Why Do Airlines Go Bankrupt?

Bankrupt airlines interfere with the travel plans of thousands of people every year. And even the world’s largest carriers aren’t immune from financial hardship. American Airlines, Virgin Atlantic Airways, LATAM, South African Airways and Avianca have all flirted with bankruptcy recently. But why are airlines so susceptible to bankruptcy? And what can you do if your travel plans are ruined by bankrupt airlines? We discuss the various reasons for bankruptcy in the airline industry. Read on for tips on what to do if your airline encounters financial difficulties.

• Fuel costs
• Legacy costs
• International events
• What can I do if bankrupt airlines affect my travel plans?
• Can I get a refund or compensation?

Fuel costs

Any airline’s largest ongoing cost is fuel. Even the slightest rise in world oil prices can have a dramatic impact on a carrier’s cost base — and its profitability. This is why most airlines buy their fuel in advance at a fixed price. Unfortunately, there’s little even the largest airline can do to mitigate the cost of high oil prices. They can raise prices, but that often reduces demand. Modern airlines run on the tightest of margins. It doesn’t take a big change in the price of aviation fuel to tip a carrier into bankruptcy.

Legacy costs

Larger, flag-carrying carriers have much larger cost bases. They developed their business models before the industry was deregulated. According to prominent economist Severin Borenstein, these “legacy” costs might be up to 50% higher than those of budget airlines. Labor costs are often tied to longstanding union deals. And contracts limit what airline staff can do. This lack of flexibility within a workforce makes cost-cutting difficult when times are hard. Budget airlines, by comparison, give their workers much broader job definitions — allowing them to cut labor costs quickly to meet the needs of the business.

International events

In many cases, bankrupt airlines weren’t able to react quickly enough to external events. Take the September 11 attacks in New York, for instance. Demand for air travel around the world plummeted after the terrorist aggression, and it remained relatively low for several years. More recently, the COVID-19 pandemic decimated the airline industry. Thousands of commercial aircraft remained grounded for several weeks. This sudden drop in demand, coupled with the huge fixed costs most airlines have to manage, resulted in several airlines declaring bankruptcy.

What can I do if bankrupt airlines affect my travel plans?

Unfortunately, there isn’t always a lot you can do when bankrupt airlines interfere with your travel plans. Your options depend on when the airline declared bankruptcy. For example, if you haven’t started your journey, you might be able to cancel your flight and rebook with another carrier. You probably won’t be reimbursed immediately by the airline, however. This is why travel insurance is so important. If you’re halfway through your vacation or waiting for a return flight, check your options on the carrier’s website. There might be assistance for getting back home. Also, check your national government’s website, as there might be a repatriation program in place if you’re out of the country. If not, you’ll have to book an alternative flight — and claim the associated costs against your insurance policy at a later date.

Can I get a refund or compensation?

Unfortunately, it’s very unlikely that you’ll receive a refund on tickets from bankrupt airlines. But having a good travel insurance policy may mean you can claim back the cost of your flight tickets when you return home. You will become a creditor to the failed airline, but you’ll be far down the list when it comes to reclaiming what you’re owed. Consumer rights vary around the world, but your insurance company will help you navigate the refund process. Some jurisdictions operate an industry-sponsored insurance plan — ATOL in the UK is a great example. However, such plans rarely cover tickets and vacations booked directly with airlines. If possible, book your flight tickets using a credit card. Credit providers usually reimburse the cost of airline tickets through their own insurance plans.

It’s worth remembering that it’s very rare for major airlines to declare bankruptcy. Arrange insurance and book your next flight in confidence with BudgetAir Canada.