Where Do My Miles Go If American Goes Bankrupt?

Is American Airlines headed for bankruptcy? And if it is, should you be worried about losing your frequent flyer miles?

While the answer to the first question is "maybe," the answer to the second is "probably not."

The airline's deteriorating financial situation has been the subject of considerable recent reporting in the business press, and bankruptcy concerns have the company's stock trading at the lowest prices since 2003, falling 33 percent yesterday.

The problems have been a long time coming.

In 2005, several major U.S. airlines declared Chapter 11 and used bankruptcy protection to renegotiate lower wage-and-benefits packages with their unions. American opted to forego bankruptcy and, as a result, today finds itself with higher labor costs than its competitors.

According to Forbes, American's labor costs account for 31 percent of total costs, versus 22 to 23 percent for Delta and United Continental.

Attempts to negotiate new terms with the airline's unions have been unsuccessful.

Even as its costs remain unsustainably high, with no end in sight to the economy's swoon, there's no reason to expect an uptick in travel demand to push American back into profitability.

Chapter 11 - Protection

With no help on the horizon for either the cost or the revenue side of its business, American could be forced to reorganize under protection of Chapter 11 bankruptcy.

In a Chapter 11 scenario, the airline would continue operations more or less as normal while restructuring its debt and labor agreements.

As has been the case with other airlines in Chapter 11, there would be little or no effect on AAdvantage members' ability to earn or redeem their miles.

It's worth remembering that, for a two-week period in 2005, more than 50 percent of the U.S. airline industry's flights were operated by carriers in bankruptcy.

Chapter 7 - Liquidation

If American's problems prove insurmountable and the airline is forced into Chapter 7, liquidation, the AAdvantage program would almost certainly be sold to another major airline—it's one of the company's most valuable assets. In that case, program members would find themselves and their miles transferred to another program.

For background, when Eastern Air Lines liquidated in 1991, Eastern miles were honored in Continental Airlines' program. In that same year, when Pan Am succumbed, WorldPass members and their miles were folded into Delta's program.

More recently, when TWA called it quits in 2001 after three Chapter 11 filings during 12 consecutive years of losses, 14 million Aviators members and their miles were transferred into American's AAdvantage program.

Members of smaller programs haven't fared as well. When Midway, MGM Grand, National, and Aloha shut down, miles earned in their loyalty programs simply disappeared.

But American's 66 million AAdvantage members would represent an enormous marketing and sales opportunity for the likes of United, Delta, or US Airways. If they, and their miles, were for sale, one of those airlines would happily buy them. AAdvantage members would then find themselves in a new program, with a different name, but with their miles intact.

This article originally appeared on FrequentFlier.com.

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