Colombian flag carrier Avianca failed to timely file its 2019 annual 20-F report with the SEC. They explain this is because their auditors have ‘substantial doubt’ as to their ability to continue as a going concern. They plan to file their report in June, and include this caution.
The airline is currently in default on debt covenants. United Airlines disclosed that it expects to lose $697 million of the $700 million it has lent to Avianca.
In a 6-K filing Avianca says their problems are driven by the coronavirus crisis, and 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’ve 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 would not buy LifeMiles at this point. However there’s little that can clearly be done to protect LifeMiles in your account. 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.
That said I do think – despite warnings from Avianca’s auditors – that the airline will continue even if going through bankruptcy. As long as it remains operational, LifeMiles should be safe and retain value. And since United values their Avianca partnership long term, and has already written off the value of its loans, it seems unlikely that they would be the ones to force the airline into bankruptcy.