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The Hidden Risk Of Budget Airfare

Thomas Cook Group aircraft detail.
photo by Mark Harkin

Flying is cheaper than it used to be, but many people still hunt for bargain-basement travel packages out of preference or necessity. Unfortunately, a cheap holiday can cost more than you expect. If you need proof, ask the hundreds of thousands of travelers stranded by the sudden collapse of Thomas Cook Group.

Thomas Cook was a British company that operated in two segments: as a tour operator and an airline. The company specialized in low-cost vacation packages including flights and accommodation. An estimated 500,000 travelers were stranded around the world when Thomas Cook halted operation over the weekend. The United Kingdom’s Civil Aviation Authority has coordinated efforts to bring home 155,000 British tourists, relying on help from operators including easyJet and Virgin Atlantic. British taxpayers will spend around 100 million pounds (about $124 million) to get these stranded travelers home. Other countries, notably Germany, are also working out emergency arrangements for travelers. Thomas Cook has international subsidiaries that will continue to operate for now. But since these entities share resources, including planes, with their former parent company, without a rescue deal it is unclear how long they can limp along independently.

Customers have complained of a lack of communication and disruption at airports as they try to get home. The Civil Aviation Authority has said that the repatriation efforts will not include outbound flights from the U.K., creating extra uncertainty. If travelers hope to recover any money, they will need to seek compensation from the U.K. government, or their credit card or insurance companies. The Air Travel Organizer’s License protects most package vacations sold by British companies, but getting compensation is likely to take months. And travelers who only bought flights, rather than packages, do not have access to the same protections. Customers with booked upcoming holidays will be able to claim a refund, though those with vouchers for use on future travel will not be refunded.

Thomas Cook blamed factors including last summer’s heat wave and Brexit for its significant 2019 losses. Travel experts have also pointed out that travel agencies have diminishing use in the age of the internet, making half of Thomas Cook’s business dead weight. A U.K. government representative noted that the company’s financial problems were “substantial, long-standing and well documented.” Regardless of the particular pressures that contributed, the result is that the world’s oldest travel company ceased operations more or less overnight.

Thomas Cook’s downfall is the latest in a long string of recent airline bankruptcies. But it is likely not the last, and it may not be the largest.

Most of the airlines that have gone broke were budget carriers focused on Europe and Asia, operating on something like a shoestring. But Norwegian has also been struggling for many months. As the carrier expanded operations, it took on debt in order to add new planes and more routes. Its shares have dropped significantly since this spring, and in July CEO Bjorn Kjos stepped down from his position. Struggling with the ongoing 737 MAX debacle, which has grounded a significant part of its fleet, Norwegian recently cut routes between Ireland and North America.

From the outside, it is not self-evident that Norwegian is doomed, but there are reasons for travelers to be wary. While the closures of Thomas Cook and other budget European airlines have affected a limited number of Americans, Norwegian’s rapid growth on long-haul routes in recent years could hit U.S. travelers harder. My family regularly uses Norwegian on vacation trips to Europe, and we aren’t alone. In 2018 Norwegian became the largest non-U.S. airline to fly transatlantic routes out of New York.

The past decade has been hard on budget airlines, even if Americans have been spared much of the resulting pain. Earlier this year, Iceland’s Wow Air shut down abruptly; like Thomas Cook’s closure, the collapse of Wow left travelers stranded worldwide. Iceland’s tourism sector has struggled in the months since. The Danish budget carrier Primera Air shuttered in October 2018. The same month, Cyprus-based Cobalt Air ceased operations. British carrier Monarch Airlines collapsed in 2017, stranding more than 100,000 passengers abroad. (The U.K. government stepped in to get British travelers home then, too.) All told, eight European budget airlines have shut down in the past year alone, not including Thomas Cook.

Travel discounts generally involve drawbacks in the form of fewer amenities and less flexibility. But travelers should bear in mind that they also involve the risk of the carrier itself collapsing without warning. Carriers are seldom forthright about imminent cash flow troubles, since such honesty would create a vicious and self-fulfilling cycle of canceled and forgone bookings that would hasten collapse. This means that bargain fare hunters are taking a gamble on the sturdiness of a given carrier. Anyone who scoops up a bargain fare needs to have either a flexible travel schedule or enough resources to lay out cash for a return trip home should they need to resort to plan B. Ironically this means it is easier for well-heeled travelers, such as many retirees, to take advantage of bargain airlines than for those on tighter budgets and schedules.

Even so, it is wise to learn from the misfortunes of others. The price of that budget ticket can be higher than you think. Plan accordingly.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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