United Airlines, which knew the situation well, had already written down $700 million worth of debt down to $3 million. The Colombia-based carrier already ceased commercial flying two months ago and furloughed most employees. It is winding down its operation in Peru.
The bankruptcy is immediately driven by:
- $65 million debt payment today they were going to miss
- Failure to obtain a government bailout or other support
This is being widely blamed on the coronavirus crisis. That’s certainly true, but financial challenges predate the current pandemic. Last summer the head of the airline was caught on video acknowledging that the carrier was ‘broke’. They already planned for layoffs and a smaller fleet.
— Colombiaalaire.com (@colombialaire) August 26, 2019
In 2015 Avianca sold 30% of its frequent flyer program LifeMiles for US$343.7 million. LifeMiles is a separate company. However the value of miles in the LifeMiles frequent flyer program is intimately tied to the health of its associated airline.
It’s through Avianca that LifeMiles has access to Star Alliance award redemptions. When Jet Airways collapsed, the separate JetPrivilege program had little to offer members though it has valiantly rebranded as InterMiles.
I’ve warned against buying LifeMiles because of the risk that the miles would become worth less (not worthless) as a result of failure of the airline. Partner airline redemptions aren’t a hedge against bankruptcy, although there’s some chance if LifeMiles survives while Avianca does not, that awards issued on Avianca ticket stock will still be honored to the extend that LifeMiles is able to pay for them.
The advice with LifeMiles – which has a good award chart, no fuel surcharges, and sells miles cheap – has long been to buy what you need to use right away, not to invest in the program long term.
Chapter 11 bankruptcy does not mean an end to the airline. It means that existing equity and unsecured creditors take a haircut and there’s an opportunity to recapitalize the carrier. As long as the airline continues to exist and remains a member of Star Alliance with other members accepting its tickets then LifeMiles retain their value.
While United isn’t spending any money it does not have to at this point, they do value their Avianca partnership long term. It seems likely that some airline will emerge from Avianca’s bankruptcy, and that airline is far more valuable as a part of Star Alliance than outside of it. So I remain cautiously optimistic.