A Nonsense Rumor That's Spreading About United Airlines Bankrupcty - View from the Wing

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.

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• 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.
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• 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.
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• 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.