When your air miles go belly up

For example, American says that 6.4 million AAdvantage members earned more than 95 billion miles through companies other than airlines in 2002 alone.

Mile conversion
That's why the "highest and best use of frequent-flier miles" isn't always practical. The other alternatives for burning miles include converting miles to points and then back to miles with a more financially sound carrier. This option is available in two non-airline programs: Diners Club's Club Rewards and Hilton's HHonors Rewards Exchange.

Ten airlines, including American and Hawaiian, participate in the HHonors Rewards exchange, allowing the points-to-miles-to-points conversion among all 10. However, these exchanges come at a price. For the most part, 5,000 miles earns 10,000 HHonors points. (Kilometers from Lan Chile and miles from Virgin Atlantic are exchanged at a 1-to-1 ratio.) Converting the points back to miles erodes the value considerably. For all but Lan Chile, you get 1,500 miles for every 10,000 HHonors points. Essentially, you've traded 5,000 miles for 1,500 miles. (In Lan Chile's case, you get 6,500 kilometers for every 25,000 HHonors points.)

Only two airlines allow you to convert their miles into Diners Club Rewards points.

"Consumers can convert miles with United and American at a 1-to-1 ratio into Club Rewards points," says Ashley Miller, the program's North America director.

The points can be converted back into miles with the program's 24 other partner airlines, but at a 2-to-1 ratio so that 10,000 Club Reward points becomes 5,000 miles. There's also a handling fee for converting points to miles. Miles in those other 24 partner programs can't be converted to Club Rewards points.

Because of the value lost, Perkins slaps a big "L" for loser on the miles-to-points-to-miles strategy. When you can't burn the miles with the original carrier, he says it makes more sense to convert to the points in any loyalty program that allows it and get the full value of the points, if not the miles. For instance, Miller says her Club Reward points can be used to purchase more than 800 items, from gift certificates to brand-name merchandise.

Add MilePoint.com to the mix, as well. This online membership site allows you to trade miles from seven participating airlines, including Delta and Hawaiian, "for savings on leisure-related purchases -- specifically cruises, resort and condo stays, experiential vacations (spa, golf, adventure trips, etc.) and magazine subscriptions," says Peter Brennan, MilePoint's chief marketing officer.

Using your miles in this fashion, Perkins says, "Historically, you get about half the value."

The do-nothing option
Petersen and Perkins agree that history shows that frequent-flier miles don't disappear as a rule, but that the risk of losing miles if an airline fails is real. So doing nothing is a viable option with an unknown risk.

"There is real risk out there," Petersen says, pointing to the cases of Ansett, an Australian carrier that could find no one to buy or bail out its business and so ceased operations in September, 2001, and National, a small carrier out of Las Vegas that was ordered into liquidation on April 14 after spending two of its 3.5 years of existence in Chapter 11. All the frequent-flier miles were lost. But, neither was a major U.S. carrier.

Petersen's AirGuard was set up to respond to the collapse of the original Midway Airlines in 1991 when 700,000 frequent fliers lost all their miles. So there is a risk in doing nothing, but Petersen still advocates holding onto miles rather than trying to burn them just to use them up before a carrier goes belly up. He is so sure of this advice he admits that despite holding thousands of miles of his own, he's not even a member of AirGuard.

That's because most carriers such as America West and US Airways, which recently emerged from Chapter 11, continued their miles programs without a hitch through their respective bankruptcies. United and Hawaiian mileage programs are still in place, as well.

"Even when airlines have gone out of business completely, there are comparatively few cases where people flat out lost their frequent-flyer miles," Perkins says.

In most of those cases, pieces of the extinct carrier were acquired by other airlines, which honored frequent-flier miles to win over these customers, he says.

Petersen points out that in some circumstances the carrier's failure can be your gain. TWA, which was unable to emerge from bankruptcy, was bought by American. The stronger airline folded TWA Aviator miles into its AAdvantage program.

"Those miles got more valuable because TWA was a shell of an airline," Petersen says, and miles in the AAdvantage program qualify for international routes and a host of other options unavailable from TWA.

However, the opposite is also true.

"They're talking now that United ... may face liquidation," Perkins says. "Looking at it through a cloudy crystal ball, even if United is forced into liquidation, (through acquisition) there will continue to be some entity called United Airlines ... and to retain as much customer goodwill as possible, such an operation will continue to honor United frequent-flyer miles."

However, he expects that such an operation would be considerably smaller and thus devalue the current United miles.

"I would be hard-pressed to say that history is a reliable guide (of what to do with imperiled miles)," Perkins says. "It may have something to teach us and that's that frequent fliers are a valued asset ... but the fundamental answer is that nobody knows."