mahasamatman

There is no precedent for the scope of what's happening now, but historically, no frequent flier miles have ever been lost to bankruptcy.

RangerNS

See: https://www.flyertalk.com/forum/air-...es-coming.html for analysis.

Yes, in the sense that we also would all die if there was an extinction level asteroid hitting the earth.
and
No, in the sense that even a bankruptcy would protect creditors, including aeropeso holders, so they might be devalued, but not to $0. In the mean time, AC has a lot of cash, a lot of planes and relatively little debt, and would likely get government help to bridge any likely gap, and post-this they will want to return to normal as quickly as possible, including filling empty seats by having you use up aeropesos.

Adam Smith

That was a risk even before AC bought Aeroplan. If AC had gone down when the two were separate, it could have attempted to disclaim or renegotiate the Aeroplan contract. In that event, you might not have lost all your miles, but lost the ability to redeem them for flights on AC or had them significantly devalued. Or a rush by people to redeem their miles with a crisis looming at AC could have caused a run on the bank and forced Aimia in to insolvency as well.

As for what might happen now, I expect the miles would be maintained, albeit devalued somewhat, as long as the airline went through a restructuring (reorganize, cancel some debts, but keep operating) rather than a liquidation (shut everything down, sell off assets to raise cash to pay creditors). See this post for detailed analysis, as well as others in that thread.

I wouldn't lose sleep over it.

Not true. Some airlines have shut down and gone in to liquidation, especially in Europe. Those miles have likely been lost or become worthless. I believe holders of Air Berlin miles lost out quite substantially when it went under.

In North America, FFPs and miles were maintained through insolvencies by AC and the US3 (and their predecessor entities) during insolvencies in the last 20 years, so the precedent here is much better than in Europe.

Holders of Aeroplan miles aren't normal creditors, who are typically owed a certain some of money. AC has a financial liability accrued on its books for future points redemptions, but that's not the same as points holders having claim to a specific sum. AC has the right to change the terms and conditions of the Aeroplan program whenever it wants, without recourse to an insolvency process. It would be smart for AC to devalue the miles before an insolvency, in fact, to simplify their lives. Then during the insolvency, they simply state that they'll leave the Aeroplan program unchanged.

So Aeroplan holders really aren't protected by an insolvency. But, as I said above, I expect they'd make it out okay.

RangerNS

Thank you for the technical clarity. Further to that, (And maybe for the other thread), what would you say the interaction of the retail banks funding the acquisition (for their obvious selfish purposes more than direct cash ROI) be?

Adam Smith

CIBC, TD, and VISA Canada have their own contract with AC for funding the acquisition of Aeroplan and their continuing card arrangements. Amex didn't participate in the funding, but later joined on to continue their partnership post the re-launch. I don't think the AC/CIBC/TD/VISA agreement has been published anywhere, but it's reasonable to expect that the banks negotiated certain conditions for the Aeroplan, and what changes AC could and couldn't make to the program, to ensure that the program would still be attractive to their customers and that they could recoup their investment in acquiring Aeroplan.

Ordinarily, they would have recourse to that contract, but if AC became insolvent, it would likely attempt to disclaim that contract as well. For what it's worth, prior to AC's first insolvency, they had an exclusive arrangement with CIBC to issue Aeroplan credit cards, which was very lucrative to CIBC. AC used the restructuring process to leverage significant concessions from CIBC (here's a Globe and Mail article from early on in the process), including an up front payment, an increase in the per-mile price for points, and a relaxation of its exclusivity (this is when Amex first became an Aeroplan card issuer). The details are described in the blurb below from CIBC's Q2 2003 results.

Note that back in 1999, CIBC had made a large up-front payment to AC to help with the whole Onex/Canadian bunfight and in return got an exclusive 10-year contract with Aeroplan, so AC certainly would have precedent for throwing a financial partner under the bus even after it had been so helpful not long ago

Stranger

Right. Points get very loose. :-)

RangerNS

A good summary (and historical conclusion) for those of us not versed in accounting and industry minutia.

StanCA

MY friend lost over 3 million points on Eastern airlines.

that was his retirent travel.

PB53x11

I think your starting position - that AC isn't going to get a cheque for doing nothing - is the first issue. As noted, AC has essentially been told by the government to drastically reduced its business, for the greater good. So I think that it - and many other businesses - will be given some direct compensation to help them not go under, effectively as partial compensation for the government shutting them down (to a significant degree, not zero) - i.e., they will be given a cheque for doing nothing. $X million per month, for instance. The challenges will be, what is X, and how does the government do this in a fair manner? I think the various airlines should be treated proportionately, but what about hotels, restaurants, etc.? How much do they get per month? Many will still be losing money, but hopefully not to the point they go under.

Then to the term sheet itself, LIBOR + 5% seems too high, given the environment. Perhaps LIBOR + 2%. My guess is that the environment for air travel is going to be challenging for an extended period of time, and I don't want the interest expense to be crushing. Other than that, I have no objections to your term sheet. (Meaning that though I said I thought your term sheet was too harsh, I really should have said the combination of your starting position and your term sheet are too harsh.)

I'll acknowledge that my first paragraph is the real point of differentiation and from a political perspective drives a lot of emotion. The current federal government is all about the middle class, and providing support for big business, I think, goes against their grain. But I think it will be necessary to support many businesses, big and small, or the economic fallout could be even worse than it's otherwise going to be.

Admiral Ackbar

That is the reason the mantra on these forums has been earn and burn for decades. Multiple stories like this of people hoarding millions of miles for a trip of a lifetime/retirement only to be hit by devaluation/bankrupticies/availability woes

One of the reasons I haven't cancelled a trip to Japan this summer, don't want 300K points in my account, would rather use it (if safe of course).

Adam Smith

I think the challenge with the money for nothing approach is that many people will soon be struggling financially in a big way. While it may be important to keep certain parts of the economy from going under completely, I think that handing large corporations, many of which have been (until recently) very profitable, free money will be politically unpalatable to the government. Just look at the number of people in this thread who have talked about wanting to see AC go bankrupt before it gets a dollar of taxpayer money

Perhaps it would work better to give AC some sort of payment for continuing to run the flights that it will be doing over the next few weeks - for instance, if AC only sells 30% of the seats on its flights, have the government top them up as though AC had sold the seats to an 80% load factor, let's say. Kind of like the Essential Air Service program in the US. That could be done outside the framework of the bailout, and it could be sold to taxpayers as a cost to maintain a vital service at a time of need. It might end up with a similar result as handing them a fixed sum every month, but probably easier for voters to swallow.

The extra 3 percentage points really wouldn't kill AC, but I also made that term sheet pretty light on restrictions, only the dividend/buyback limitation. If AC were willing to provide certain guarantees on staffing levels, reduced executive compensation, maybe refund policies, etc, then I think that lowering the interest rate would be justifiable. The US airlines actually came out with a well thought out proposal on that yesterday or this morning (i.e. willing to attach some substantial strings to the bailout money they're asking for), I think, which hopefully will put AC in a better frame of mind. Although I don't think they were offering the government any equity upside.

I'm really not sure that the previous federal government would have felt any differently about it. But yes, the government is going to have to support a lot of businesses to prevent utter economic ruin. The Danes have actually taken a very interesting approach. Rather than bailing out specific companies (like AC) or sectors (like airlines), they're trying to underwrite the entire economy. It's incredibly expensive, but given the widespread damage this is causing (as you've pointed out above), I wonder whether it may be a more effective approach than going company-by-company or industry-by-industry. That being said, our government certainly appears to be going down the latter path, so we'll probably see something for the airlines fairly soon.

Bartolo

inaccurate. I lost all my Aloha miles when they went under.

YEG USER

I was just reading another forum (avcanada). Sounds like pilot layoffs have started. For now it appears to be any recent hires who have yet to complete ground school. That is 162 pilots. Early retirement being offered to another large number of pilots. Likely more to come...

24left

@YEG USER

Indeed. I've followed that forum for some time. The AC layoff thread that was started on March 18 has been an interesting discussion. There were also threads for other topics that are actively discussed here.

YEG USER

The story is now on the CBC...

https://www.cbc.ca/news/business/air...lots-1.5507945