What Happens To Your Miles When An Airline Declares Bankruptcy

[FORBES, DEPOSITPHOTOS]

Over the weekend, Colombia’s Flagship airline Avianca declared bankruptcy. While that might not seem notable to many U.S. travelers, diehard points and miles collectors had cause for concern. The airline’s mileage program, LifeMiles, can be lucrative—from domestic flights on United starting at 6,500 miles to flying some of the best first-class products in the skies for under $50 out-of-pocket. LifeMiles also has had a habit of selling miles for a price that made them seem almost too good to be true. 

Avianca wasn’t the first airline to declare bankruptcy due to the coronavirus pandemic. UK-based Flybe, Virgin Australia and U.S. regional airlines Trans States Airlines and Compass Airlines have all entered some form of bankruptcy protection since the beginning of March 2020. Unfortunately, this probably won’t be the final tally by the time travel returns to normal.

Whether you have collected millions of airline miles from business travel or have just been scraping together miles to save on a trip, you’re probably wondering what an airline bankruptcy means for your miles. While each case is unique, let’s review some possible outcomes.

The Status of LifeMiles and Velocity Miles

Of the airlines that have declared bankruptcy so far this year, Virgin Australia and Avianca are the only two that have dedicated mileage programs. In both cases, the mileage program is a separate legal entity from the airline, and neither loyalty program has entered bankruptcy. 

The news was especially bad at first for those who hold Virgin Australia’s Velocity frequent flyer miles. On April 21, 2020—the same day that Virgin Australia entered administration—Velocity announced an immediate “pause on redemptions” for an initial period of four weeks. Although members probably didn’t have plans to use miles to travel anytime soon, this pause included non-travel redemptions like gift cards.

The good news is that this pause was lifted on May 15. Members can now redeem Velocity miles for domestic flights starting September 1, 2020. Even better, Velocity is waiving all change and cancellation fees on awards through September 1.

LifeMiles is off to a more-confident start. Hours after the news broke that Avianca had filed bankruptcy, LifeMiles issued a press release and emailed members. The message: “LifeMiles Remains Strong”:

Members can still redeem LifeMiles for Avianca and Star Alliance partner flights as before. LifeMiles is going further by incentivizing travelers to continue using the program. LifeMiles has agreed to waive change penalty fees through October 2020. Also, LifeMiles is emphasizing that Avianca will continue to honor LifeMiles loyalty program terms. Current elite status tiers have been extended through January 2022.

Mileage collectors can be optimistic that LifeMiles will continue to remain strong through Avianca’s reorganizational Chapter 11 bankruptcy—just as U.S. airline mileage programs have done through the past two decades. However, confidence in the future of a program isn’t a guarantee that things will work out.

RIP Miles: Air Berlin’s Topbonus Mileage Program

Days after Air Berlin declared bankruptcy in August 2017, its Topbonus mileage program suspended all redemption activities. A week later, the Topbonus loyalty program also declared bankruptcy.

As with Virgin Australia’s Velocity and Avianca’s LifeMiles program, Topbonus was a separate entity. Since that entity was 70% owned by Etihad Airways, there was hope that the program would be saved.

Within a couple of months, Topbonus restarted redemptions by allowing members to redeem miles for Etihad flights. As the final Air Berlin flight touched down in October 2017, Topbonus declared to its members by email that “Topbonus Ltd. and the loyalty program are here to stay.”

However, this statement proved to be overly confident. By April 2018, Topbonus’ 4.3 million members were emailed by the Insolvency Administrator that their mileage balances were being set to zero. Members were told they could “make an insolvency claim” for the value of their miles.

Mileage members were able to submit a claim for 0.36 euro cents per mile, but over two years later Topbonus still hasn’t paid these claims.

Zombie Program: Jet Airways’ JetPrivilege

For another example of what can happen to airline miles when an airline declares bankruptcy, let’s consider Jet Airways and it’s JetPrivilege mileage program. After years of losses, Jet Airways finally collapsed in April 2019 and declared bankruptcy in June 2019. 

As with Air Berlin’s Topbonus program, Jet Airways’ loyalty program—called JetPrivilege at the time—was a separate legal entity. Just like with Topbonus, Etihad owned a majority of JetPrivilege. However, unlike Topbonus, JetPrivilege survived the failure of Jet Airways, but the program lost much of its value.

While Jet Airways was still operating, you could earn and redeem JetPrivilege JPMiles with dozens of airline partners—from Air France and Delta to Vietnam Airways and Virgin Atlantic.  The since-renamed InterMiles program now has exactly one direct airline partner for earning and redeeming miles: Etihad Airways. 

Alternatively, InterMiles members can earn and redeem miles on hundreds of airlines by booking flights through its travel portal. While that’s better than the program going away entirely, the program is a shell of what it once was.

The InterMiles program remains a transfer partner of Citi ThankYou Points (1:1 transfer ratio) and Marriott Bonvoy (3:1 transfer ratio with a 5,000-point bonus for transferring 60,000 points).

Business as Usual: U.S. Airline Bankruptcies

Since 2002, most current U.S. airlines have filed for Chapter 11 bankruptcy protection. That includes American Airlines (2011) and its merger partner US Airways (2004), Delta (2005) and its merger partner Northwest (2005), United (2002), and low-cost carriers Frontier and Sun Country (both 2008). Yet, all of these airlines—and their mileage programs—continue to this day, in one form or another.

When it comes to airline miles, incremental award devaluations seem to be a constant. However, U.S. airlines haven’t devalued miles when times are bad. Airlines struggling to survive are happy to incentivize travelers by offering a valuable loyalty program.

In fact, on the same day that American Airlines filed for bankruptcy in 2011, the airline filed a request with the bankruptcy court to allow it to continue its AAdvantage program without changes. American Airlines argued that the continuation of the program was critical to maintaining loyalty from its travelers.

For better or worse, there’s one aspect of the U.S. mileage programs that’s different from the international programs that we have discussed. While Velocity, LifeMiles, Topbonus and JetPrivilege are all separate legal entities from their respective airlines, mileage programs of U.S. airlines are part of the airline itself.

That means that we likely wouldn’t see a “zombie” situation like JetPrivilege/InterMiles if a U.S.-based airline was to declare bankruptcy. As the airline goes, so would the mileage program.

However, there’s one aspect that sets the U.S.-based mileage programs apart: the value of their loyalty programs. For decades, airlines have made billions in profits from selling miles to banks. Because of these valuable partnerships, some stock analysts believe that the value of American Airlines’ AAdvantage frequent flyer program is worth much more than the current value of the airline with the loyalty program in-house. Analysts have come to a similar conclusion about United, Delta and Alaska’s programs.

Because of these partnerships, it’s unlikely that U.S. airlines will devalue their miles in all but the most extreme situation. Even now, with air travel down more than 90%, these bank partnerships are crucial for the airlines. JetBlue has recently sold $150 worth of miles to Barclays, and both United and Delta are in talks to sell miles in bulk to Chase and American Express, respectively, in order to raise cash. In exchange for giving airlines this lifeline, banks are likely going to require the airlines to maintain the value of the miles they just bought in bulk.

What This Means for Velocity and LifeMiles

As you’ll see from the examples above, there’s no clear answer about what will happen to your miles when an airline declares bankruptcy. Sometimes the airline programs survive and members retain the value of their miles. In some cases, airline miles are worth just a fraction of their previous value. And, it’s possible that your miles may become entirely worthless.

The key is typically the continued operation of the airline itself. Neither Air Berlin and Jet Airways was able to find an investor to save the failed airline. When the airline ceased operations, the mileage programs lost access to the airline’s partners. Without partners, it’s hard for mileage programs to entice members to earn miles with the program.

The situation is a bit more complicated for Avianca and Virgin Australia. Avianca’s commercial flight operations are entirely shuttered at this time, and Virgin Australia is operating just a few domestic flights a day. Typically, that would be a bad omen for the future of both airlines. But, these are truly extraordinary times. With demand for travel cratered, it may be best for the future of both of these airlines to power down for now and try to restart when travel resumes.

What to Do With Your Points and Miles

Humans have a strong loss aversion. When considering the loss of our hard-earned airline miles, our natural instinct is to get some sort of value out of them—even if that means redeeming them for poor value for non-travel redemptions like gift cards. Some travelers may feel best doing this, especially with only a small balance in a loyalty program account.

Still, I wouldn’t recommend cashing out a large amount of points and miles at this time. In part due to refunds from travel cancelled by COVID-19, my wife and I currently have millions of points and miles in our loyalty accounts. Instead of cashing them out, we are digging into award charts and booking trips that we hope to be able to take later this year and in early 2021.

However, there is one thing that I’d recommend doing now. If you haven’t done so already, consider switching your credit card spending to cards that earn transferable points—such as American Express Membership Rewards points, Chase Ultimate Rewards and Citi ThankYou Points. Each of these bank programs partners with at least 10 different airlines.

By collecting points in one of these bank programs, you reduce the risk of any one airline mileage program losing value. Then, when you’re ready to travel again, you can transfer these points to the airline that’s offering the best redemption rate for the trip you’re looking to take.

By JT Genter