion, supposedly exists to improve the nation’s airports and whole air transportation system. In reality, however, it is used primarily to make the federal deficit seem less forbidding.

“We think a certain percentage of this huge fund, perhaps 2%, should be allocated each year to cover possible airline bankruptcies,” Bessel said. “If there’s no bankruptcy during the year, that percentage of money then goes back into the aviation trust fund.

“Carriers once had a default plan of their own. That one fell apart when the major airlines didn’t want to bolster their weaker brethren. If an airline default system can be eliminated that quickly by carriers, it’s not a very effective system,” he added.

Not everyone, however, believes that a default protection plan is necessary. In a report submitted to Congress, the DOT stated that it “does not believe that the facts support the need for any mandatory, government-imposed system of airline default protection.”


In addition, the DOT said that 62% of all airline tickets are credit-card purchases that are generally refundable under federal credit laws, and that some tickets are protected by private default plans and insurance.

The report also showed airline defaults declining every year since 1984, and the DOT receiving fewer complaints.

The DOT claims that government-imposed default protection may harm consumers by imposing costs on carriers that would result in higher fares.

It also believes that such mandatory protection against airline defaults would give special protection to air passengers that the government doesn’t give to consumers affected by other business bankruptcies.


“The DOT argument that some air passengers are already protected doesn’t deal with the more important question of why there isn’t a plan to protect all passengers,” Bessel said. “And the argument that airlines might increase fares to provide consumer protection against bankruptcy doesn’t seem to have any facts behind it.

“I think passengers would be happy to have this protection even if it meant paying a few more pennies with each fare, which is all it would be.”