Looming Bankruptcies Threaten Airline Miles

What to do when bad things happen to good miles.

October 18, 2001 - On September 11, the universe of airlines was, in one fell swoop, separated into three distinct groups: airlines which are not in bankruptcy, airlines which are in bankruptcy, and airlines which soon will be in bankruptcy.

As we go to press, the already-in-bankruptcy list includes Ansett, Midway, Sabena and Swissair. Some of these carriers continue to operate, temporarily propped up by government largesse or private financing. Others have grounded their planes completely, possibly forever.

There are as many bound-for-bankruptcy lists as there are industry prognosticators. But whichever version of the "endangered airlines" list you happen to see, it's likely to be a disturbingly long one, including carriers in every corner of the world.

And while there may be disagreement as to which airlines will survive and which will succumb, there is broad agreement on the industry's current shape and future direction: The world of airlines is shrinking, and will shrink further still. And as airlines disappear, so will frequent flyer miles.

Where Do Miles Go when Programs Die?

Unlike dollars deposited in a checking account, which in most cases are insured by the FDIC, miles come and go with the airlines which operate the mileage programs.

Often in the case of an airline declaring bankruptcy, the miles simply disappear because, when the carrier's assets are sold, miles are viewed as a liability (the eventual cost of transporting a passenger for free). When it ceased operations on September 12, Midway was a partner in the programs of Continental and Northwest but did not operate its own program. So no miles were lost. However, when the original Midway went belly-up in 1991, it did have a program and 700,000 members lost their miles. Another current bankruptcy case: Ansett, Australia's second largest airline. While Ansett continues limited flights, the accounts of its 2.4 million Global Rewards members are frozen.

On the other hand, if a faltering carrier is acquired by another airline -- as happened with American's acquisition of TWA -- the frequent flyer program members, including their miles, may be seen as a positive asset. To insure that TWA's customers -- especially its most frequent and profitable ones -- would transfer their loyalty and business to American after the sale, American is merging all members of TWA's program, together with their miles, into American's program.

What to Do?

Given the unprecedented uncertainty of this post-September 11 period, and the likelihood of airline bankruptcies and lost miles, many frequent flyers are fretting over their options, mileage-wise.

Redeem ASAP

The natural tendency, when faced with the prospect of losing one's hard-earned miles, is to use them before they disappear. The tactic: redeem the miles for award travel on partner airlines, which presumably will still be flying after the airline operating the frequent flyer program has gone bankrupt.

But, as former head of Pan Am's WorldPass program, Joan Benham, cautions, it's a Catch 22 situation: participating in a run on awards from an already-floundering carrier could contribute to that airline's demise.

Exchange Endangered Miles

Another option is to exchange the at-risk miles for miles in a program with better survival prospects. There are three exchange mechanisms to choose from.

First is the Reward Exchange feature of Hilton's HHonors program. Conversion is a two-step process: redeem miles from participating airline programs for HHonors points; then redeem the HHonors points for miles in one of the participating airline programs. The convenience comes at a price: more than half of your original miles will be lost in the conversion.

A second option is Diners Club Rewards, which has both Miles-to-Points and Points-to-Miles capabilities.

As with HHonors' Rewards Exchange, you would convert from one airline's miles to another's, by way of Diners Club Rewards points. And as with the HHonors option, much of your original miles' value will be sacrificed in the conversion process.

The third option is the dedicated mileage-exchange service, Points.com (http://points.com). While the process is highly efficient, only five airlines (not including Delta or United, two of the three largest) participate. And the exchange will leave you with only 10 - 20% of the miles you started with.

The Best Insurance: Insurance?

Proving the maxim that anything and everything can be insured, AwardGuard is insurance for frequent flyer program miles.

The brainchild of Randy Petersen, editor and publisher of InsideFlyer, AwardGuard is one component of PrivilegeFlyer (http://www.privilegeflyer.com/), a package of services designed for the mileage-conscious traveler. The mileage-protection service was introduced in 1991, and currently covers more than 80,000 frequent flyers, 5,000 of whom have signed up since September 11th.

AwardGuard costs $119 for one year's coverage, $214 for two years. If your program goes bust, AwardGuard coverage permits you to redeem your miles at the originally published levels (e.g. 25,000 for a free domestic coach ticket) through the AwardGuard travel center, which will purchase tickets on your behalf up to a combined value of $7,500.

All major U.S. airline and hotel programs are covered, as well as the American Express Membership Rewards and Diners Club Rewards programs.

Petersen cautions that AwardGuard "isn't for everyone." By his reckoning, if your mileage assets are less than 50,000 or more than 800,000 miles, AwardGuard may be overpriced or provide insufficient coverage. Petersen's caveat notwithstanding, in the current volatile environment, $119 seems a small price to pay, even for accounts which lie outside Petersen's guidelines.

Wait and See (and Hope for the Best)

The history of bankrupt airlines' miles, which is a checkered one, suggests that the "do nothing" option may be a viable strategy.

On the negative side of the historical ledger, members of the programs of Braniff, the original Midway and Legend all lost their miles when those airlines shut down.

But there are positive precedents as well. Members of Pan Am's program were merged into Delta's program; Eastern's members were incorporated into Continental's; and most recently, American adopted TWA Aviators members, miles and all. In each of these cases, the affected frequent flyers were arguably better off after the change than before it.

So if you expect your carrier to be among the casualties, you could elect to do nothing with your miles, on the strength of the hope that your program (including the member database and their accumulated miles) will be acquired by an airline which views frequent flyer miles as an investment in future loyalty rather than a contingent liability.