SmartMoney ran a piece telling frequent flyers to go out and burn their American Airlines miles because the airline is so troubled.
Attention, nervous flyers: It may be time to buckle up and use your American Airlines miles. Shares at the airline plummeted by one-third Monday amid fears that it will seek Chapter 11 bankruptcy protection. As investors panicked and sold their shares, its 67 million frequent flyer members around the world were also left with a worrying question: In a worst-case scenario, will all those hard-earned miles be lost? The bad news: When airlines file for liquidation, loyal customers are usually among the last on the long list of creditors to be reimbursed. Experts say nearly all other major debts will be paid before these rewards are redeemed.
What a lead, eh?
And the advice here couldn’t be more wrong.
I have nearly a million American Airlines miles myself, and lifetime Platinum status with the airline. And I’m not worried about my stash in the slightest.
Sure, liquidation on an airline is not usually good for that airline’s miles. The AAdvantage frequent flyer program is likely profitable on a standalone basis, and could survive as a going concern as an independent entity and could well be worth acquiring. But let’s assume that it isn’t. What’s really going on here, and should you be worried?
There is virtually no chance of liquidation of American Airlines. Share prices have certainly fallen on risk of bankruptcy re-organization in which equity holders take a haircut. The reason for a bankruptcy filing is as a mechanism to get costs under control. But what of it?
During the past decade Delta was in bankruptcy, so was United, US Airways was in bankruptcy twice. Their miles are fine. And those carriers are now in a bit better shape than American, in part because they used the bankruptcy process to restructure their costs. American’s problems aren’t just costs, but they haven’t reduced their costs with a bankruptcy filing the way that their other major competitors already have.
If American goes through a bankruptcy proceeding, it will be a strategic filing, not a signal of the end for the carrier. In fact I would argue that bankruptcy may be a boon to American Airlines frequent flyers. It’s been quite some time since American Airlines restructured their frequent flyer award redemption chart. There hasn’t been inflation here in years, while other carriers have adjusted their own redemption charts. A bankruptcy could well (1) put off any award chart inflation, not wanting to anger or spook customers during the process, and (2) lead the carrier to attempt to leverage the program during bankruptcy through lucrative bonus offers and promotions, much to the benefit of members (although likely presaging future award chart inflation).
Last week the airline sold $725 million in new debt and while it’s pricey at over 8 percent interest, the airline is clearly still able to access capital markets. Equity holders may take a haircut, but debt holders believe they have a strong chance of being repaid, suggesting that investors with real money on the line believe the carrier has a future outside of liquidation — a good thing for frequent flyers.
Pricing of credit default swaps do suggest a high likelihood of bankruptcy coming in the next five years, but there’s no indication of liquidation. And with over $4 billion cash on hand, they’re certainly well-positioned to weather current losses. The timing of any bankruptcy filing is likely to coincide with large debt maturities, as a means of preserving their cash position.
While as the only remaining large standalone US carrier not having gone through bankruptcy – ever – there’s a good chance that they take the route at some point, the likelihood of near-term liquidation strikes me as very, very, very low. (Update: Ok, so Southwest hasn’t been through bankruptcy, I mentally exclude them but others will not.) And that means no reason to worry about frequent flyer miles.
Miles don’t always survive cessation of operations. American’s oneworld partner Mexicana demonstrates that, with no benefits accruing to former Frecuenta members. And former United/Star Alliance partner Ansett Australia shut down without any acquisition of their frequent flyer liabilities (although Star Alliance partners did ultimately honor already-issued award tickets paid for with Ansett miles, though this was not obviously going to be the case in the days immediately following Ansett’s declaration of receivership).
But American Airlines is not Ansett Australia or Mexicana Frecuenta. I believe my AAdvantage miles are safe for the medium-term, and that I even may benefit in the case of a structured bankruptcy filing should one come to pass. I’m not quite as bullish as Matthew who sees current stock price movements as an opportunity for speculative gain on American shares. But I’m still pretty bullish on the miles.