LifeMiles’ credit rating is downgraded, outlook “negative”

LifeMiles, the mileage program for Colombian-flag carrier Avianca, has become a favorite among award travelers for its reasonable valuations and generous mileage sales. As a member of the Star Alliance, LifeMiles members have access to award tickets on United, ANA, Lufthansa and Swiss, to name a few. However, like most companies in the travel industry, Avianca and LifeMiles have been hit hard by the COVID pandemic and subsequent flight groundings.

Separate Companies…

Avianca and LifeMiles have a fairly unique business structure. In 2015, Avianca sold 30% of LifeMiles to Advent International, an American private equity firm. Avianca retains a majority 70% ownership share of LifeMiles, but the companies operate independently.

Although there have been calls for airlines to spin off their mileage programs, we haven’t seen this happen often. Air Canada spun off its Aeroplan loyalty program in 2002, and the results have been mixed, at best. Although loyalty programs can fetch large investments – Advent paid $344 million for their stake in LifeMiles – they are also huge profit centers for airlines and are often more valuable to an airline as an integrated business unit.

…but, interdependent

Although Avianca and LifeMiles are separate companies, they are both tightly intertwined. When a passenger earns miles on Avianca, the airline must purchase these miles from LifeMiles, and these miles are recorded as a liability on LifeMiles’ books. Avianca-branded credit cards are also a key source of revenue for LifeMiles. Every mile that is earned from spending on an Avianca credit card must be purchased from LifeMiles. In total, about 80% of LifeMiles’ revenue comes from Avianca or Avianca branded products. Credit cards accounted for 49% of revenue, while Avianca directly accounted for 26% of LifeMiles’ revenue.

Avianca Bankruptcy

Avianca has been hit hard by COVID. The airline was already struggling before the pandemic hit, and in May 2020 Avianca filed for Chapter 11 bankruptcy. Most of Avianca’s fleet has been grounded since March 2020, and it’s unclear if or when the airline will resume normal operations

Although Aviana is a separate company, LifeMiles will still be impacted heavily by the airline’s bankruptcy. Avianca’s groundings cut off a significant portion of LifeMiles’ revenue, since the airline doesn’t buy miles from LifeMiles when its planes are not flying. The financial instability of Avianca threatens LifeMiles’ credit card revenue as well. Holders of Avianca-branded credit cards are less likely to use these cards with the airline’s future in doubt.

LifeMiles will almost certainly be worthless if Avianca is unable to emerge from bankruptcy. Without Avianca, LifeMiles loses a key source of revenue and simply does not have a sustainable business model. Avianca’s partners will also quickly sever ties with LifeMiles; there’s little incentive for Avianca’s partners to allow LifeMiles award redemptions if LifeMiles doesn’t have the cash to pay for these redemptions.

Bank Run

LifeMiles members should also be concerned about the future of the company as global travel picks up. A run-on-the-bank situation is likey as LifeMiles members, worried about the future of the company,  rush to redeem their miles for partner award travel. This, combined with the ongoing grounding of Avianca flights would mean cash pours out of LifeMiles, but little comes back in. LifeMiles only has enough cash to cover 2.6x its debt, and if the company doesn’t have enough cash to pay airlines for travel, LifeMiles as a mileage currency is worthless.

Moody’s Downgrade

This sentiment was echoed by Moody’s Investors Service, one of the “big three” credit rating agencies. On May 20, 2020, Moody’s downgraded LifeMiles to a Caa1 rating with a negative outlook. The Caa1 rating means that LifeMiles’ debt is considered “poor quality” and the company is a “very high credit risk”. Debt with this rating is often referred to as “junk bonds”. The rating makes it difficult and more expensive for LifeMiles’ to obtain debt because its ability to repay that debt is uncertain.

According to Moody’s:

LifeMiles’ downgrade to Caa1 reflects its exposure to the weak credit profile of its controlling shareholder Avianca Holdings, S.A. (Avianca) which announced that it has filed for Chapter 11 protection on May 10. The Caa1 rating also incorporates our expectation that LifeMiles’ operation will be temporarily hurt by the global spread of coronavirus affecting consumer spending, traveling and economic growth.

The Caa1 rating is not necessarily a death knell for a company, but it can signal bad news to come. JC Penny had a Caa1 rating in May 2019, just a year before its bankruptcy, and the credit rating of Hertz was actually better than Caa1 just two months before its bankruptcy filing.

About Those Blogs Pitching LifeMiles

It’s been disappointing to see that many blogs have continued to push LifeMiles on unsuspecting travelers, even as the company’s financial position deteriorates. The reason for this is simple: LifeMiles is a huge advertiser on travel sites.

One of the worst offenders here is The Points Guy. In its article about Avianca’s bankruptcy, the site emphasizes that LifeMiles is a separate company and insists that “your miles are probably safe”. As recently as June 2020 The Points Guy was still hawking LifeMiles mileage sales. The site’s article titled “Everything You Need to Know About Avianca LifeMiles, published on June 7th, 2020, hypes the various redemption possibilities for LifeMiles, while not even mentioning Avianca’s bankruptcy. Not surprisingly, the site did not report on LifeMiles’ credit downgrade.

What’s Next?

The next several months will be critical for LifeMiles. The company’s future is not bright if Avianca is unable to resume flights and emerge from bankruptcy. With the company’s future uncertain, holders of LifeMiles should try to redeem their miles as soon as possible. I expect that LifeMiles will offer increasingly attractive mileage promotions as it approaches insolvency, but needless to say this is a risky investment.