I hate scaremongering and click-baiting. However, the whole Coronavirus situation is causing havoc around the world and airlines are feeling the brunt of it. These are unprecedented times, and as time goes on, global panic is destroying businesses around the world — a simple look at the markets can tell us this much.
I’m a big Virgin Australia fan; I love the airline, the crew and the service/product they offer. Their frequent flyer program is also pretty good, and for Australians, it’s easy to earn points via credit cards, shopping portals and from flying.
So what’s the problem you may ask?
Here’s the thing, Virgin Australia is a relatively small airline, and the current conditions are destroying the company.
If things go south (and I really hope they don’t), Velocity Frequent Flyer members will be the first to feel the impact.
Corporate Bonds And Your Points
To see how serious the situation is, we need to take a look at Virgin Australia bonds. If you’re not familiar with corporate bonds and how they can potentially impact your frequent flyer points. Here’s the low-down:
In short, companies issue bonds to raise capital. When you invest in bonds, you are lending money to a company or government.
In return, you get regular interest payments, called coupon payments. If you hold the bond until maturity, you get back the face value of the bond. Unless of course…the company who issued the bonds goes bust.
For the next part, I asked the opinion of a friend who is a trader and a points nerd.
Here’s what he has to say:
“In an attempt to quantify the riskiness of holding Velocity points at the moment, we can look to financial markets as a guide.
As point-holders, we are essentially unsecured creditors of the company (VAH). The holders of VAHHA, Virgin’s unsecured notes (investors who have lent money to Virgin), are in a similar position to us point-holders in the event of a Virgin collapse.
So how concerned are the note-holders? In short, very.
The notes in question (VAHHA) pay an $8 coupon (interest) per year and promise to repay $100 in November 2024.
The notes traded today below $48.
That is right; investors were prepared to accept less than half of the money back that they are owed in November 2024, as well as forgoing $8 per year in interest income rather than waiting to be repaid in-full.
Surely a telling sign of the market’s concerns regarding Virgin’s chance of survival.”
Learning from history
Those who do not learn from history are doomed to repeat it. At least that’s how the quote goes by George Santayana.
So let’s look back at some of the other airlines who had their frequent flyer programs collapse.
Air Berlin, a small airline with a compelling One World frequent flyer program. They went bust in 2017, and with it, their frequent flyer program ceased to exist. I personally had a few points in their program and redemptions, were the first thing to get blocked. In the end, I walked away with a small compensation after submitting an insolvency claim.
Remember Jet Airways? I sure do because the miles I purchased in the JetPrivilege program went to zero value overnight when the company collapsed. No compensation was given.
What can you do?
As the saying goes: don’t have all your eggs in one basket. If you’re currently holding a huge Velocity Points balance, now might be a good time to diversify. Thankfully, transferring points to Singapore Airlines KrisFlyer is instant (and a valuable way to use your Velocity Points).
Is this a sure thing?
Not at all! I hope Virgin Australia and its Velocity Frequent Flyer program survive this virus disaster. However, to think everything will be fine is just naive. At this stage, anything can happen!
Will my partner airline redemptions be safe?
If you have bookings on partner airlines such as Etihad or Singapore Airlines, it’s highly unlikely you will get to keep your booking in case the worst happens.
This isn’t a call for panic, but rather a heads up about what’s happening in the markets and how that reflects on points collectors like us. Personally I only have a small balance in Velocity, but if I did have substantially more, I would at least send 50% across to KrisFlyer as an insurance policy. Let’s all hope this whole shitstorm is over soon and airlines can re-bounce!