When your air miles go belly up
By Salvatore Caputo • Bankrate.com

If you're a frequent flier, what can you do to preserve the miles you earned on a failing airline?

Chances are good that you will want to answer this question sometime soon. The industry is reeling from declining traffic and spiraling costs.

"We've never had a situation anywhere close to this one where not just one big airline but a bunch of big airlines are in serious financial trouble," says Ed Perkins, a consumer advocate and founding editor (retired) of Consumer Reports Travel Letter.

U.S. carriers that have been particularly hard hit include:

• Hawaiian Airlines, which filed for Chapter 11 bankruptcy protection for the second time on March 21.
• United Airlines, which entered Chapter 11 in December. Some industry scuttlebutt says liquidation is being seriously considered.
• American Airlines, which was threatening to file for Chapter 11 if unions didn't agree to certain concessions. Even with concessions, American's condition remains shaky.
• Delta Airlines, which lost $466 million in the first quarter of this year, up from a loss of $397 million in the same quarter of 2002.

The situation may imperil billions of unused frequent-flier miles. For instance, American Airlines' AAdvantage program has more than 45 million members worldwide, and United's Mileage Plus program has 41 million. Estimating that the air miles currently in circulation are worth $500 billion, The Economist magazine labeled frequent-flier miles as the second biggest "currency" after the dollar.

Bailing out
Concern about the industry's situation forced the suspension of one long-standing form of protection, AirGuard. This membership program (often mislabeled as insurance but, unlike real insurance, no policies are issued and no cash claims are paid) honors frequent-flier miles when a carrier goes out of business and that carrier's frequent-flier program is not absorbed by another carrier.

AirGuard was itself insured by a London company that would pay it for any losses it incurred to honor mileage claims. In light of the current airline industry turmoil, the insurer braced for the possibility of major claims by AirGuard by drastically raising the premium, says Randy Petersen, president of AirGuard.

"The premium is too expensive for us right now, but we're still going round and round with them," he says. AirGuard is not accepting new members now, but claims by existing AirGuard members will still be honored.

The easiest way to protect the value of your miles would be to sell them, but that would be wrong. Frequent-flier programs prohibit that. Even though there are brokers willing to sell award tickets for you (they can't do anything at all with miles sitting in your account), if someone else is caught with your award ticket, it will be confiscated and your frequent-flier account permanently frozen. That's not a good tradeoff for a quick fix.

To squeeze some value out of those unused miles, consumers have three options:

• Use them up while the carrier is still flying
• Convert them and redeem them elsewhere
• Hang onto them and use them whenever it's convenient

Burn, baby, burn
Even when the industry was not shaky, Perkins says, the best strategy has always been to use up the free miles. "Burn your miles? I'd say unequivocally yes, that's always been the case ... Frequent-flier miles do not improve with age. That's been true forever."

Programs have seen a "steady drip, drip, drip" eroding their benefits, he says. "So under any circumstances you're better off using than holding them."

And the best strategy for burning them?

"The highest and best use of frequent flier miles is for air travel," he says.

However, many people can't redeem the miles from the carriers as fast as they can earn them, says Petersen, who is CEO of a number of travel-related businesses besides AirGuard, including Inside Flyer magazine.

"In the original frequent-flier programs, you could only earn miles by flying." There were no partners offering miles for hotel stays or credit card purchases. "Now, you can walk out your front door and earn miles ... We've become spoiled because they've made it too easy to earn miles."