COVID-19 cancellations and commercial measures. What options for airlines?

Following the different measures taken to stop the spread of COVID-19, the airlines are facing a wave of cancellations never seen before. At first it was due to customers who were afraid to travel or were “banned” from certain destinations and then on their own initiative as borders closed and flight bans increased.

A difficult situation for the passenger but quickly normalized

At the beginning things were not easy for the passengers because nothing was planned to compensate them in case of preventive cancellation on their part.

We had the same case at TravelGuys with a trip planned in a destination that suddenly closed its doors to French passengers. But as long as the airline did not cancel we decided not to cancel our tickets on our own and to adopt the best possible attitude: wait and see. Seeing how fast everything was closing we thought we wouldn’t have to wait long for our flights to be cancelled by the airline so we would be eligible for compensation. Which happened very quickly.

Soon airlines and hotels began issuing waivers, exempting passengers from having to pay penalties for cancelling or changing travel dates, regardless of the terms of their tickets. This means that if some passengers left at one time and found themselves stuck abroad, it is because they wanted to leave.

What do the airlines offer to passengers prevented from travelling because of COVID-19?

It’s good to know that you haven’t lost your flight, but you still need to know what you have in return.

For the customer who has a flexible ticket the question does not even arise, he did not even need a gesture from the airlines. For the others it was mostly :

  • Cancellation without fees
  • Free postponement (until a certain date)
  • Issuance of a voucher (voucher of the value of the ticket) to be used before a certain date.

Two things matter here. What is written (“a certain date“) and what is not (refund). And we will start with this second point: the reimbursement! Let’s be clear: nobody or almost nobody does it, the only airlines, to date, refunding tickets automatically are Qatar Airways, American Airlines, Ryanair, Eva Air, China Eastern, China Southern, China Airlines, Finnair and some others.

35 billion dollars worth of airline tickets in the air

According to IATA (International Air Transport Association), 35 billion dollars worth of tickets have been cancelled and the airlines must reimburse their customers. I say must: it is not an option, it is not a commercial gesture, it is an obligation as soon as the customer asks for it. But no airline does.

The reason is simple: it would lead them straight to bankruptcy. If we take the example of Lufthansa, the airline has 5 billion euros in cash and should refund 4 billion worth of tickets. The calculation is simple: if it refunds them, it will be bankrupt in 2 months. It would have 1 billion left over after refunding, but it won’t be enough to meet its other payments and fixed costs for so long. Very few airlines in the world have enough cash to refund without running a deficit, and even those that do (Lufthansa ? British Airways ? Delta ? ….) would not go survive long afterwards.

So of course everything suggests that States will help It is more reasonable to assume that their support will be used to compensate for fixed costs and lost commercial revenue and not, in addition, the reimbursement of cancelled tickets, which would raise the bill unreasonably.

In short, the airlines refuse to refund and issue vouchers, to the great displeasure of passengers who prefer to have their money back. In a way they are right because they are entitled to ask for a refund but from another point of view if we apply the law to the letter all the airlines will have filed for bankruptcy by the middle of the summer or even before. So once again we can say that “the States just have to pay” but we can also hear that we prefer that taxes are used to help the airlines, like any other business, to get through this bad moment and not to refund tickets whose amount is not lost anyway.

A little light for the lucky few though. As we have experienced, Amex Travel, the travel agency of American Express, reimburses what was booked through them without any problem and then deals with the airlines. But few travel agencies can afford it. In addition to this, for holders of an American Express Platinum (we say Amex Platinum, we do not know about the Amex Air-France KLM Platinum), all trips cancelled and paid with the card are reimbursed.

Common Sense vs. Law Enforcement

Coming back to the reimbursement vs. voucher debate, even if the customer grinds his teeth, we can think that the voucher policy is just common sense. The same people who would like to be reimbursed would not like to be told in 6 months that it is no longer possible to travel because there is no surviving airline. And we are not even talking about the social and employment impact. For your information, beyond the airlines, an airport like Roissy represents 100,000 jobs, not counting the jobs generated outside the airport. We leave it to you to do the calculations at the world level, without even thinking of all the professions that live from tourism throughout the world. A hecatomb.

Besides, some states support in a more or less official way the position of their airlines, as it is for example the case of Germany with Lufthansa by requesting a temporary relaxationas was done, for example, on the rule that led to fly planes empty to keep slots.

But the fact remains that the law is the law and that both the DOT (Department of Transport) in the USA and the European Commissioner for Transport Adina Vălean have recalled that the airlines have the obligation to reimburse customers who request it.

Un rappel logique aux textes tant que ces derniers n’auront pas été momentanément assouplis mais qui ne manquera pas de soulever les limites de la chose : if everyone asks to be reimbursed, there is a good chance that many will not be reimbursed for lack of cash. And if the airline goes out of business, the customers will be the last creditors to be paid. Not sure there are many winners in this little game.

If we take for granted the principle of the voucher, then as I said above, a second question arises: for how long can we postpone our flight or use our voucher?

Customer experience first: vouchers that can be used far into the future

In these complicated times, the last thing an airline should do is dissatisfy its customers. Let’s say they’ve already displeased them once by refusing to refund, you don’t want to add fuel to the fire, i.e. be restrictive about using vouchers or rescheduling flights.

Yes, we can say to ourselves “we have the money, if they fly it’s with us, if they don’t fly it’s too bad” but this is a short term view. Indeed they will fly again with you but it may be the last time.

There are two schools of thought. On the one hand, Delta and United give travelers two years to use the voucher for their cancelled tickets. On the other hand we have for example Lufthansa which imposes to make its new reservation before August 31st and to fly before December 31st 2020.

We note the very “customer friendly” position of Air France which proposes vouchers valid for one year and refundable afterwards if the flight has been cancelled by the airline and non-refundable if it has been cancelled by the passenger. A nice gesture even if we find the global policy of the airline a bit difficult to read. If you postpone your flight, you have to postpone it until November 30th at the latest, subject to the availability of seats in the same class, after December 1st, with possible supplements…., whereas if you ask for a refund you have a voucher valid for one year. Difficult to decipher for the average passenger.

Some have it right, others have it wrong? Not that simple.

Don’t forget the impact of cancelled tickets on the books

A voucher is a bit like the miles you get from a loyalty program. It is a debt of the airline towards the customer and it will add to its balance sheet. In the current state of affairs, it is 35 billion dollars of debts that will plague the accounts of the airlines. And the airlines are going to do what they do with miles: encourage them to use them up quickly or cancel them to improve their balance sheet!

From this point of view, Lufthansa’s strategy is fully justified: they want to get rid of this burden as soon as possible in order to start 2020 with healthy books.

So Delta and others who take the same position will be saddled with a debt that will take two years to pay off, which is much worse for its books? Not so sure. We can already think that passengers will use their vouchers as soon as they can. Indeed, why pay in cash for a future trip when you have a credit available? And then such a practice is better for the revenue!

If everyone uses their credits at Lufthansa by the end of the year, the airline risks to make many people who paid long ago travel and to have less room to sell for passengers who would book their tickets after the crisis but would bring in fresh money. Of course there is a bet that not everyone will use their vouchers and that they will be lost…but still. Conversely Delta by smoothing the consumption of vouchers will also be able to bring in more fresh money.

What about the customer? Depending on your sensitivity, you will say that he is being cheated by a policy that is too restrictive or, conversely, that given the situation, he should first think about finding airlines that will be able to fly at the end of the crisis rather than having a claim on an airline that has disappeared or is clinically dead.

But we can also temper this statement.

– From our point of view, Lufthansa is doing “realpolitik” with a very German pragmatism. Today, given what we know, they have chosen December 31, but there is nothing to prevent them from extending the deadline depending on how the situation develops. But the idea remains to liquidate the debt as soon as possible.

– Beyond trade policy, this also reflects a culture of debt aversion and “clean” finance.

– And in the end this can also be explained by different exit strategies. Where others aim for a return to normalcy, others want to clean up their books to participate in the consolidation of the sector. With very good finances so far and hoping that the state aid (from which all the airlines will benefit) will allow it to erase part of the COVID-19 effect, Lufthansa which was at one time in the running to take over Alitalia (in the process of being renationalized -provisionally?- since then) and was the obvious candidate to take over TAP can hope to emerge from the crisis in better shape than many of its competitors and to get hold of a few players who will have emerged from the episode weakened.

What is the best strategy? In this uncertain context, it is hard to know and we can bet that we will only know it when we take stock of all this, that is to say in a long time. One thing is certain, however, and that is that before we get to that point it will be necessary to overcome the crisisand that those who entered with the most strength are already leaving with an advantage, unless certain states come to distort the deal with aid that would not only cover the COVID-19 episode but would also smooth out past management errors.

Photo : unhappy customers by Antonio Guillem via Shutterstock

Bertrand Duperrin
Bertrand Duperrin
Compulsive traveler, present in the French #avgeek community since the late 2000s and passionate about (long) travel since his youth, Bertrand Duperrin co-founded Travel Guys with Olivier Delestre in March 2015.

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