Know your options if your airline goes bankrupt

With the airline industry continuing to struggle, it’s important for you to know your rights and how to protect yourself if your airline goes bankrupt, or worse, out of business altogether.

“Bankrupt” doesn’t mean “out of business”

Just because you hear that your airline might be going into bankruptcy court, don’t throw away your tickets or burn your frequent flyer miles on unwanted travel. Many airlines have clawed their way back from bankruptcy throughout the history of commercial aviation.

In fact, the airline industry has a long and proud tradition of bankruptcy, with more than 20 filings in the past 20 years, and only about half of those airlines disappeared forever. America West, Frontier, and others have faced Chapter 11 in the past and are still flying; Continental has saved itself from liquidation twice.

The effects of bankruptcy

Your airline will probably stay in the air while it overhauls its finances, and the impact on you will probably be minimal. That said, it’s possible that you will see some effects. To save money, the airline may cut its number of daily flights, or eliminate flights from its schedule. You’ll want to keep checking for updates to your itinerary to make sure you know about any flight changes well in advance of your boarding time.

If you live in a hub city and the dominant airline declares bankruptcy, other airlines will most likely increase their flights to that airport. That’s the good news; the bad news is that you may lose nonstop flights to a particular destination in favor of connecting service through a competing carrier’s hubs.

Protect yourself with credit

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A great way to protect yourself from losing money is to make sure to book your tickets on a credit card. By doing so, your purchase will be protected under the Fair Credit Billing Act if your trip is canceled. Under this law, you cannot be held responsible for “charges for goods or services you didn’t accept or weren’t delivered as agreed.” In short, if you can’t take the trip you paid for and your airline can’t or won’t refund your money, you’ll get your money back from your credit card company.

The effect on frequent flyer miles

If your airline files Chapter 11, you don’t need to mourn the loss of your frequent flyer miles just yet. Remember that as an airline enters into bankruptcy, it becomes more important than ever that it keep its loyal customers happy. Your airline will not abandon its loyalty program and will continue to honor your frequent flyer miles in bankruptcy.

Because a bankrupt airline’s future is so uncertain, you might think that you should drain your frequent flyer account if you see your preferred carrier floundering; after all, you’ve earned your miles, so you don’t want to see them disappear along with an ailing airline. While it can be tempting to use up your miles or move them to a more stable carrier, remember that in most cases, your airline will emerge from bankruptcy, or another airline will purchase its loyalty program and you’ll still be able to book award travel with your miles.

However, if you’re worried that this approach won’t work, you can book award tickets and use the miles up before they potentially lose their value. If possible, book awards with a partner airline, which will likely honor your miles even if your airline goes under. If you have no immediate travel needs, consider giving the miles to someone else who can use them. Most airlines won’t let you transfer miles to other peoples’ accounts, but it is perfectly legal to book an award ticket in someone else’s name and give the ticket as a gift.

If you’re really nervous and want to move your miles out of your airline’s program in a hurry, it’s possible to transfer miles to a different airline at a hefty price. Using a mileage-exchange service like Points.com will allow you to transfer miles among accounts, but as frequent flyer expert Tim Winship explains, [% 4618 | advice | exchanging miles is pricey %]. For example, converting 10,000 American AAdvantage miles would yield only 1,046 Midwest Miles through Points.com, a conversion loss of more than 85 percent. Taking such a big loss usually isn’t in your best interest unless your airline is talking liquidation.

Most travelers will not notice much of a difference between flying a bankrupt airline and a financially healthy one. Knowing your rights, keeping an eye on news coverage, and taking a few precautions are all you need to do to make sure you’re not left high and dry by an airline bankruptcy.