Exclusive: Leaked Email Exposes Direct Air Refund Disaster

Thursday, May 03, 2012

Jeff Lavery, GoLocalWorcester Contributor

Although Direct Air declared bankruptcy in March, customers holding ticket vouchers are likely to feel the sting of the shut-down for years to come.

While Chapter 7 Bankruptcy proceedings are in motion, the likelihood of customers and creditors being made whole anytime soon is far from certain.
To date, over $600,000 in claims have been filed by customers, outstripping the $200,000 surety bond set aside to settle claims. When – and if – customers and creditors are reimbursed, it won’t happen before January 2013 per the rules established by the Department of Transportation (DOT).

When claims can be fulfilled

According to a claims specialist from Platte River Insurance Company, the company holding the bond on behalf of Direct Air, the DOT forbids settling claims until 60 days after the last scheduled flight. Since customers pre-purchased tickets for flights as far away as November 2012, claims can’t legally be fulfilled until after that date.

A Direct Air customer leaked an email to GoLocal from Platte River Insurance Company responding to a customer's claim. “We will be working with our attorney moving forward but, unfortunately, we do not anticipate we will be able to bring this matter to conclusion until sometime after January 2013,” says Patricia Framke, a claims specialist with Platte River. “Typically, what we have to do next is interplead the bond funds into the court. They (the court) then make a ruling on how the funds should be distributed.”

The reimbursement process

According to local legal experts, there’s good reason to question whether creditors and customers will ever be paid. Joe Baldiga, a partner at Worcester law firm Mirick O’Connell and the Chapter 7 trustee appointed to administer the case, notes that the reimbursement process hinges on many factors and is filled with unknowns, and is also dealing with fraudulent claims filed by passengers who actually used their Direct Air vouchers without issue.

“Right now, there’s about $1 million in the escrow account. There are minimal dollars, certainly not enough to pay claims any time soon,” says Baldiga. “The only way to collect money to pay creditors is to sell any assets or by recovering improper transfers, such as shortfalls in the escrow account. Right now there is no money to pay out, and the only way to get creditors paid is to bring money into the estate. It will be a while before creditors will see anything.”

Where’d the Money Go?

For the customers and creditors hung out to dry by Direct Air, the question most want answered is why the company’s escrow account was depleted. Worcester attorney Russell Chernin notes that the airline was obligated to keep funds from ticket sales in the escrow account until the actual flight occurred. In theory, other revenues would address the high costs of running an airline, from purchasing fuel to paying gate fees. However, the lack of resources in the company’s escrow account indicates the airline’s business model was anything but conventional.

“The only way they’re going to find out what happened is to gather all the books and records from the accounting department and trace where that money went,” says Chernin. “It will take years to sort out because of the numbers of transactions involved.”

Deciphering what happened to the escrow funds is precisely what Baldiga and his team are working to uncover.

“I’ve already reached out to Direct Air’s prior management, the management team that was in place during Chapter 11, the various institutional creditors and banks – all of these conversations are ongoing,” says Baldiga. “I’m also seeking records from various entities so we can start piecing together what happened.”

While customers who used credit cards to purchase their tickets will receive refunds from the card issuers, the creditors themselves will be stuck seeking reimbursement for quite some time – if they’re ever paid at all.

“There appears to be some shortfall in the funds that were supposed to be put into segregated accounts to protect against cancelled flights,” says Baldiga. “And there is some question as to whether or not they (Direct Air) will be able to pay those claims.”

What’s Next for Worcester

The airport’s history of commercial air travel has had a turbulent track record. After Continental and USAir cut ties with the airport, charter airlines like Allegiant Air and Direct Air became the sole providers of commercial service. As recent history has shown, the airport has needed more than cheap fares and one-way flights to warm weather to keep the terminals full.

Massport held its April board of directors meeting on Thursday, which outlined plans for an additional $17 million of infrastructure improvements to the airport. Officials noted that this spending will both maintain compliance with FAA rules and make the airport more attractive to legacy carriers. While the airport recently held a tour for JetBlue executives, future commercial service remains a wish. But Massport officials cite Direct Air’s full flights and community support as reasons why commercial carriers should consider Worcester.

“Direct Air proved there is a market in Worcester,” says Edward C. Freni, director of aviation for Massport. “Although it wasn’t a promise, JetBlue was very pleased with what they saw.”

However, it also exposed an important distinction in commercial air service: air service versus an airline. An air service like Direct Air lacks the stability of an airline like JetBlue, which has control over its resources like manpower and airplanes. An air service often uses equipment and services on an as-needed basis, and while the price may be lower, customers can’t necessarily jump on another flight when one is cancelled. For local travel experts, this is one of the biggest hurdles in attracting a reliable airline to the airport.

“We want very much to have a major, reliable, scheduled air carrier out of Worcester. There’s a market and it would work,” says Elisabeth Rossi of Rosenlund Travel on Mechanic Street. “But when charter airlines are allowed to come in with seasonal models and skim passengers away from the established carriers, the large airlines can’t stay because they don’t have adequate load factors.”

Despite the challenges, Massport’s Freni says the airport’s operators are committed to making Worcester a success in the future and moving forward from Direct Air’s failings.

“We feel bad for the people that were stranded,” says Freni. “Our goal is to try and make Worcester Airport attractive to commercial services.”

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