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Personal Finance > Smart Spending > Travel
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What United's bankruptcy means for you
Travelers won't be stranded, but there may be some inconvenience.
December 10, 2002: 10:52 AM EST
By Sarah Max, CNN/Money Staff Writer

BEND, Ore. (CNN/Money) - With United Airlines filing for bankruptcy protection Monday, 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.

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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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But most travel experts agree that United's filing under Chapter 11 of the bankruptcy law means passengers will not be greatly affected -- at least in the short term. In fact, most major airlines that have filed Chapter 11 in recent history have emerged successfully or continued operating before being sold or liquidated. Continental Airlines (CAL: Research, Estimates), for example, filed for Chapter 11 protection two times before turning itself around. Trans World Airlines was also in Chapter 11 three times before it was bought by American Airlines.

"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 spokesman Jeff Green, the world's No. 2 airline expects to continue to honor all reservations and frequent flier miles. Nevertheless, the airline would probably be forced to eventually reduce the frequency of some of its routes and cut some routes altogether. "Obviously some flights might go away," said Green last week before the filing. "Obviously we'll need to cut costs."

United had already announced plans to further shrink its capacity and schedule of flight, even before the current bankruptcy crisis hit. Analysts suggest that if it gets strapped for cash, it could be forced to sell off some of its gates at crowded airports or even some international route authorities as a way of raising cash. But those are not the types of move that bring unscheduled cancellations of flights.

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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 allows United to reorganize its debt and continue operating. But she expects them to eventually dramatically curtail their service.

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 uncharted 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."

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."

United insists its service will not suffer. It points out that it had the U.S. industry's best on-time record in November, even as the threat of bankruptcy loomed.

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 (liquidation) bankruptcy and go out of business, the loss of this competitor would surely push up prices," said Mitchell.

But other air travel experts question Mitchell's prediction of higher fares. They say that since it is the lower cost, low-fare carriers such as Southwest Airlines (LUV: Research, Estimates) and JetBlue Airways (JBLU: Research, Estimates) who have been growing and gaining market share and helping to drive fares lower in recent years. If those types of carriers get a lift from United's bankruptcy, overall fares could decline even as United and other major carriers such as American Airlines and Delta Air Lines (DAL: Research, Estimates) cut their capacity.

"The fares are never going to go back up to where they were," said Jim Craun of Eclat Consulting, an airline consultant. "The shrinking of networks will not allow them to raise fares back where they were. The low cost carriers will be the check on that."

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."

Even if United ceases to be an independent carrier, it is possible that its frequent flyer program could be rolled into another carrier's program.

TWA's miles are now part of American's program, after American parent AMR Corp. (AMR: Research, Estimates) bought it in early 2001. The uncertainty comes from the fact that there is no airline with the cash resources to buy all of United if it is forced to liquidate. But many carriers would be eager to win the loyalty of United's core customers by purchasing the mileage program.  Top of page




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Market indexes 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. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.