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First Data got what it deserved

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Louise M. Furche

Published April 19, 2008 at noon

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I would like to comment on the colossal error that First Data made in its attempt to "protect itself" from the deteriorating financial condition of Frontier Airlines. While not familiar with the financial conditions of either party, I am an expert in the field of Business-to-Business Credit and would like to shed some light to those who may not know all of the details that go into these kinds of transactions.

According to the Denver Post, Rocky Mountain News and other local news agencies, Frontier Airlines stated that its last minute decision to file for Chapter 11 Bankruptcy protection was entirely due to the demands from its credit card processor, First Data Corporation. First Data demanded a 200+ percent increase in cash reserves by the end of the week, "in accordance with our original agreement".

Keeping in mind that the reason for credit is to maximize sales while remaining confident of payment, I will point out how First Data failed to live up to this requirement. I will also then show an example of how First Data could have handled the situation and not be facing the loss they are today.

Since First Data felt the need to "protect itself" from the perceived risk of Frontier's financial condition, its first step should have been to negotiate reasonably with Frontier. Instead, they sent a letter stating their outrageous demands thus backing Frontier into a corner. Frontier responded the way that any other company would with such a deathblow - they filed for bankruptcy. First Data failed to accomplish what it set out to do which was protect itself. They failed to see it from the client's point of view and failed to find a way to accomplish their goal of minimizing risk. In addition, assuming that they wanted to keep Frontier as a profit-producing client, they failed there too. I am just guessing here that Frontier will not use them for credit card processing when all of this blows over. Now First Data has put itself in the worst financial position possible - the client filing Bankruptcy.

A better route for First Data would have been to sit down face-to-face with Frontier since they are both based in the Denver area and a meeting could have taken place with less than a 30-minute drive to a neutral location. The original agreement could have been still been enforced but perhaps a more logical demand, for example, would have been to gradually increase the cash reserve by $3.8 million each week over the next 20 weeks. The dollar amount and the length of time is a very basic management negotiation tool. First Data would have protected itself and Frontier would not now be in Chapter 11.

This type of discussion takes place every day between creditors and businesses of all sizes and every day they are settled to the satisfaction of both parties. Now First Data gets what it deserves - to be left out in the cold after they pushed their client into bankruptcy with excessive demands. This is an example of how NOT to manage business credit. In fact, it is the ultimate failure of any Business Credit Manager.

Louise M. Furche, CCE, is president of B2B Credit Consulting, LLC in Arvada.

Comments

  • April 22, 2008

    8:26 a.m.

    Suggest removal

    cardperson writes:

    This is a very poor analysis.
    The credit card processor is not a creditor, nor do they expect to be. They are providing a service. All Credit card transactions that are charged and billed to the cardholder for a service or product that is delivered at a later date, may be charged back by the cardholder if that service or product is not delivered or rendered at a future date. If a "future service" merchant closes its doors and does not perform the service, the merchant processor will have to reimburse the cardholder for these "charge backs" or returns, typically causing a loss for the processor. This unsecured loss stands behind all secured creditors in bankruptcy.

    if an airline stops flying, all unflown tickets are reimbursed to the cardholder by the processor according to visa rules, creating an huge loss. When these relationships are established, the airline should maintain a reserve equaling the value of all unflown segments that have been charged on a credit card. This is normal procedure. By requiring the reserve and putting the airline into bankruptcy, the card processor gets preferred rights from the courts to continue processing the airline without risk of these losses and the airline can continue to operate to work out the situation with their real creditors. It actually is best for both parties, especially if the airline has used the funds, that should be on deposit to protect the public, for other purposes. FDR, in processing credit cards, probably does not have a secured position from other creditors and this is their only way to protect themselves.
    So to think you can sit down and earn you way back to a reserve with Frontier is like negotiating with Braniff, republic, etc.... I am willing to bet this was the negotiated outcome.