A Nonsense Rumor That’s Spreading About United Airlines Bankrupcty

Over on FlyerTalk there’s discussion of rumored United Airlines plans for bankruptcy.

I was stunned to hear some details of discussions between lead banks and many of the airlines, including United, about potential reorganization plans if bankruptcy filings are necessary.

…Plans as I’ve heard including more intensive “give-backs” from the unions, never a pretty sight.

But the item that caught my attention more was as “demand” from the banks that the airlines plan to “sweep all the unredeemed frequent flyer miles” from their balance sheets! This combined with an “overhaul” of the plans, which banks consider too generous. As I understand several draconian restructuring items have been raised during discussions between Treasury and the airlines.

A draconian measure that was never even contemplated during previous bankruptcies. With billions (trillions?) of unredeemed miles on their books the most frequent flyers would likely take much of the hurt from this idea.

Now it would be actually be shocking if there haven’t been discussions at each U.S. airline around what a bankruptcy filing might look like. Chapter 11 bankruptcy doesn’t mean ceasing operations. It means freezing obligations and restructuring its debts. And one of the things that would be looked at in any bankruptcy is the airline’s labor contracts.

American Airlines mechanics, for instance, just ratified a new contract with 91% in favor after a long, acrimonious summer because they know perfectly well that they’d never get the same sort of deal in the current environment.

However the specifics of this rumor are utter nonsense. When United filed for bankruptcy 18 years ago it received significant debtor-in-possession financing from its credit card partner. MileagePlus, after all, was the most profitable part of the business at the time, and it’s been far more profitable in recent times. Reportedly United has been in talks with Chase about pre-selling hundreds of millions of dollars worth of miles.

Chase is going to be at the forefront of any discussions around bankruptcy. There’s no world in which Chase would require United to walk away from its loyalty program obligations, undercutting its own portfolio of co-brand MileagePlus cards. And there’s no reason why United would walk away from the most profitable part of their business, the loyalty program.

There’s a reason that standard practice in airline bankruptcies on day one is to re-affirm the a frequent flyer program’s mileage obligations.

  • Airlines are going to need their best customers to successfully revive their businesses. United has generated enough ill will refusing refunds for cancelled flights, decimating their mileage program and chasing away customers with the potential to purchase an outsized portion of travel in the future is a non-starter.

  • Walking away from mileage balances would chase away customers from co-brand cards. There’s no reason to accumulate United miles if mileage balances aren’t secure, and no reason to accumulate more miles in a program that’s even less valuable than United’s is today.

  • Marketing spend will be more important than ever for a business that isn’t selling out all of its product. Expect more generous frequent flyer promotions in the near-term, not devaluation.

It’s standard good practice to game out scenarios like bankruptcy for airlines suddenly struck with almost no revenue while retaining significant cost. However they’re nowhere near that point. Recall that federal bailout money is being parceled out in chunks, including through the summer, so no such filing is imminent with United or the other major carriers. Each has continued to access private liquidity markets, even as federal subsidized loans remain on the table.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Someone on Flyertalk back in Dec or Jan was talking about AA filing for Chapter 11… Makes sense for any business right now to be looking into every option. UA just dumped a huge loss with many misc. items just to clear out the books and reduce or eliminate any taxes for the time being. AA might do similar, surprised DL didn’t but they might next quarter.

    The web is full of idiot who don’t know what they are talking about especially when it comes to business. AA, DL and UA aren’t going to change their business plans based on some nameless, faceless person who types on a blog or comments on one. If they would, I would truly question their management.

    Good God people, Flyertalk for business advice. . . I should have just wrote that!

  2. United just raised $1B in an equity offering. I think those new / existing shareholders would have done their due diligence before participating. In 6 months who knows but bankruptcy imminent is false.

  3. Let me give a shot at this. At the end of the day, I am inclined to believe the frequent flyer programs are too valuable to be liquidated.

    However, if the airlines are in violation of bank covenants (and I am busy to check), the relationship line (and remember these loans are most likely syndicated, and many banks are probably involved) might have sent the loans to workout groups. People in workout groups play hard ball and are likely to discuss all sorts of scenarios as a way of putting pressure on the borrower. And visa versa.

    Further, if the airlines are trying to sell points to shore up liquidity, I am guess both the banks and the airlines are threatening worst case scenarios as a way of getting a better deal. The banks have the airlines between a rock and a hard place. Well, the airlines also have the banks in a hard place, because the banks probably stand to lose a lot of money (and be capital constrained) if the airlines stop operating as well.

    And I have not even gotten to bond covenants.

    So at the end of the day, going on previous Chapter 11s, I am thinking that Gary is right. However, I am guessing that these conversations are going on in the background and are not just crazy rumors.

  4. Related sidetrack on banks purchasing points. If a bank (other financial institution or anybody) thinks that an entity, such as an airline, might declare bankruptcy, then that bank has to be very careful what types of transactions it does with the entity. Why? because any contract it signs with the entity might be seen as preferential, and be immediately voided in bankruptcy court (read, general claim against the entity behind all secured claims, but no cash or points). Given that the airlines all might still go into bankruptcy, despite any bailouts, I am guessing no bank would be willing to pre-purchase a large amount of points. However, once the entity goes into bankruptcy, if a bankruptcy judge approves the sale, then the bank can make it, because that sale would have preference over other claims (even secured ones) against assets.

    Given the tricky nature of bankruptcy law, I am guessing every bank is working with their workout group on any (and I do mean any) transaction they make with the airlines for the time being.

  5. Not quite as stupid as something else I heard in public today…but really illogical and seems almost parody.

  6. Banks know what the total debts of companies are and how the cash flow is and how resilient the business is . I think a lot of workouts are coming.

    Right now , we all know that most airlines have high debt levels from buying aircraft , no cash coming in because they are grounded , so survival really depends on how large their cash reserves are and how much cash the respective government or shareholders can pump in .

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