Avianca Declares Bankruptcy. What Happens To LifeMiles?

Two and a half weeks ago I warned that Avianca seemed likely to file for bankruptcy. Now it has filed in the U.S. Bankruptcy Court for the Southern District of New York.

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.

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.

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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  1. Why would a Colombian company file for Chapter 11 bankruptcy in New York? And ask the Colombian government for a bailout. Shouldn’t the Company file for bankruptcy in Bogota? Is this the mistake AirBerlin did?

  2. I know you stated that tickets booked with LifeMiles on partner airlines might still be good as long as Avianca has the means to pay those partners…but that begs a more general question: when I book a partner award (through any airline’s program) for some date in the future, when does an airline actually “pay” the partner airline for that ticket? Is it at the time of booking? Day of the flight? After the flight(s) has been taken and the ticket(s) redeemed?

  3. Long before COVID was considered an issue, I used LifeMiles to book a November flight from BKK to ORD on ANA in Business/First. I obviously don’t want to lose the miles, but also don’t want to get to Thailand and find myself unable to get home. Any thoughts on when we will have a better sense on whether the ticket will be honored?

  4. Should I average down on my 249,000 miles by purchasing their debt at .01?

    Isn’t this an opportunity for AA to gain valuable markets to beat back Delta?

    Next, I’m waiting for my VS miles to become worthless.

  5. @Mike That is a process called interline settlement, and it occurs after the last flight segment is completed, often as part of a monthly batch process.

  6. @ABC – I’m curious about all that as well. In the linked Yahoo article it also notes “In parallel to its Chapter 11 filing in the United States, Avianca said it intends to begin winding down operations in Peru pursuant to local laws.” Avianca Holdings, SA is headquartered in Panama and is a subsidiary of Brazilian-based Synergy Group.

    Does a company file bankruptcy and similar proceedings in every country in which it does business and/or has creditors? I have zero knowledge about such things.

  7. As it relates to when a ticket is ‘paid for’ by Avianca to the partner airline (assuming there is no special service set up for *A redemption tickets) it would most likely use the IATA inter-airline settlement service which substainlly all carriers use for inter-airline settlement. Tickets are submitted for payment after the ‘coupon’ (or in this case the segment) is flown. Depending upon the region, IATA settlement is generally 14 days after submission – once a week (when last I looked at it about 3 years ago). So as an example, fly on May 10, the Operating carrier submits to the settlement service say by May 17, and then settlement would be on or about May 31.

    Airport services performed by one airline for another are also settled via this same process on a net basis. (So for example Cathay Pacific in normal times might owe for example $50,000 weekly for ground services AA provides it at JFK. This will be offset by lets say $180,000 of award tickets AA issued and where flown on CX for award tickets that week. On a net basis then AA would settle in 14 days after presentment for $130,000 net of the ground service fees. (On a practical basis there is one net settlement by an Airline with IATA which nets across all airlines – but the example above explains the principle.)

    So really what it comes down to is when IATA decides Avianca can no longer participate in it’s settlement service. In normal times that would typically be when the airline ceases flying. Given the current situation it may be driven by their available settlement accont balance vs. their typical net settlement amounts weekly or based upon what the Bankruptcy court actions.

  8. Thanks, Mike, for that explanation. It helps me understand why an award ticket would not be honored even though I “paid” for it months ahead of time, should the issuing airline go belly-up in the meantime. I’m sitting on a bunch of LifeMiles that I had hoped to use for a trip to Thailand (like a few other posters in this thread!) later this year, but I hadn’t actually found flights I wanted. And now I’m not even sure I would book and rely on them even I could find availability.

  9. I actually was an advisor on an earlier Avianca financial restructuring. As was the case last time in 2003, the company filed for bankruptcy in the United States because the US has a very well established bankruptcy legal framework and is relatively debtor friendly. At the time I worked with Avianca many years ago, the Colombian bankruptcy legal framework was very new and hadn’t been tested in such a large case with so many foreign creditors. Furthermore, Many of Avianca’s international obligations (e.g., leases, debt, etc.) are governed by US law. There may be a parallel proceeding in Colombia but most of the work will be done within the US system.

  10. I get a good chuckle how in many articles you start with “I told you this would happen 2 weeks ago, and, surprise surprise, look it happened”. For fun you should do a post about the things you predicted that DIDN’T come true (if this even exists)

  11. So airlines only get paid for the partner award ticket on/after flying date? Not the confirmed/ticketed date?

  12. So my parents are stuck in ecusdor awaiting the end of this virus while waiting for avianca to provide for their flight back….what would happen to my parents flight now that they’ve declared bankruptcy will avianca still provide their return flight or what’s likely to happen ?

  13. what would be great is if someone flying on an a LifemIles ticket on a partner say ANA could tell us whether there were any issues in using that award ticket.

  14. @Gary. Saw your Skype video outake on “recapping” airlines. It was an Alijazeera news bite on the FireTV News app.

    While your one of the few bloggers that is an industry expert. It is kinda of funny how often I’ve recently read blowhard bloggers (TPG) interviewed as aviation industry expert (business end) during the COVID crisis.

  15. Interesting on how miles award works.

    However, how do redemptions for hotels work? Wonder if it’s safe to use Lifemiles to do a hotel reward, if the hotel gets paid in advance and has no basis for rejecting a future stay?

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