Transport

Why Air NZ should refund all its customers

Pressure is mounting on Air New Zealand to put the interests of its customers above those of its shareholders and repay travellers who are potentially out of pocket by hundreds of millions of dollars for plane tickets they bought before flights were cancelled because of the Covid-19 pandemic.

Consumer advocates say Air NZ customers who are refused refunds for flights they have paid for, but can’t take because of Covid-19 restrictions, are basically giving an involuntary, no-interest, unsecured loan to our national carrier. A carrier which is also potentially benefiting from $900 million of taxpayer money.

Seriously?

The airline is only giving refunds when it is forced to under overseas consumer protection legislation.

This is despite receiving a $900 million bailout from the Government, in the form of a loan the airline can use if its cash reserves drop below a certain level.

Finance Minister Grant Robertson said the money would ensure the airline's financial viability.

The loophole

The reason Air NZ is able to offer credits, rather than refunds, is because airlines in New Zealand are exempted from normal fair trading provisions which force companies to provide refunds to customers.

Under the Consumer Guarantees Act, if you bought a fridge, a car or a set of linen sheets before the pandemic and the company you bought them from cancelled your order and didn’t deliver the goods “in a reasonable time”, you are entitled to a full refund.

Not so if you bought a plane ticket. Under the Civil Aviation Act - basically a loophole for airlines - Air NZ is legally entitled to keep your money unless it is the airline’s fault your flight is cancelled. If it’s a problem with the weather, or a global pandemic, well that’s tough. They can keep your money. If they are feeling generous, they can offer you a credit you may or may not be able to use.

Consumers are being asked to extend interest-free credit to the airlines.

Air NZ is only paying real cash if it is forced to because one of its international flights comes under another country’s more consumer-friendly laws - for example, if a flight starts, transits or finishes in the US or Europe.

Even then the airline has been reluctant to always pay up. Consumer NZ was forced to take a complaint to the Commerce Commission this week before Air NZ reluctantly conceded that customers whose flights transited in the US were entitled to refunds

“Consumers are being asked to extend interest-free credit to the airlines,” says Jessica Wilson, Consumer NZ’s head of research.

“We think it’s time for the Government to step in and take action to protect consumers disadvantaged by outdated laws.”

Consumer NZ's Jessica Wilson says Air NZ should give ticket holders their money back. Photo: Lynn Grieveson

Consumer Affairs Minister Kris Faafoi told Newsroom he had asked for advice from officials about changing the law.

Not good enough, Wilson says. Any legislative change will take months if not years and won’t help the thousands of customers stuck now with vouchers not dollars.

“Rather than wait for a law change, it is time for the shareholding minister to take an active stance and fix the immediate problem.

“People with credits may have lost income or jobs. It would be much more useful to them to have money.”

The situation where airlines don’t have to give customers a refund if the cancellation isn’t unique to New Zealand, Wilson says. But these days many countries including the US, the UK, the EU, Switzerland, Iceland and Norway guarantee refunds, because any other situation is blatantly unfair to customers.

The US Department of Transportation (DOT) is so hot on the issue it has issued not one, but two clarifications basically reminding airlines that refunds are non-negotiable

The latest was last week. “The obligation of airlines to provide refunds, including the ticket price and any optional fee charged for services a passenger is unable to use, does not cease when the flight disruptions are outside of the carrier’s control (eg a result of government restrictions),” DOT told the industry.

Because that ruling applies not just to US carriers, but to any airline and any flight that so much as touches US soil, Air NZ customers arriving, leaving or transiting the US are entitled to full refunds. 

How big is the problem?

Air NZ is just the tip of the iceberg of the problem worldwide. Alexandre de Juniac, director-general of the International Air Transport Association, estimates airline passengers worldwide have paid $US35 billion for flights that can’t now take place.    

Forbes.com says many airlines aren’t giving refunds even when they are legally required to.        

Can Air NZ afford to pay?

Aviation commentator and economist Benje Patterson points to the fact Air NZ had $1 billion of cash in the bank and $1.3 billion of liabilities from forward ticket sales all sitting on its books when it last reported its financial performance - at the end of December 2019.

Aviation commentator Benje Patterson says airlines prefer to keep ticket holders' money on their books rather than pay it out. Photo: Supplied.

And giving customers credits rather than cash is great for keeping its balance sheet as healthy as possible in tough times. Airlines are desperate to conserve their cash in a market where hardly anyone is flying. 

But Consumer NZ argues customers need cash too. Maybe they booked a ticket for an event that won’t be happening, like a wedding or a festival. Maybe they have lost their job or their business is struggling, and they can’t afford that overseas trip any more. Maybe they are old or sick and won’t be able to travel next year or the year after.

And in these tough times, businesses need money too. They might well not be sending their staff overseas for a while, so why should Air NZ be keeping their money for flights that were cancelled. 

They argue their businesses can't get a $900 million lifeline to stay afloat.

Ticket holders want more options. Photo: Nikki Mandow

There are also cases where customers still want to travel, but want a refund because they need the flexibility to be able to choose an airline with a schedule that suits them. Air NZ won’t be flying as often or to as many places as it once did for months, if ever.

Take Gerard*. His flight to Thailand in April was cancelled and Air NZ’s July schedule to Bangkok didn’t work for him. Eventually, when he kicked up a stink, Air NZ booked him on a Thai Airways flight. But they charged him $200 (a 14 percent markup) to cover the difference in fares. When he queried it, Air NZ agents told him that was all part of the terms and conditions.

If your new flight costs more than your airline credit amount, you must pay any remaining difference. If your new flight costs less than your airline credit amount, you forfeit the remaining value.

You can pay us; we won’t pay you

Terms and conditions are always tricky for customers, and Newsroom wasn’t able to get to see the fine print for Air NZ’s customer credits - we were just guided to the more general information on the company’s website. 

But another Air NZ customer, who had booked thousands of dollars of Air NZ international flights via the website Expedia, sent us that company’s t&cs, including this shocking statement, under the heading “Good to know”.

“If your new flight costs more than your airline credit amount, you must pay any remaining difference. If your new flight costs less than your airline credit amount, you forfeit the remaining value.”

So good to know.

There is nothing on the Air NZ website to indicate our national carrier does it any differently. In fact it makes it quite clear there are no refunds on offer, which presumably includes unused credit.

Air NZ spokesperson Monique Simpson says customers who book through a third party (in this case, Expedia) are subject to that third party’s terms and conditions.

Air NZ says ticket holders whose flights have been cancelled are lucky to get credits. Photo: Lynn Grieveson.

An “extraordinary step”

Simpson puts a positive spin on the airline’s no refund policy.

“Covid-19 has wreaked havoc on airlines worldwide and Air New Zealand understands the enormous disruption [the virus] has caused to our customers. That is why we have taken the extraordinary step of pro-actively placing all airfares on cancelled flights, including non-refundable airfares that would ordinarily be forfeited, into credit. 

“We are also enabling customers who have not had their flight cancelled to elect to receive a credit. Customers with credit have a higher amount of flexibility to use that credit. Customers have until June 2021 to book with their credit and a further 12 months to complete their travel. 

“The credit can be used across several separate bookings.”

Others disagree this is extraordinary generosity. With many people around the world stuck with credits for their unused tickets, the European Commission has suggested airlines make vouchers more attractive, according to Financial Times contributing editor and columnist Michael Skapinker. 

“Passengers should be allowed to transfer their vouchers to someone else. Vouchers should be valid for at least 12 months and, if unused at the end of that time, should be automatically redeemable for cash. Governments or the private sector should set up a scheme to guarantee the voucher’s value if the airline went out of business.”

These “constructive” EU proposals “provide some hope that the airlines’ unwilling creditors may eventually be compensated for the flights they booked,” Skapinker says.

Where are the reserves?

British travel agent David Speakman says it’s vital airlines hold enough in reserve that they could pay back all their ticket holders if they needed to without asking for bailouts. 

“Customers have paid cash for holidays, and flights, and they just can’t get their money back. It’s amazing. Airlines are saying they are short of money, well yes, but you shouldn’t be short of money. If you’re short of money you go to the bank and ask for more money.

“Have all these airlines who are not paying out, have they gone to the bank? Why are they coming to the Government? Why are they knocking on our door as taxpayers?”

A New Zealand-based travel agent, who didn’t want to be named, had a similar view.

Why are airlines different?

“Travel agents are required by travel agents’ association TAANZ at the behest of [International Air Transport Association] IATA to keep all client monies in a separate bank account - sort of like a lawyer's trust account but not as strict. “We keep a commission component and transfer that to our trading account when bookings etc are finalised.”

This is not necessarily the case with airlines, he says.

“Some have not been keeping passenger prepaid airfares separately at all, and have obviously been using the dosh well before those passengers travel.”

Air NZ stresses the reason it is not giving refunds is because it is not required to under New Zealand law.

The other side of the story

Air NZ isn’t the only one arguing against a wholesale refunding of customer money.

Commentator Benje Patterson says the case isn’t cut and dry.

“If I was to look at who were the most frequent fliers with Air NZ, it’s likely to be higher income earners. So if they are missing out, it’s probably more equitable than spreading it across the entire taxpayer base, which includes low income earners."

If the Government was putting pressure on the airline, perhaps it should be around being much more flexible around giving refunds to customers with extenuating circumstances, rather than forcing a wholesale policy of refunding everyone, he says.

If paying out pushes the airline under, customers are in an even worse position as unsecured creditors. Then their credits would also be worthless.

True, but the Government has never let the airline fail in the past; this isn’t the first bailout.

National's aviation spokesman Brett Hudson doesn't want nationalisation through the back door. Photo: Lynn Grieveson.

Brett Hudson, the National Party spokesman on aviation says he’s been approached by a lot of passengers concerned about getting their money back. He says in a small number of cases the airline has been prepared to make an exception and has refunded money, but mostly not.

Still, he worries about the repercussions of Air NZ using government bailout money to refund passengers, because a default on the loan could effectively wipe out private ownership in Air New Zealand.

“Without knowing the scale, if all cancelled bookings were being refunded, it’s conceivable that you could see the carrier nationalised,” Hudson says. 

“That would be a less than optimal outcome for the future of the airline.”

In fact nationalisation is a distinct possibility because one option for Air NZ to pay back any money it borrows from Government is to give the Crown a bigger stake in the company.

Government currently owns 52 percent, and paying back a full $900 million in shares would effectively wipe out private ownership, Patterson told Stuff last month. 

The final piece of the puzzle

So, Air NZ is holding hundreds of millions of dollars of customer cash it is largely refusing to give back. And it has the option of a $900 million loan from the Government.

There’s one more piece of the puzzle: the gnarly issue of share buybacks. More exactly, whether the present disaster calls into question Air NZ’s past programme of share buybacks - a programme that made lots of money for shareholders and senior executives, but which used up cash that might in hindsight have been better spent another way - like paying back a few ticket holders.

Oftentimes the CEO and other board members are paid in stock - stock that is now, magikazam, worth more money.

Share buybacks are complicated, but basically they involve the bosses of listed companies deciding they would like the company’s share price to be higher, and using profits from the business, or money from the bank, to buy (back) shares in that business. They then wipe those shares, which (in theory, and mostly in practice) makes the price of the remaining stock go up. 

This is great for investors and often is also a windfall for the senior executives and board members who made the decision about the share buyback. That's because they often get some of their pay in shares or stock options.

For an entertaining look at how the Covid-19 crisis has a few very rich people in America calling out companies for initiating buybacks when times are good and demanding bailouts when times are tough, it’s worth checking out the Planet Money podcast Buybacks and Bailouts. Here’s a quote from that podcast:

“For some people, buybacks are everything that is hateable about Wall Street. You get these bigwigs at a company buying back a bunch of their own stock which then pumps up the value of that stock. And here's the kicker - oftentimes the CEO and other board members are paid in stock - stock that is now, magikazam, worth more money.”

Investors love share buybacks. The announcement a company will purchase its own shares is usually greeted with great enthusiasm and a share price appreciation

The main negative about share buybacks is that funds are being spent on boosting the share price that otherwise might have gone on, say, investing in new technology, paying employees more, or boosting a company’s rainy day fund. Which would have been useful given the Covid pandemic.

Commentator Brian Gaynor says share buybacks are often bad for a company long term. Photo: Supplied

Investors love share buybacks,” said commentator Brian Gaynor, in a column in the New Zealand Herald in 2018. 

“The announcement that a company will purchase its own shares is usually greeted with great enthusiasm and a share price appreciation.

“However, support for buybacks is far from universal. A number of studies have criticised these repurchases because they can have a negative impact on the long-term financial health of a company, particularly if they are debt funded.

“They may also indicate that the management team has run out of investment ideas.”

US corporates have been masters of the share buyback, particularly over the last decade, when trillions of dollars of profits have gone into pumping up company stock prices. By contrast, New Zealand companies have used them less frequently and pumped considerably less money into them.

Still they do happen here, and Air NZ is one NZX-listed company that got into share buybacks.

In September 2012, chairman John Palmer told the company’s annual general meeting it was hoping to spend over $23 million buying up to 3 percent of the issued stock, a BusinessDesk article said at the time.

“Air New Zealand says its share price does not reflect the strength of the national carrier's financial performance and is to begin a share buyback scheme as a consequence.”

Air NZ's share price went from just over $1 in September 2012 to over $2 in August 2014. Source: Yahoo!finance

The year-long buyback started in early October 2012 and was renewed in September 2013 for a further year. The 2013 annual report shows the company spent $11 million buying  back shares that year.

Between September 2012 and July 2014 the share price doubled from just over $1 to just over $2.

This was good news for Air NZ senior leaders. On September 21 2012, just before the buyback started, a group of six or seven executives were issued 371,000 shares at the bargain basement price of 84 cents each. A year later they got another 877,000 shares for just over $1 a share. By that time, shares were trading at around $1.50 each.

On September 21 2012 the executive team also got 21.6 million of share options worth $4 million under the company’s long term incentive plan; two months later they got another 4 million options ($1.1 million). These share options could be exercised (that is bought at the original discounted issue price) 3-5 years later.

Meanwhile, chief financial officer Rob McDonald received 2.4 million options worth $400,000, according to the 2013 annual report, and chief executive Rob Fyfe got 8.6 million options, taking his total to 28.2 million.

Then Air NZ CEO Rob Fyfe and other senior executives benefitted from the company's 2012-2013 share buyback. Photo: Getty Images.

As the buyback continued and the share price rose, so Air NZ executives exercised their stock options. 

The 2014 annual report shows Fyfe exercised 20.2 million of his options; others in the executive took up 18 million of theirs.                  

Mike Treen, national director of the Unite Union, says share buybacks rewarded executives in the good times, but now the bad times are here, it’s staff and customers that are suffering.

Air NZ chief executive Greg Foran. Photo: Supplied

Air NZ chief executive Greg Foran said at the end of March that 3500 jobs would go over the next few months, including 1500 cabin crew. As of mid-May, 300 pilots have been made redundant, 300 engineering and maintenance staff have lost their jobs and more than 1300 cabin crew were told on Wednesday they weren’t being kept on.

“It’s amoral,” Treen says. "Executives rewarded themselves and didn’t prepare for a rainy day. The Government has to prepare for a rainy day, so why not big corporates?"

The only good thing about this whole sorry affair, he says: At least the airline might at some stage end up back in the Government’s hands.

* Not his real name.

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