Airlines brace for credit-card processor demands

Reuters - Tuesday, October 7 By Kyle Peterson

CHICAGO, Oct 6 - U.S. airlines, struggling to find stability in a time of unprecedented economic turbulence, are bracing against possible trauma that could be inflicted by credit-card processors made skittish by the credit crisis.

In recent months, top carriers like AMR Corp's American Airlines and UAL Corp's United Airlines have topped off their cash positions or changed deals with credit-card processors -- defensive moves triggered by fears that processors may demand bigger cash holdbacks.

"People are trying to get out in front of this because they don't want to be in the position that Frontier was," said airline consultant Robert Mann.

Frontier Airlines Holdings Inc filed for bankruptcy in April after its credit-card processor, First Data Corp, surprised the low-cost carrier with higher withholding requirements that put a strain on Frontier's liquidity. Other airlines aim to avoid that fate.

"It's going to continue to be an issue as long as the credit markets are in disarray," Mann said.

Credit-card processors take payment from airline customers who book travel weeks or months before a flight. Processors then pass that money to the carrier. But in doing so, they take on the risk that the airline could go under and fail to reimburse the money for travel not provided. In that event, the card processor would be left with that obligation.

To avoid or limit that risk, processors often require airlines to put a percentage of their advance booking proceeds aside for use should reimbursement be necessary.

Depending on its agreements with airlines, a processor that doubts the ability of an airline to provide travel or repay its debts may require a higher percentage of advance ticket revenue to be withheld.

In Frontier's case, First Data demanded that 50 percent of credit-card funds from advance purchases be withheld.

"Most credit card processing agreements include some kind of minimum liquidity requirement," said Bill Warlick, analyst at Fitch Ratings.

Warlick noted actions by American Airlines parent AMR and United parent UAL.

Last month, AMR said it would draw down its $225 million revolving credit facility to add to its liquidity pool and reduce the amount of potential credit-card holdback reserves. The company has said only one of its agreements gives the processor the right to hold back proceeds.

"t is possible that we could have holdbacks in place by the end of the year to the tune of about $200 million to $300 million," AMR Chief Financial Officer Thomas Horton said in July.

In June, UAL reached a deal with credit-card processors reducing reserves that United is required to maintain under a credit-card processing agreement.

In August, Delta Air Lines Inc borrowed the full amount of its $1 billion revolving credit facility to bolster its cash position. The company also amended its Visa/MasterCard processing agreement, which has no cash holdback requirement.

In June, Continental Airlines Inc amended a card processing deal to remove a minimum earnings-to-fixed-charges ratio as a trigger that could require the airline to post additional collateral. The agreement, however, requires the airline to maintain a minimum level of cash as well as a minimum rating on senior unsecured debt.

Fitch's Warlick said the U.S. airline industry, which in recent years has gone through a massive reorganization, is somewhat insulated from the credit crisis. The companies have restructured their debt and have less need for major purchases as they downsize.

But the risk that they might face higher cash holdback requirements remains a wild card.

"It's definitely one of the key liquidity issues that we're focused on right now," he said.