What happens to your frequent flyer points if an airline goes bust?

While Virgin Australia may have escaped collapse, the news of it going into voluntary administration showed us all just how fragile the situation can get for airlines and their loyalty programs. Fees for extra baggage, snacks or another inch of legroom couldn't save the airline and neither could the lure of points and perks.

Unfortunately, any changes have an impact on millions of Australians who are members of one or more frequent flyer programs. Just last year Velocity reached a milestone of 10 million members (October 2019), while the latest figures from Qantas show its frequent flyer program has 12.3 million members.

Now, with our travel options more restrictive than a middle seat in economy class, anyone with frequent flyer points should be asking some serious questions about their value. Starting with: what happens if the airline goes under?

Airlines and administrators consider this carefully before sharing any details with frequent flyer members or the wider public. But generally, there are two main outcomes if something is going to change.

1. Your frequent flyer account and points could be sold

When Virgin Australia first went into voluntary administration, there were whispers that the Velocity Frequent Flyer program would be sold. In the past, there have been at least two instances of speculation about the Qantas Frequent Flyer program being sold too.

But one of the most interesting examples of this is Air Canada's Aeroplan, which was launched by the airline in 1984 and sold in 2002-03 when Air Canada was going through a turbulent period of losses. Then, in late 2018, Aeroplan was bought back by Air Canada (and others) for CA$450 million. This shows that frequent flyer sales don't have to be one-way tickets for airlines.

This brings us to the value of loyalty programs, which can be worth millions of dollars to the right bidder. The value is largely because of all the consumer data and insights they offer (this data still follows privacy policy regulations, so it's not too personal).

In an ideal scenario, the sale of a frequent flyer program wouldn't lead to too many changes. But, in reality, even if the program is set up as a separate entity to a failing airline (as was the case for Virgin Australia and Velocity); it is likely to limit your reward options. So for members of the frequent flyer program, a sale can lead to changes in the ways points are earned and redeemed - and the potential for points to lose value (also referred to as "point devaluation").

But it's unlikely you'll see a sudden drop in value. In a 2019 report on loyalty schemes, the Australian Competition and Consumer Commission (ACCC) said program operators should give members advance notice of changes and "a genuine opportunity to redeem their existing point balance". It also recommended they look at offering compensation, such as a boost to your point balance. So if there are changes and you feel you're being treated unfairly, you could complain to the ACCC.

2. The whole loyalty scheme could go down with the airline

This outcome is the one frequent flyer members dread. In the worst-case scenario, the points will be completely lost - meaning all the time and money you spent earning them was for nothing.

This was the case for Ansett frequent flyers, back when the former Australian airline went bust in 2002. At the time, the Ansett Global Reward program had more than 2.5 million members, with a collective total of 70 billion points. But despite the protestations of these frequent flyer members - including an attempted class action lawsuit - those points went the same way as the airline.

What can you do to protect the value of frequent flyer points?

Thanks to Bain Capital's bid for Virgin Australia, Velocity Frequent Flyer members can now use their points to redeem select domestic flights in Australia. This means there is still at least some way to get value from any points you've been saving up.

The Velocity website also says there are plans to open up more flight reward options in the future, including to New Zealand, Bali and Fiji, "when international travel restrictions ease".

But, with so much uncertainty around when travel could resume - or even what the future of travel will look like - it is worth taking stock of frequent flyer points you have with any airline loyalty program.

Option 1: Redeem your points now

If you're seriously worried about the value of your frequent flyer points while they're sitting in your account, using them now gives you a way to get some benefit from them. The downside is that your options may be limited (as is the case with Velocity Points) and you probably won't get as much value from points as you could when flights open up (flights and upgrades typically offer the best value for using points).

As an example, if you have 100,000 Velocity Points, you could use them now to book a future return business class flight from Sydney to Perth (71,000 points, plus carrier charges) or a Valentine's weekend at Peppers Noosa Resort (41,500 points per night). You can also redeem points for car hire with Europcar, with Velocity stating it will update members when reward options change.

Meanwhile, if you're not sure you want to hold on to Qantas Points, you have a few more reward options. With 100,000 Qantas Points, you could get $500 worth of Woolworths digital gift cards, for instance, along with merchandise from the Qantas Store. But when you consider 100,000 points is also enough for a return business class flight from Sydney to Auckland (83,000 points) or two return economy flights from Melbourne to Bali (40,600 points per person), the potential value of these points goes up. So it's worth asking yourself if you want to use the points now, just so you can, or if you want to save them until there are more travel options, or at least more certainty.

Option 2: Switch to a different loyalty program

If your "main" loyalty program earns you frequent flyer points, you could shop around for another option.

The key is to think about what you want points for. If you're keen to save on everyday costs, a program like flybuys lets you do that at Coles, Liquorland, Kmart and many other partnered brands - as well as offering a healthy number of ways to earn points.

If you want to keep your reward options more open, you could look at a credit card reward program. These usually give you lots of different ways to use points, including cashback and gift cards, money off shopping with select partners, merchandise and travel. All the major providers have their own loyalty programs, including American Express Membership Rewards, ANZ Rewards, CommBank Awards, NAB Rewards and Westpac Altitude Rewards, to name a few.

When you're looking at credit cards that offer these rewards: see if there is an online catalogue of rewards so you can get an idea of how many points you'd actually need (and how much you'd have to spend to get them) before you could use them. And consider the card's annual fee and interest costs. That way, you have a good chance of finding a program that actually rewards your loyalty.

Option 3: Stop chasing points

If the thrill of seeing your points balance go up has gone, it might be time to think about whether you really want to earn rewards any more.

For some people, the time and money spent getting points is part of the fun. But it's not always the most cost-effective option if, say, it means you spend more on an item just so you can earn points. In some cases, you could get more value by waiting for a sale and being loyal to the best deal available instead.

In the end, it's about deciding what is worth the most to you. If you still want reward points, great - there are plenty of options. Then again, maybe it's time to just be loyal to your local cafe, where a free coffee every now and then feels like a perk without any extra work.

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