Frontier’s bankruptcy puts frequent flyer miles at risk

Another week, another bankruptcy.

This week’s, [% 2549144 | | Frontier’s %], is different from those of [% 2541752 | | Aloha %], [% 2544741 | | ATA %], and [% 2546182 | | Skybus %]. Whereas the latter three shut down operations either immediately or shortly after their bankruptcy filings, Frontier promises it will use Chapter 11 for its intended purpose: to give the company a temporary respite from creditors while it reorganizes.

According to Frontier’s president, Sean Menke, “By filing for Chapter 11, we will now have the time and legal protection necessary to obtain additional financing and enhance our liquidity.”

In recent years, Delta, Northwest, United, and US Airways all spent time under protection of Chapter 11 and all emerged from bankruptcy and are flying today. The question facing Frontier customers, and members of its EarlyReturns frequent flyer program in particular, is whether Frontier will follow in the footsteps of carriers that have used bankruptcy as a bridge to long-term survival, or those carriers for which bankruptcy was the beginning of the end.

In a sense, the issue is more pressing for EarlyReturns members than for purchasers of Frontier tickets. If Frontier were to cease operations next week, travelers who had purchased their tickets with a credit card could expect a refund from the credit card issuer. But in the event of a complete meltdown, any miles remaining in the accounts of EarlyReturns members would likely be lost forever. That’s what happened to members of the programs of Aloha and ATA, as well as members of the program of Maxjet, which went out of business in December 2007.

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There’s only one way to protect miles from loss: Redeem them while the airline is still operating. The best option would be to redeem miles for award tickets on Frontier’s single airline partner, AirTran. According to Frontier’s website: “An EarlyReturns member can use 20,000 EarlyReturns miles for a round-trip ticket to any AirTran Airways destination, including San Juan, Puerto Rico, and 40,000 EarlyReturns miles for a round-trip business-class ticket, including San Juan, Puerto Rico.”

While there are no guarantees, AirTran would probably honor an award ticket issued for Frontier miles even if Frontier stopped flying, albeit on a standby basis. Still, that’s better than watching one’s miles disappear altogether.

So, should EarlyReturns members cash out sooner rather later, to hedge against the possibility of losing their miles in the event Frontier folds?

Risk assessment is an inexact endeavor at best. But Frontier faces the same environment which led to the recent outright failures of Aloha, ATA, and Skybus—the price of oil above $100 a barrel, and the U.S. economy in or on the brink of recession. And there are no compelling reasons to expect a significant improvement in either of those factors in the near future.

I wish Frontier the best. But I’d have to suggest that EarlyReturns members prepare for the worst.