Written by Craig D. Robins, decease Esq.
The recent bankruptcy filing of American Airlines on November 29, illness
2012 got me thinking in several ways about the interplay between airlines, consumers and bankruptcy.
How does an airline seeking bankruptcy protection continue its frequent flyer programs and honor tickets? I’ll answer this question in this column.
What happens when a consumer, who has a cache of frequent flyer miles, files a consumer bankruptcy — can the consumer keep those miles? I’ll answer that question next month.
As a regular flyer on American Airlines, I get e-mails from AA almost daily. Within hours of the Chapter 11 bankruptcy filing, which AA commenced in the Southern District of New York under AA’s parent company, AMR Corporation, AA sent me an urgent e-mail assuring me that all would be OK and that it would be“business as usual” during the course of the bankruptcy.
The e-mail stated that miles “you’ve earned are yours and will stay yours.”
AA’s spin doctors included verbiage that the bankruptcy proceeding was going to make the airline leaner and stronger, and better for its customers.
As a bankruptcy attorney, I wondered what procedural path they would take in bankruptcy court to continue its business practices.
American Airlines Files a First-Day Application Seeking Special Bankruptcy Court Approval to Continue Certain Business Practices
On my own, I tracked down one of the first-day applications that AA filed, which sought an immediate order permitting AA to continue its customer programs and practices in the ordinary course of business and honor existing obligations to its customers.
It is standard Chapter 11 practice for debtors to bring several “first day” applications seeking various types of immediate relief. This application was necessary because technically a Chapter 11 debtor is prohibited from honoring pre-existing debts and obligations.
The 23-page application, which was prepared by the Manhattan bankruptcy powerhouse firm of Weil, Gotshal & Manges, sought authorization pursuant to Bankruptcy Code sections 105(a) and 363(c), to continue a multitude of programs including the AAdvantage frequent flyer program, as well as seek permission to honor pre-petition tickets, refunds, access to Admirals Club lounges, gift cards, etc.
Bankruptcy Caselaw and Statutory Authority for the Application
Section 105(a) is the Bankruptcy Code’s general catch-all provision that grants bankruptcy judges broad equitable powers to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”
The application discussed how the airline’s customers were the lifeblood of their business, which is highly competitive, and that customer satisfaction is the key to survival.
Airlines routinely offer travel to many of the same locations as their competitors. The application discussed the concept that this competition makes retaining loyal customers and attracting new customers critically important.
AA argued that the Chapter 11 filing would negatively affect customers’ attitudes unless AA was able to continue its customer practices. The airline also argued that continuation of its customer programs on an uninterrupted basis is critical to maintaining this support and loyalty.
Incidentally, AA created the first frequent flyer program in 1981, by rewarding its loyal customers with frequent flyer miles. The application stated that there were 69 million members of their AAdvantage frequent flyer program.
There is precedent for granting such relief, as Eastern Airlines requested similar relief about two decades ago when it filed for reorganization and sought authority to continue its pre-petition obligations.
It has become well-established that bankruptcy courts have the power to permit the post-petition payment of pre-petition obligations where necessary to preserve or enhance the value of a debtor’s estate for the benefit of all creditors.
This is sometimes referred to as the “doctrine of necessity.” See the Eastern Airlines case, which is: In re Ionosphere Clubs, Inc., 98 B.R. 174, 176 (Bankr. S.D.N.Y. 1989).
The airline argued that if they could not get the requested approval, the consequences would be draconian. Their customers would lose confidence, question the airline’s ability to survive, and likely take their business elsewhere. All of the loyalty and customer goodwill that AA had engendered over years would be lost.
It was therefore no surprise that the bankruptcy court granted the application, thus permitting AA to continue its customer programs on an uninterrupted basis.
Thus, the experience of flying on American will likely stay the same for the short-term, but as the airline tries to reorganize itself through bankruptcy, it will probably make significant changes down the road.
Incidentally, most financial commentators suggest that AA will successfully emerge from bankruptcy, as several of its legacy competitors have done this past decade, and that AA is in no danger of liquidation at this time.
One industry analyst quipped, “Airlines do a better job at filing bankruptcy than delivering luggage.”
I personally have a boatload of American Airlines Aadvantage miles, some of which I earned traveling to conventions and workshops of the National Association of Consumer Bankruptcy Attorneys. It is therefore a relief to know that they will be protected!
The Effect of Consumer Bankruptcy on Frequent Flyer Miles
These days, most consumers have an assortment of frequent flyer miles, whether they earn them from flying or credit card spending.
These miles can have a substantial value to the consumer as they can be used to obtain tickets worth thousands of dollars or purchase goods or store gift certificates.
What happens to these valuable miles when a consumer files for bankruptcy relief? Can they be protected? I will cover this question next month.