Virgin Australia is the biggest airline victim so far of COVID-19. It was a weak player to begin with – losing money for the last seven years during a time that has been good to the airline industry overall. It’s now in administration, after the Australian government declined to provide subsidies beyond paying for a limited domestic flight network.

The airline’s major investors – Etihad, Singapore Airlines, China’s HNA group, Richard Branson’s Virgin Group and a Chinese conglomerate which purchased Air New Zealand’s stake in the carrier – refused to provide additional cash even as Branson publicly argued that the government should be handing the airline funds. It continues to operated on a limited basis while restructuring takes place, looking for new money.

Virgin Australia Velocity Suspends Redemptions

Virgin Australia’s Velocity Frequent Flyer program has suspended redemptions even though it is a separate company and not included in the administrative restructuring. The frequent flyer program had been spun off in 2014, but reacquired.

The program’s 10 million members apparently had been redeeming points for “gift cards, electronic goods, and wine,” according to the airline, while members weren’t redeeming for travel. There was a ‘run on the bank’ as members questioned the viability of the program with the airline in trouble. Members were spending all their points worried about the program. Turns out they were right to be worried, since the program did this!

Implausibly the airline claimed “[t]his unexpected demand has made it difficult for our suppliers to provide these offers and limits the availability for all members to redeem their Points.” Since too many redemptions have “limit[ed] the availability for all members to redeem their Points” (cough) the program has decided to limit the availability for all members to redeem their points itself – by suspending all redemptions for four weeks, though they state that this period could be extended.

The airline’s administrator says they don’t plan to sell off the program, rather they intend to use it as a draw for additional capital for the airline – that the buyer of the airline gets the loyalty program. Of course if they cannot attract new capital for Virgin Australia, the strategy changes.

Turning off redemptions, though, reduces trust in the program and thereby reduces value in the program. It risks becoming a mailing list of prospects, rather than a loyalty program that drives business. Members accumulated points, but they’ve learned those points have no enduring value at the whim of administrators.

No Value To Virgin’s Miles Without Virgin

Virgin Australia Velocity had redemption costs, but little revenue, during this period. They’re pausing the expiration of points while members can’t redeem them, but whatever earn activity had been occurring will certainly cease.

So what happens to Virgin Australia Velocity? If the airline survives, the program survives. If the airline doesn’t survive, assume that the miles become worth very little. As an independent program it won’t have much value to offer.

• air berlin’s topbonus program was a separate company but folded when the airline did. That’s because the biggest asset the frequent flyer program had was a receivable from the airline. The airline had been awarding miles for flights, but not paying for those miles.

• On the other hand the Jet Airways JetPrivilege program was also a separate company when its associated airline went under. The program remained solvent, and renamed itself InterMiles. It’s just that there was no value without an airline on which to offer flight awards at the saver level, and without that airline’s flight partners.

The continued connection and associated risk from the original airline is one reason why spinning off frequent flyer programs turns out to be a bad idea.