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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Unintended Consequences from Frontier

Comments (9)

As I sit here in the San Francisco International Airport (they announce that so proudly over the PA when they tell me that the thread condition is orange every few minutes) I’ve been pondering the unexpected Frontier Airlines bankruptcy.  My Frontier flight is now an hour late so I’ve had plenty of time to surf the web and try to figure out how / why this happened so suddenly.  I’m also almost brain dead from my 10 day trip so it’s hard to actually do anything productive at this point.

I’ve determined that the bankruptcy filing is simultaneously a smart survival move for Frontier and an example of the classic "unintended consequences" (which my dad also taught me result from "complicated mistakes.")  This one is a doozy.  I have no idea what the actual facts are, but the WSJ asserts that the Chapter 11 filing by Frontier was in response to their credit card processor (First Data) increasing they amount and length of time of their holdbacks for credit card receipts.

Let me get this straight. I’m a customer.  I charge a Frontier ticket on my credit card.  First Data processes it but now holds the money until they decide to release it to Frontier.  As a result, First Data effectively controls Frontier’s cash flow (since almost all customer purchases are made on credit cards.)  All right, I got it.

In one of the articles I read, it was stated that First Data increased the holdback percentage from 45% to 100% and the time duration until "the flight was taken."  That strikes me as completely unreasonable on First Data’s part – they now control the float from the moment of purchase until the moment of flight completion confirmation (which I expect is a non-trival reporting process for Frontier.)

Frontier’s response – "Dear First Data: Bullshit.  We are filing for Chapter 11 and invalidate your ability to change the holdback terms.  See you in bankruptcy court."

All the chatter I heard today while waiting for my plane was whether Frontier would be going out of business and whether our plane would arrive.  The fact that is was an hour late didn’t help.  Nor did the fact that the electronic scoreboard announcing the flight time was not working and the gate agent wrote all the info on a piece of paper taped to the wall.  Everyone at Frontier is keeping their chins up and saying "no problem – this is just a technicality."

Hopefully I’ll get home today.  As one of my twitter friends told me – "at least I’m not on American Airlines."

  • Ross

    I am so glad you posted this – I've been semi-curious about this all day and the way you summed it up was just perfect. My initial reaction was “fucking airline industry” but clear Frontier did the “right” thing here – amazing that this isn't being reported more straight forwardly – then again the media just loves to slam the airlines these days.

    Thanks Brad, great post.

  • BlackSwan

    This is nothing new for First Data, at my previous job they did the same thing and put the company out of business. They said they wanted to guard against chargeback risk, but 4 years later, the possibilities of chargebacks are over, and that money has “disappeared”.

  • http://commavee.com John Minnihan

    The unanswered question is whether First Data can legally do this. I'd love to see Frontier's contract with them – since this is going to BK court, perhaps we *will* see it.

    T&Cs either allow this or they don't. Which is it? Frontier has stated that FD “unexpectedly…” did this. Nowhere was it stated that this change was in violation of the contract's T&Cs.

    If the T&Cs allow for this type of “unexpected” material change, I'll bet that Frontier isn't the only airline that will face this issue. Who's next?

  • Steve Bergstein

    You could go back a step in this little saga. On the public radio show Marketplace last night, they reported that First Data's action was caused by some financial analyst who downgraded his assessment of Frontier's creditworthiness. So this analyst caused the bankruptcy filing and, possibly, your little visit to “airport hell.”

    • http://www.feld.com Brad Feld

      The real “entertaining thing” will be when we find out that the analyst got his “analysis” from a 23 year old “analyst” who has already spent over 100 hours this week playing with Excel models. At least I’m home now.

  • http://michjeanty.blogspot.com/ Michelin Jeanty

    This is ridiculous. Someone srew up badly here. I don't care how much a company owe, to hold its cash flow is insane. Is there any law that prohibit this kind of vicious behavior? Is there some type of agreement that allow this? It has to be.

  • Dave

    I wonder whether First Data got burned in the ATA debacle because they (ATA) actually did stop flying. All those customers that had tickets that weren't honored would process chargebacks to try and get their money. If so, that would explain the behavior – essentially the credit card processor is left holding the bag if an airline actually shuts down.

  • http://www.komar.org/ alek

    Dave's implication is correct – the credit card company is exposed if the airlines goes under because they are then on the hook for the chargebacks. So First Data's behavior makes sense (if they deem the risk has increased) and so does Frontier's response to “freeze” the current business relationship.

    As a fellow Republic of Boulder'ite, I also like Frontier (my kids love the animal tails and Direct-TV), so it would be sad to see 'em really go under. Plus I have already have travel booked in May (not too worried about that one) and August (things could change by then). And we use their Branded credit card for the miles.

    I thought you were a Premier Exec 1K Global Services Big Cheese on United … so how come you are flying Frontier Brad?

    • http://www.feld.com Brad Feld

      While I’ve flown a zillion miles on United I get tired of spending 3x the price for a ticket so I’m happy to fly Frontier whenever it’s convenient. Even better, I love flying Southwest!

  • http://intensedebate.com/people/ross2308 ross2308

    I am so glad you posted this – I've been semi-curious about this all day and the way you summed it up was just perfect. My initial reaction was "fucking airline industry" but clear Frontier did the "right" thing here – amazing that this isn't being reported more straight forwardly – then again the media just loves to slam the airlines these days.

    Thanks Brad, great post.

  • Michelin Jeanty

    This is ridiculous. Someone srew up badly here. I don't care how much a company owe, to hold its cash flow is insane. Is there any law that prohibit this kind of vicious behavior? Is there some type of agreement that allow this? It has to be.

  • John Minnihan

    The unanswered question is whether First Data can legally do this. I'd love to see Frontier's contract with them – since this is going to BK court, perhaps we *will* see it.

    T&Cs either allow this or they don't. Which is it? Frontier has stated that FD "unexpectedly…" did this. Nowhere was it stated that this change was in violation of the contract's T&Cs.

    If the T&Cs allow for this type of "unexpected" material change, I'll bet that Frontier isn't the only airline that will face this issue. Who's next?

  • BlackSwan

    This is nothing new for First Data, at my previous job they did the same thing and put the company out of business. They said they wanted to guard against chargeback risk, but 4 years later, the possibilities of chargebacks are over, and that money has "disappeared".

  • http://intensedebate.com/people/steve_bergs2127 steve_bergs2127

    You could go back a step in this little saga. On the public radio show Marketplace last night, they reported that First Data's action was caused by some financial analyst who downgraded his assessment of Frontier's creditworthiness. So this analyst caused the bankruptcy filing and, possibly, your little visit to "airport hell."

  • http://intensedebate.com/people/bfeld bfeld

    The real “entertaining thing” will be when we find out that the analyst got his “analysis” from a 23 year old “analyst” who has already spent over 100 hours this week playing with Excel models. At least I’m home now.

  • Dave

    I wonder whether First Data got burned in the ATA debacle because they (ATA) actually did stop flying. All those customers that had tickets that weren't honored would process chargebacks to try and get their money. If so, that would explain the behavior – essentially the credit card processor is left holding the bag if an airline actually shuts down.

  • http://intensedebate.com/people/bfeld bfeld

    While I’ve flown a zillion miles on United I get tired of spending 3x the price for a ticket so I’m happy to fly Frontier whenever it’s convenient. Even better, I love flying Southwest!

  • alek

    Dave's implication is correct – the credit card company is exposed if the airlines goes under because they are then on the hook for the chargebacks. So First Data's behavior makes sense (if they deem the risk has increased) and so does Frontier's response to "freeze" the current business relationship.

    As a fellow Republic of Boulder'ite, I also like Frontier (my kids love the animal tails and Direct-TV), so it would be sad to see 'em really go under. Plus I have already have travel booked in May (not too worried about that one) and August (things could change by then). And we use their Branded credit card for the miles.

    I thought you were a Premier Exec 1K Global Services Big Cheese on United … so how come you are flying Frontier Brad?

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