Airlines around the world are facing an unprecedented cash crunch, with more canceled and changed itineraries than new bookings. As a result, carriers are pushing vouchers and other ways to bank credit in lieu of refunds. BCD Travel director of research and intelligence Mike Eggleton explains the approach and speculates on what it means for the future.

The travel industry is changing rapidly and doing things never previously imagined as it struggles to deal with the impact of Covid-19. First, it must survive. Then it needs to plan for an unknown future. A big topic of late has been airline ticket refunds. Decisions made now could have a lasting impact on a fundamental component of the mechanics of corporate travel.

The International Air Transport Association on March 31 said it expected the world’s airlines to burn through $61 billion of their cash reserves during the quarter ending in June, while they post a quarterly net loss of $39 billion. This assumes that severe travel restrictions last for three months and depress air travel demand by 71 percent in the quarter. 

The damage done to airline liquidity by net losses in the second quarter will be compounded by a $35 billion refund liability on sold but unflown tickets. At the start of 2020, IATA estimated that airlines had on average two months of cash, and so are at genuine risk of a liquidity crisis before the recovery arrives.

Airlines urgently need working capital to sustain their businesses during a period of extreme volatility and uncertainty. Governments are providing support, be it through direct bailouts or the relaxation of rules governing slot ownership. 

Mike Eggleton, BCD Travel
Mike Eggleton, BCD Travel director of research and intelligence

In the United States, the Department of Transportation last week said airlines must provide refunds for tickets purchased for canceled flights, including nonrefundable tickets. It would be hard for a U.S. carrier to defy that order while accepting financial relief.

Elsewhere, government support may not be as forthcoming, so airlines will be more inclined to be creative in the way they handle refunds, as we’re seeing in Europe. In some cases, governments are allowing airlines to offer vouchers instead. This raises a number of issues and questions about the future of airline ticketing and refunds.

How long will the practice of offering vouchers be allowed to continue? At what stage in the pandemic cycle will an airline’s finances be sufficiently secure for refunds to resume? How do we decide? 

Damage to airline finances is likely to take years to repair, and the liquidity vouchers offer will play a role in this process. Vouchers could become so firmly entrenched in the compensation process that they are hard to dislodge. At the moment, some airlines are offering bonus funds to travelers and agencies that opt to reissue tickets rather than request refunds.

When oil prices surpassed $100 per barrel in 2008, many airlines introduced fuel surcharges to limit the impact on their finances of a sudden spike in one of their main costs. These surcharges survived perhaps longer than they should have, morphing into “carrier-imposed surcharges,” continuing even as oil prices retreated back towards $50 to $60 per barrel. Fuel surcharges, in whatever form, remained in place despite widespread calls for their withdrawal. Airlines may be tempted adopt a similar position on voucher-based refunds.

It is possible that there will be a second Covid-19 wave from September/October. With this in mind, airlines may be inclined to continue using vouchers until it’s clear Covid-19 will not recur. It’s easier to keep them in place over the summer, rather than reintroduce them within a matter of months. 

The rules on ticket refunds never imagined a near complete shutdown of the global airline industry for an extended period. Covid-19 may have caused a fundamental change to the way travelers are protected and compensated when flights are cancelled.

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