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Personal Finance > Smart Spending > Travel
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What UAL bankruptcy could mean to you
Travelers wouldn't be stranded, but there may be some inconvenience.
December 5, 2002: 4:28 PM EST
By Sarah Max, CNN/Money Staff Writer

BEND, Oreg. (CNN/Money) - With United Airlines on the brink of bankruptcy, you may be thinking that your ticket home for the holidays will get you nowhere or that the Mileage Plus points you've worked so hard to accrue will be worth less than a bag of airline peanuts.

On Wednesday, the Air Transportation Stabilization Board (ATSB) rejected United's application for $1.8 billion in federal loan guarantees. Without these loan guarantees United, the nation's second largest carrier, won't be able to make good on $1 billion in loan payments due next week. Bankruptcy, says United Airlines spokesperson Jeff Green, is not a foregone conclusion, but "it's certainly a possibility."

Most travel experts agree that if United files for Chapter 11 bankruptcy protection passengers will not be greatly affected -- at least in the short term. In fact, most airlines that have filed Chapter 11 in recent history have emerged successfully or continued operating before being sold or liquidated. Continental, for example, filed for Chapter 11 protection three separate times before turning itself around. TWA was also in Chapter 11 three times before it was bought by American Airlines.

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"Bankruptcy is not the end of the world," said Richard Copland, president and CEO of the American Society of Travel Agents. "US Airways is in bankruptcy, and they fly every day."

Flights could be cut

According to United's Green, if United declared bankruptcy it would continue to honor all reservations and frequent flier miles. Nevertheless, the airline would probably be forced to reduce the frequency of some of its routes and cut some routes altogether. "Obviously some flights might go away," said Green. "Obviously we'll need to cut costs."

Copland says that a shrinking United will cause some inconveniences for passengers but that there is little risk of being stuck with a worthless ticket. "If you buy on a credit card and they're not flying, in most cases you'll get your money back," he said.

Passengers are further protected by the guidance issued by the U.S. Department of Transportation, at least for now. Under Section 145 of the Aviation and Security Transportation Act, which was signed into law in November 2001, carriers operating on the same route as bankrupt or insolvent carriers are required to provide air transportation to passengers whose flights have been suspended, interrupted or discontinued. This requirement, however, is itself expected to be discontinued on May 19, 2003.

According to Kristi Jones, president of Virtuoso, a network of 280 travel agencies specializing in luxury vacations, United's financial problems have prompted Virtuoso agents to steer clients away from United Airlines. She agrees that Chapter 11 would allow United to reorganize its debt and continue operating. "But they would dramatically curtail their service," she said.

Jones warns that even if other airlines are required to pick up United's passengers, they may not have the seats to accommodate them. "There's not a lot of capacity to absorb bumped passengers," she said, adding that now more than ever her travel agents are recommending that clients buy travel insurance.

Customer service could get worse

"We are entering unchartered waters," said Kevin Mitchell, chairman of the Business Travel Coalition. "The best thing a consumer could do right now is go find a really good travel agent."

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David LeMay, partner at Chadbourne & Parke, talks about how airline bankruptcy works and comments on United's future.

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Mitchell believes that the number one issue for passengers in the short term will be declining customer service.

"You're going to have thousands of customer service employees who are nervous, angry and wondering when the other shoe will drop," he said. He also expects to also see a decline in customer service at some airports as a result of United's woes. "If United defaults on payments to airports their customer service could also be pinched."

Fares could fall in the short term

If you're willing to stomach less customer service and the possibility of getting rerouted to another airline you could take advantage of lower fares. According to Mitchell, ticket shoppers might expect to see a 35 percent reduction in prices following a United declaration of bankruptcy. "United is going to suffer a lot under Chapter 11 and they're going to want to steal market share," he said.

These short-term fare sales, however, could be bad news over the long run. According to Virtuoso's Jones this forces other airlines to cut their fares, which will only add to the overall instability of an already shaky industry.

"If United were to slip into Chapter 7 bankruptcy and go out of business, the loss of this competitor would surely push up prices," said Mitchell.

All those miles

What happens to United Airlines frequent flier miles is anyone's guess. In the short-term we'll probably see no changes. In fact, United may try to keep customers loyal by sweetening some of its frequent flier deals.

Still, "it's never a good idea to store too many frequent flier miles," said Amy Ziff, editor-at-large for Travelocity.com. "It might be a good time to consider using some of your United miles."  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.