Flyglobespan, holdbacks, and E-Clear

December 17, 2009
overnight failure of Flyglobespan airlines, which has stranded thousands of passengers far from home as Christmas fast approaches? Douglas Fraser explains:

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What was the proximate cause for the overnight failure of Flyglobespan airlines, which has stranded thousands of passengers far from home as Christmas fast approaches? Douglas Fraser explains:

It was liquidity that did for Globespan – or to be precise, the cash that ought to flow from the company that carries out its credit card transactions with passengers.

This is a business that gets a lot of its payments up front, but these payments weren’t making their way into the Globespan coffers. Quite a lot of that money seems to have been withheld by a company called E-Clear, which specialises in credit card transactions for the low cost airline business.

What we’re talking about here is something called credit-card holdbacks, which brought down Frontier Airlines last year. It’s all quite legal, as I explained then: all airlines deal with something called an “acquiring bank”, which passes on their credit-card income while holding back a certain percentage so that they can refund travelers their money should the airline fail.

In Europe, E-Clear seems to have carved out a niche in the high-risk business of processing airline credit card transactions. As Flyglobespan teetered on the brink of insolvency, E-Clear had two choices: either buy the airline itself, or let it fail. It chose the latter.

So I’m not persuaded by the dark mutterings from Flyglobespan’s administrators:

Administrators said they planned to investigate why a “significant” amount of cash from credit card bookings did not reach Flyglobespan.

Bruce Cartwright, of PWC, said this was not to do with the credit card companies, but the way money reached the airline when online transactions were processed by a company called E-Clear.

He said: “That money goes into a booking site and is then passed to the airline.

“There does in this case seem to have been a significant build-up of cash that has not reached the company.”

I’m not sure what he’s talking about when he refers to “a booking site”, but my guess is that E-Clear is going to end up losing money on this whole deal, thanks to the number of people who booked travel on their credit cards and are now due a refund. Yes, E-Clear will have held back a large amount of Flyglobespan’s money, for precisely that eventuality. But I’m sure it had the contractual right to do so.

The only twist in this case, as opposed to the Frontier Airlines case, is that in Europe low-cost airlines force passengers to pay extra when buying tickets on their credit cards, precisely because that credit-card income gets held back. (If you buy a ticket on your debit card, that’s cheaper, but don’t expect your money back if the airline fails and your flight never takes off.) It seems that the canny Scots knew that buying on their credit cards was a good idea regardless — after all, Flyglobespan’s credit-card income seems to have made all the difference between flying and failing.

So if you do find yourself flying in Europe and wondering whether it’s worth paying extra to charge your credit card, remember the insurance which comes with it. It’s not always particularly valuable: if you buy a low-cost ticket you only get a refund back, which won’t cover the cost of a last-minute replacement flight should the airline fail. But it’s still better than nothing.

(Thanks to Joe Brancatelli for the heads-up)

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