Bankruptcies Ahead: The Uncertain Future of Frequent Flyer Miles

Recent headlines have been portending the worst: bankruptcies, liquidations, the end of the airline industry as we know it. With such dire assessments appearing almost daily in the major media, it’s no wonder that travelers are on edge. The prospect of one or more airlines falling by the wayside, leaving frequent flyer program members empty-handed, looms large in the minds of millions of loyalty program members who see their miles at risk.

And with so many airlines experiencing financial difficulties, it’s a rare frequent flyer who remains untouched by the turmoil. Air Canada, Hawaiian Air, and United continue to operate under bankruptcy protection, US Airways spent time in Chapter 11 last year, and even American came within a hair’s breadth of filing for bankruptcy. In recent weeks, Delta has warned that bankruptcy protection could be in its near-term future, and ATA is running out of cash and may be forced into bankruptcy before the end of the year.

With so much instability in the industry, frequent flyers can take one of three courses of action: continue to hoard miles in the hopes that their airline won’t liquidate, use miles for travel or other rewards, or convert miles into the program of a more stable airline. However, given the current state of the industry and the varying value of a mile, one option may be better for you than the others.

Liquidation and miles

Many travelers express concern when their airline enters Chapter 11. But, airlines continue to operate normally under bankruptcy protection, and I have never found a single case where an airline’s being in Chapter 11 resulted in the loss or devaluation of frequent flyer miles.

It’s Chapter 7, which typically occurs after an unsuccessful attempt at reorganization under protection of Chapter 11, that puts miles at risk when an airline’s assets are liquidated.

There are two important facts you should know about Chapter 7 and frequent flyer miles.

The bad news: In a Chapter 7 liquidation proceeding, “owners” of frequent flyer miles have no legal standing when the company’s assets are distributed among creditors. So their miles could indeed disappear.

The good news: In the 23 years since American introduced the first mileage program, there are very few instances of miles of a failed carrier’s program disappearing altogether. And the record of the larger carriers is especially heartening. Miles from Eastern Air Lines’ program were folded into Continental’s program. Pan Am WorldPass miles were transferred into Delta’s program. TWA Aviators miles were converted into miles in American’s AAdvantage program.

The history of the breakup of smaller carriers is less reassuring. When the original Midway shut down, it left members of its program in the lurch. (The second time around, in 2002, Midway credits converted to US Airways miles.) And members of the programs of Braniff, Legend, and National were all left mile-less.

That was then…

While past outcomes have been generally favorable for those with frequent flyer miles, it would be dangerous to assume that the future will play out as positively.

For exactly the same reason that one or more major airline liquidations are likely—a long and deep period of unprofitability among the legacy carriers—it is highly unlikely that any airline now has the will or the resources to assume the liability of a failed carrier’s frequent flyer program.

Would American, for example, embrace the millions of TWA miles—and the thousands of free tickets they represent—if the TWA drama were unfolding today? Almost certainly not.

In short, the risk of lost miles is much higher in this environment than it was during more profitable times. Hoarding miles may indeed result in forfeiting miles.

Consumer options

What, then, can consumers with at-risk miles do to minimize the possibility of loss?

Up until March 2003, the list of options included AwardGuard, insurance specifically for frequent flyer miles. No doubt reflecting the heightened likelihood of failed programs, AwardGuard has been taken off the market.

What’s left are two basic approaches to minimizing the risk of losing miles: Use them or convert them.

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Use ’em (or lose their value)

The full value of frequent flyer miles can only be realized one way—by redeeming the miles for award tickets and using the award tickets for travel.

It follows that the urgency with which program members should use their miles will vary with the probability that the airline hosting their program will fail.

In practice, that means that members of the programs of United and US Airways, which are at higher risk of liquidation, would do well to shift from accumulation to redemption mode. And members of American and Continental’s programs are relatively safe proceeding as usual, at least for the time being.

(I make it a policy to stop short of predicting which airlines will survive and which won’t. But I will share with you my educated guess as to which airlines are at greatest risk. Among the Big Six, from highest to lowest risk: US Airways, United, Delta, Northwest, American, Continental.)

For those with modest account balances, most programs have added magazines and newspapers to their award charts, offering subscriptions for as few as 400 miles. While USA Today is no substitute for a week in Maui, on a cents-per-mile basis, these deals can represent good value.

Conversion

After using miles, there are three options for converting endangered miles into miles in a program with a brighter future.

Of the three, only Points.com is intended to convert miles among participating airline programs, including Air Canada, Alaska, American, America West, Delta, Hawaiian, Midwest, and US Airways. Note that Delta members cannot transfer miles out of the SkyMiles program, though members of other frequent flyer program can make exchanges into Delta’s program. The same is true for US Airways members, with the exception of US Airways Visa cardholders, who may exchange Dividend Miles for other eligible currencies.

Before ponying up the $50 annual fee for the entry-level US Airways Visa in order to shift miles out of the Dividend Miles program, consider the beginning and end amounts. Converting 10,000 US Airways miles nets a scant 581 American AAdvantage miles, a 94 percent loss. Similar “conversion loss” afflicts other Points.com transactions.

The other two conversion options are two-step transactions, exchanging airline miles for points in the Diners Club Rewards or Hilton HHonors programs, and then exchanging those points for miles in a second airline program.

Only American and United participate in Diners’ miles-to-points exchanges, although 26 airlines are included in points-to-miles exchanges.

In Hilton’s program, both miles-to-points and points-to-miles conversions may be made in the programs of American, Hawaiian, LanChile, Mexicana, Midwest, South African Airways, and Virgin Atlantic.

As with Points.com exchanges, the conversion loss makes these transactions unpalatable, except in the most desperate circumstances.

Consider the options, then hit the road

Given the pros and cons of the limited options available to worried frequent flyers, the best choice is to redeem those miles and travel sooner rather than later.

The timing is ideal. With the summer travel bonanza behind us, flights will be running emptier, making for more award-seat availability and a less cramped in-flight experience. Airports will be less congested. And attractive fall and winter discounts on hotels and car rentals should be widespread.

So go travel! That’s why you earned the miles in the first place, right?