A week ago airberlin filed for insolvency, after Etihad withdrew their financial support. In the US when companies file for bankruptcy protection it’s often “business as usual” for some amount of time, though the law works differently in Germany. When companies file for insolvency there are often immediate changes due to the need to differentiate different types of debt. As a result, we’ve seen the airline make refundable tickets non-refundable, and also no longer award compensation in accordance with EU laws.
However, last week we also found out that airberlin’s topbonus frequent flyer program has suspended mileage accrual and redemptions until further notice. Per a notice on their website:
We cannot currently (since Saturday, 19. Aug.17) guarantee that your miles will be credited. We have had to suspend mileage accruals and redemptions pending clarification of the situation.
We are working hard to resolve the matter as soon as possible and hope for your understanding.
Thank you for your patience.
This confused me at first, since topbonus is a spun off loyalty program, so I’m not sure what specifically would cause this. A friend with much better knowledge of German law, as well as the finances of the program, filled me in. I figured I’d report back on what I’ve learned, because now I realize just how screwed topbonus is (in many ways their situation is even more complicated than airberlin’s).
Topbonus is 70% owned by Etihad
Topbonus is a spun off loyalty program, and in 2012 Etihad purchased a 70% stake in the program for ~184 million Euros. This was clearly an attempt for Etihad to finance airberlin beyond what was otherwise legally allowed.
The arrangement between topbonus & airberlin
This is where things get tricky. Specifically, the way they’re account for costs is likely why airberlin is no longer awarding miles or allowing redemptions. The below is largely based on the 2015 government filings for topbonus. To simplify this as much as possible, up until now here’s how things have worked:
- Airberlin has purchased miles in bundles from topbonus
- Rather than airberlin paying cash for the miles directly, topbonus has shown the awarded miles as debt, with the agreement that when a member makes a redemption, they’ll offset the cost of the redemption against the debt; this gives airberlin access to miles without huge cash expenditures (this is reflected in the first screenshot below)
- Since not all miles are going to be redeemed, this meant that a good chunk of this would be a direct profit (as you’ll see in the second screenshot below, there’s potentially quite a discrepancy between the minimum number of miles sold and the minimum number of tickets purchased, since not everyone redeems miles right away)
But this gets significantly trickier now that airberlin has filed for insolvency:
- Airberlin can no longer buy new miles for old tickets, since those tickets are “old debt”
- When a member wants to redeem miles, topbonus can no longer offset these costs from the old debt, as that debt has become frozen; this means topbonus would either have to pay for the awards out of their own pockets, or airberlin would need to pay for issuing the tickets, and airberlin can’t afford it either
What’s next for topbonus?
Presumably topbonus’ only option will be to file for insolvency as well, given that they don’t really have a way to continue to operate. With airberlin no longer able to pay topbonus for miles, and presumably with topbonus’ partnerships quickly dwindling as customers no longer have interest in earning these miles, and with members probably eager to redeem their miles (which is costly for the program), they don’t have much of a future.
So, can topbonus just discontinue the program overnight, or what could this mean for members? Here’s what the topbonus terms say regarding that:
3.2. Discontinuation of the Program: In the event of the topbonus Program being discontinued, topbonus Ltd. shall be entitled to issue due notice to terminate membership of the topbonus Program (see section 3.1.). The same applies in the event that the topbonus Program is replaced by another program. In this case the member is also entitled to give notice of termination in accordance with section 3.1., however, in such case miles already collected can be used up until 18 month after due notice of termination has been received by the member. The same applies if the operator and issuer of the topbonus Program should change.
The program can only be discontinued with 18 months of notice to members. So it looks like the program couldn’t be discontinued overnight even if they wanted it to. However, I’m not sure what their obligations are if topbonus just goes out of business.
Furthermore, I guess it’s entirely possible that topbonus could continue to exist without airberlin as an airline. The question is what value (if any) the program would have at that point.
This is a very nuanced and screwed up situation. Typically when a loyalty program is spun off, the airline and loyalty program are run as separate entities with separate goals. In this case, topbonus being spun off was a way for Etihad to increase their ownership stake in airberlin-related companies, and really the program has been run as something intended to support airberlin, rather than as an independent for-profit company.
As a result, topbonus is pretty screwed at this point. They’ve been operating in a way that limits the cash paid by airberlin, which is fine when both companies are doing well. However, now that airberlin has filed for insolvency, that’s old debt, and the airline can’t offset those mileage purchases anymore.
So now airberlin either has to pay cash for miles, which they can’t afford, or not award miles, which is what they’re doing for now.
On top of that, topbonus needs to provide 18 months of notice to members before discontinuing the program, which really makes you wonder how this will all go down.
This whole situation is the perfect example of Etihad’s flawed investment strategy. I can’t believe it took Etihad so long to fire James Hogan (for that matter, the guy should have never run the airline, after his failures at Gulf Air).
What. A. Mess.