Bankrupt Frontier Airlines Claims First Data Tried To Clip Its Wings

Leading card processor First Data Corp. on Friday found itself cast as the villain in the bankruptcy of Denver-based Frontier Airlines Holdings Inc., which claimed it sought Chapter 11 reorganization in order to prevent its card processor, First Data Corp., from increasing the so-called “holdback” on card charges and thereby crippling its cash flow. According to a statement filed by a Frontier executive with the bankruptcy petition, First Data only on Tuesday informed the airline that it wanted to increase its reserve by $75.5 million, and it would start doing so Friday. In a statement, First Data said it regretted that the “current economic conditions” had led to the bankruptcy filing. But the processor went on to say that it essentially was following established business practices governing relationships between merchant acquirers and airlines. “We continually monitor and manage the credit risks associated with processing transactions in industries where we provide services,” the statement says. “The terms of our agreement with Frontier Airlines are not unique; they are considered standard industry practice and terms originally agreed upon by Frontier. We have been in ongoing dialogue with Frontier Airlines for several months and will continue to work with them in as constructive a manner as possible.” The low-fare carrier filed its petition Thursday in U.S. Bankruptcy Court in Manhattan and is operating as normal. According to Frontier, the automatic stay provision of the bankruptcy code prevented First Data from increasing the holdback. Holdbacks refer to the amount of a card charge for an airline ticket that the processor keeps in reserve until the cardholder actually travels. It is intended in part to cover cancelations or other potential chargebacks in the often-long time between the booking and the flight. An airline spokesperson told the Associated Press that the current holdback was 45%, but that First Data wanted to increase it to 50% immediately and to 100% by May 1. A statement submitted by Frontier senior vice president of finance Edward W. Christie III says that on April 8, First Data sent Frontier a letter stating its intent to increase, beginning on April 11, the collateral required under their bank card agreement from $54.5 million to $130 million. The letter also says First Data planned to retain 50% of bank card sales. “This material and unexpected notice of an intent to alter our payment stream would have deprived us of approximately 50% of expected receipts for ticket sales under the bank card agreement on a go-forward basis,” Christie's declaration says. “Such a change in the debtors' (Frontier's) cash flow would have had an immediate and material effect in their liquidity.” The declaration goes on to say that Frontier filed on Thursday to prevent the increase from happening as scheduled on Friday. How quickly First Data wanted to get the reserve up to $130 million was not immediately clear. Also, Christie's declaration does not mention a 100% hold back. Spokespersons for Frontier and First Data, which is based in the Denver suburb of Greenwood Village, could not be reached late Friday for clarification. Frontier joins ATA Airlines, Skybus, and Aloha Airgroup as the fourth airline in less than a month to file for bankruptcy at a time of rising fuel prices and other pressures on the airline industry. But even though Frontier has posted losses in three of the last four quarters, president and chief executive Sean Menke said Frontier had been taking steps to improve its balance sheet. “Frontier has continued to perform relatively well in this difficult environment, and contrary to the trend, we have not seen a decrease in consumer demand, as demonstrated by our record traffic and revenue in March,” he said in the press release announcing the bankruptcy. Besides having $54.5 million on reserve with First Data, Frontier also has $18.5 million on deposit with American Express Co., according to the filings.