What happens to airline credit card holders if the airline goes bankrupt?

Apr 28, 2020

This post contains references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. Terms apply to the offers listed on this page. For an explanation of our Advertising Policy, visit this page.

Reader Questions are answered twice a week by TPG Senior Points & Miles Contributor Ethan Steinberg.

The aviation industry is quite cyclical, with new airlines popping up and others going bankrupt on a semi-regular basis. Unfortunately, the ongoing spread of the coronavirus is creating unprecedented financial stress in the industry, and a number of airlines are facing the looming threat of bankruptcy if they can’t secure financial aid in the near future. TPG reader Andrew wants to know what happens to airline credit card holders in the event the airline goes bankrupt …

Given that airline bankruptcies are on the rise, what would happen to a cobrand card holder during an airline’s bankruptcy (and what happens to the miles they’ve earned). Richard Branson is claiming that Virgin Atlantic will go bankrupt without government support. If that happens, what would happen to Bank of America cardholders in the scenario?

TPG READER ANDREW

For more TPG news delivered each morning to your inbox, sign up for our daily newsletter.

This is a great question Andrew and one that many people are likely wondering about. Let me begin by saying that each bankruptcy is different, as local laws in an airline’s home country can affect the order in which different creditors are dealt with.

This question really has two parts, so let’s start by looking at the miles you earn on a cobranded airline card. While the miles are given to you by the issuing bank (in this example, Bank of America) as a reward for spending on your credit card, they are deposited directly into your frequent flyer account with the airline. This is why you can cancel a cobranded airline or hotel card without fear that your miles will disappear, as long as you make sure to wait until after your first account anniversary.

So far we’ve only had one major bankruptcy since the pandemic started, that of Virgin Australia. The airline entered administration (similar to bankruptcy protections in the U.S.) and almost immediately suspended redemptions in its Velocity frequent flyer program. Interestingly enough Velocity members can continue to earn miles, so in this case my guess is cobranded cardholders wouldn’t see much of a change. If a loyalty program were to disappear entirely, that would be an issue between you and the airline, not you and the bank, which held up its end of the bargain by issuing you miles after each monthly statement.

The second part of Andrew’s question has to do with the card itself, and again there are really two main options for what the issuer can choose to do here. The first is to close your account, a logical step if the product you have with them is no longer relevant. This can have a negative impact on your credit score, especially if it’s an older account, so you may want to preemptively reach out to the bank about product change options to keep your account open.

The other option is that the bank could convert your credit card into another equivalent product, a step for which there is significant precedent in the past. Most likely they would give you a “core” card that earns cash back or transferable points as opposed to selecting another cobrand partner to set you up with, but this has the added benefit of keeping your account open and letting you decide what to do.

Related: The best airline credit cards

Bottom line

If an airline goes bankrupt, there are really only two options for the bank issuing cobranded credit cards: close all the accounts, or try and keep the customers by converting their cards to another equivalent process. Each bankruptcy plays out so differently that it’s impossible to predict what will happen in a specific case, but hopefully this question will remain hypothetical for most people.

Thanks for the question, Andrew, and if you’re a TPG reader who’d like us to answer a question of your own, tweet us @thepointsguy, message us on Facebook or email us at info@thepointsguy.com.

Featured photo by Loop Images/Universal Images Group via Getty Images.

Chase Sapphire Preferred® Card

WELCOME OFFER: 80,000 Points

TPG'S BONUS VALUATION*: $1,650

CARD HIGHLIGHTS: 2X points on all travel and dining, points transferrable to over a dozen travel partners

*Bonus value is an estimated value calculated by TPG and not the card issuer. View our latest valuations here.

Apply Now
More Things to Know
  • Earn 80,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $1,000 when you redeem through Chase Ultimate Rewards®. Plus earn up to $50 in statement credits towards grocery store purchases within your first year of account opening.
  • Earn 2X points on dining including eligible delivery services, takeout and dining out and travel. Plus, earn 1 point per dollar spent on all other purchases.
  • Get 25% more value when you redeem for airfare, hotels, car rentals and cruises through Chase Ultimate Rewards®. For example, 80,000 points are worth $1,000 toward travel.
  • With Pay Yourself Back℠, your points are worth 25% more during the current offer when you redeem them for statement credits against existing purchases in select, rotating categories.
  • Get unlimited deliveries with a $0 delivery fee and reduced service fees on eligible orders over $12 for a minimum of one year with DashPass, DoorDash's subscription service. Activate by 12/31/21.
  • Count on Trip Cancellation/Interruption Insurance, Auto Rental Collision Damage Waiver, Lost Luggage Insurance and more.
  • Get up to $60 back on an eligible Peloton Digital or All-Access Membership through 12/31/2021, and get full access to their workout library through the Peloton app, including cardio, running, strength, yoga, and more. Take classes using a phone, tablet, or TV. No fitness equipment is required.
Regular APR
15.99%-22.99% Variable
Annual Fee
$95
Balance Transfer Fee
Either $5 or 5% of the amount of each transfer, whichever is greater.
Recommended Credit
Excellent/Good

Editorial Disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.