There’s this thing called working capital, see? You buy something, you do something to it, you sell it. You have to pay the bloke you bought it from before you get the money back. That’s working capital, how much you’ve got to have on hand to cover the difference between the two payment dates.
Some luck businesses can operate with negative working capital. The money flows in before the actual goods of services have to be paid for. Supermarkets are masters at this. A British supermarket will offer, at very best – and not under special schemes for small suppliers – 90 days payment terms. They’ll also not order 90 days stock at a time. They’ll expect to be able to turnover their stock 3 to 5 times before they’ve got to pay for that first shipment that went on the shelves. They end up with piles of cash that they get to borrow for a bit doing this.
Note that this is entirely different from the capital needed to have a store, buy trucks and all that. This is about the movement of supplies in and sales out and the capital needed to finance that.
Armed with this we can partially at least understand what is happening at Ryanair here:
Some customers struggling to get a refund for cancelled Ryanair flights, and initiating a chargeback on their debit card instead, claim they were threatened with being banned from flying with the budget airline.
MoneySavingExpert.com claims to have seen at least 10 instances of people saying Ryanair staff have said that chargeback could amount to fraud or that it could result in them being blacklisted from flying Ryanair.
Airlines get the money off our card a couple of days after we book the flight. We might fly a month or 6 later. They get to use that money for that period of time. They may or may not require negative working capital but they certainly gain from that cashflow.
The problem with negative working capital being that it’s absolutely great, no, totally super, until sales start to falter. Then there’s this problem of services that have to be provided now but Oooops! we used the money three months back. Or, less unnerving but still dangerous to hte company, we’ve got to go and find new working capital to cover the manner in which new sales aren’t coming in. Or, we’ve this situation. People asking for their money back. When the company was expecting to be able to continue to use it and deliver that flight at some future date.
Now, whether this is actually a problem for Ryanair or merely an annoyance it’s certainly something they’d like to minimise. So, a certain pressure to try and get people to accept vouchers – which don’t mean money flowing out instead of refunds which do.
Chargebacks pose another problem over and above refunds. For a credit card – or debit – company keeps an eye on chargebacks. Because it has that legal obligation to repay of the service isn’t delivered it keeps, for itself, some portion of the sale until the service has actually been delivered. Insurance against it having to pay back, d’ye see? And the more claims for refunds it gets then the larger the holdback on future sales it insists upon.
To the point that there have been examples of airlines going down because the credit card companies increase the holdback to cover possible chargebacks. Say one is in trouble, the credit card company sees that it might fail. So, it says we’ll only give you 50% – just an example – of the sale now, you’ll get the other half if the flight actually happens. That neatly cuts cashflow to the airline in half and now it goes bust. The rise in the reserve for chargebacks being the trigger.
No, I do not think Ryanair is that close to the edge. They’ve got plenty of cash to be able to ride this out.
However, the internal pressure in the company is going to be to persuade punters to take vouchers, not refunds. And even then it’s vastly preferable to issue a refund than it is for the punter to initiate a chargeback. No one as gentlemanly as O’Leary is going to insist upon this. It’s just going to be that incentives – even if only by exhortation – for the customer service reps are going to be so aligned.
Negative working capital is lovely right up until it isn’t and that’s the background to this story. Ryanair and others get our money before they deliver our flights, that’s why they’re so keen to offer us a rescheduled flight, not our money back.
If an airline cancelled my flight and didn’t want to give me a refund, for sure I’d go to the credit card company, simply because doing so would cause maximum pain to the bstds who wouldn’t give me my money back.
The paragraph that begins “The problem with negative working capital being that it’s absolutely great, no, totally super, until sales start to falter…….”.
Not being educated in these things and all that, but isn’t the correct term for this a ‘Ponzi scheme’?
No. It’s negative working capital, positive cashflow perhaps. Shares some attributes with a Ponzi but that’s specifically an investment scheme where old investors are paid our from new. Sharing attributes does not mean it#s the same thing.
The big difference is that (operational overheads excepted), if you wound up Tesco every debtor would get paid off, wheres if you wound up a Ponzi scheme the newest “investors” would be stuffed. With negative working capital, there’s still stock that still gets sold, and at a profit, so if you decided that your supermarket was going to close, and you stopped buying any new stock, and you sold all the stock you currently had, then the money from selling that stock would pay the bill for buying it. With a Ponzi scheme, if you decide to just stop it,… Read more »
So they, and the other airlines doing this, should provide vouchers that have terms that are sufficiently attractive to customers to persuade them to leave their money in the airline. Zero interest with a non-negligible risk of insolvency, plus the opaque and ever-changing T&Cs is not attractive to customers. Legally it’s extremely straightforward. If the flight doesn’t happen the customer gets their choice of money back, or replacement flight at a later time of their choosing (and without paying the difference if the price is different). For the market leader to threaten to ban people who are gently requesting that… Read more »
Keep adding to the value of the vouchers offered until they become more attractive to the traveler than a refund. The market will price what the added value is after a bit of experimentation. No one, including the airline, has the foggiest idea what the actual cost of hauling the butt towards Spain in four months is anyway.