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.
Thanks for this clear, concise breakdown. I’ll be ignoring the panic button right along with you!
Completely agree with you. Most of the talk on CNBC this morning was about an unrealistic driving down of AMR stock price. With airlines fuel prices going down, AMR should be fine. Even if they’re not, the last thing this airline will do is void all the Aadvantage miles.
And Citibank may buy a bunch of AA miles for its lucrative credit card business, as AMEX did for Delta. This would imply some good AA credit card offers from Citi, as they would have a large number of miles to get off their books.
The more people who read that and go burn them up–I guess there will be more availability for me later? ALso…worst comes to worst, we can always start #OccupyDFW hehehe
Disclaimer: Dear Langley…that was just a joke..no revolution of any kind is planned.
Gary, do you think a possible AA bankruptcy could mean some kind of a tie-up (merger or otherwise) with US?
“While as the only remaining large standalone US carrier not having gone through bankruptcy – ever ….”
Southwest.
@Brian I don’t. (1) American has enough labor problems as it is (2) they need to conserve cash, not expend it in a merger.
Now, it does make American cheap. And US AIrways could decide to buy American. They might even be able to pull of the deal at current market cap. But it would be insane, considering US Airways’ labor proiblems and the cost nightmare of combining operations. Plus it’s not obvious that the carriers are at all complementary. American’s fleet is pretty gas guzzling. American has a hub at JFK, while US AIrways has a hub close by in Philly. US AIrways has a hub at Phoenix while American has a strong presence at LAX. That duplication makes no sense. MAYBE it would make sense to keep American’s Miami and de-hub Charlotte?
Just seems an odd match even if they’re the last majors at the dance.
@Ping Huang sure but from a mileage perspective they don’t count 😉
I agree completely about your assessment of the stability of AA miles. I can’t imagine doing anything different with my miles given the recent stock market turmoil. The future value of all frequent flyer miles is always a little uncertain, so you never want to be holding millions of miles. But if there were a free market fixing the value of an AA mile, it would barely have budged from this stock market drama.
I disagree with your assessment of the economic benefits of an AA-US merger. I think there are real synergies, and US management would likely be brilliant in boosting the AMR network RASM (basically, by only flying where the airline makes money doing so). But I don’t see how LCC can get AMR’s costs down absent bankruptcy — and why on earth would they want to assume their pension liabilities? That said, US management is very financially savvy, so if there is a way, they’ll find it. If not, Doug Parker will just bide his time and wait to see if AMR goes broke.
while I totally agree that there isn’t any danger of liquadation anytime soon, I think it may be too optimistic to believe that our miles won’t be devalued in any way during the process. AA mile is most valuable already among all FF programs IMO, so any change will more likely to be bad. What if by any small chance AA merge with BA/IAG, and have us trade AA miles for BA miles or whatever it’s called now? Think BA will honor the lifetime status?
Oh man.. Do you guys remember the promos during the end of United’s bankruptcy period? Around the world, fly three get one free… ahh, memories.
I recall the sense of panic that existed when United filed its bankruptcy. Some of its flyers nervously burned their miles, but United and Mileage Plus emerged intact from the process. Apparently, Chase stepped in to support United during the process, as they deemed its credit card business with United to be financially vital. If American goes through bankruptcy, I do not see it impacting its operations or frequent flyer program. In fact, I think AA may offer some promos to entice people to keep on flying. Citbank may also assist them as their AA credit cards are a major business source for them.
Nice post, Gary.
debt holders take a “haircut”, not shareholders (equity)
I have booked business award travel (LAX-JFK-BUD-ATH & ATH-BUD-JFK-LAX) with American and Malev (BUD-ATH & ATH-BUD). But Malev Airlines has gone bankrupt and American doesn’t want to reroute me with another airline (Iberia through MAD is an option) because there’s no availability. What are my options? Do they have to give me another ticket?
Yes BUT
When American took over TWA, they called it an “asset sale” that left be without my lifetime elite status, my lifetime club status, my issued reward certificates, and the remaining miles although ‘transferred’ were revalued at a fraction of what they were worth before TWA had to close (because of Icahn raided all its assets)