What will happen to my Velocity points?
COVID-19 impact on Asia-Pacific aviation worsens…
On 14 April 2020, International Air Transport Association (IATA) released updated analysis showing that the COVID-19 crisis will see global airline passenger revenues drop by US$314 billion in 2020, a 55% decline compared to 2019.
The predicted impact on Australia is a 51% drop in passenger demand meaning 50.5 million fewer passenger trips, flowing to a revenue hit of $14.2 billion which could lead to over 360,000 travel industry jobs impacted in some way.
Yes, these are huge numbers. Unprecedented.
Virgin Australia goes into Voluntary Administration, but Velocity Frequent Flyer is not in administration
On Monday 20th April, the board of Virgin Australia appointed Deloitte to handle the voluntary administration, after the federal government rejected 8 proposals which began with a request for $1.4 billion to a last-minute call for a $200 million loan.
"Virgin Australia enters Voluntary Administration to recapitalise the business and help it emerge in a stronger financial position on the other side of the COVID-19 crisis.
Velocity Frequent Flyer, while owned by the Group, is a separate company and is not in administration." - ASX Statement (21/04/20)
What is voluntary administration?
Voluntary administration essentially means allowing an external administrator to take control and look at the company’s financials with the view of possibly bringing the company back to life.
An administrator has extra powers to negotiate with creditors.
It’s designed to quickly resolve a company’s financial problems and determine its future with minimal impact. If that’s not possible, the aim is to find the best solution possible for creditors, ensuring a better return than had the company gone directly into liquidation.
Velocity Member growth (millions)
The Velocity program is a valuable and profitable business
Velocity Frequent Flyer, while being owned by Virgin Australia, is a separate company which was valued at $2 billion dollars before Covid-19 hit.
Velocity is a highly profitable business with over 10 million members and 90 partners, that generated $132 million EBITDA from $411 million of revenue, that’s a 32% margin. In other words, for every $1 of points sold to credit card companies, banks, retail partners, it makes 32 cents as profit. In a few words - a very good business.
The beauty is Velocity members have earned points that someone else has paid for… ie: credit card companies and retailers paid Velocity to award you the points.
Velocity which is not under the control of the Deloitte administrations has called in its own experts from PwC for advice.
What should I do with my Velocity points?
Right now, you can’t do anything - just sit tight.
Leading up to the Voluntary Administration:
On 3 April, Velocity imposed a redemption limit of one gift card per 24 hour period.
On 4 April, Velocity Frequent Flyer and Singapore KrisFlyer are temporarily suspending conversion of Points and Miles between the two programs. We're looking forward to providing you with this program feature once flight schedules return to normal."
On Voluntary Administration:
On 21 April, Velocity announced an initial four week pause on all redemptions (taking you to 19th May), but may be extended.
The pause on redemptions to act as the ‘circuit breakers’ in the US stock market to prevent a herd-like rush of people redeeming their Velocity points, while letting the administrators get to business and provide more information about Virgin to the market.
It is helpful and smart to ensure people do not waste their points redeeming for 3 vacuum cleaners and 4 toasters in the rush to get something rather than nothing.
“Your Points aren’t going anywhere. They will remain in your account.” - Velocity announcement
Existing points will not expire during this period. Velocity will extend the expiration period for existing points by the timeframe of the pause.
Your Velocity points are not worthless, but they will be worth less.
Your Velocity points are not worth zero.
Virgin Australia's Velocity Frequent Flyer program will survive, but members should expect their points to be worth less once a new owner is found for the airline
The points are likely to be honoured in some form as the new owners want to retain the business's customers and get off to a good start.
In the event that the airline is liquidated (worst case scenario) Velocity members could still expect some compensation.
Virgin Blue started life in August 2000 after the collapse of Ansett, it had the benefit of hearing about the pains of so many Ansett members who lost their Ansett Global Rewards frequent flyer loyalty points.
The Velocity program was designed in a special trust structure (The Loyalty Trust) and the trustee (Velocity Rewards Pty Ltd). A spokesperson confirmed the trust would protect those points, currently frozen, in every scenario that Virgin now faces, including collapse or sale to another business.
I understand the trust contains special cash reserves that have been put aside to pay out members in the instance the loyalty program cannot continue in some other form.
The Australian Financial Review revealed that in 2014 the trust had extended a $150 million loan to Virgin Australia Group (a secured loan that earns commercial rates of interest, that ranks ahead of the unsecured bondholders and general shareholders), raising questions about whether there were enough funds in the trust to cover the full value of the points, which Virgin estimated in its 2019 annual report at about $500 million.
The key is knowing how much $ is held in these special cash reserves.
Complex enough? Velocity will line up as a creditor to Virgin Australia to recoup this loan, but it’s own value will largely dependent on the sale and survival of Virgin.
My summary
As quoted in the AFR on Monday 27th April,
"There are two paths: one is the whole airline goes into liquidation and they sell all the parts. Then the Velocity members will get some money back, but it wouldn’t be as much as they expected to get," Steve said.
"But the most likely scenario is they will sell the whole airline together with the Velocity program, and then the Velocity program will be able to redeem for flights."
I believe that Virgin Australia and the Velocity Frequent Flyer program will be sold as a whole to new buyer/s within the next 6 months and as a leaner operation with a focus on domestic operations and profitability.
AFR Article (LINK)
What might happens next
The Velocity points will be devalued in due time and this is normal. I expected that that would happen anyway, without COVID, because Qantas did it in November 2019, but Velocity didn’t.
Frequent flyer points value is all relative to each other programs.
The future
Don't give up on your points, they still hold high value and can get you very cheap flights in the pointy-end. The value is swings and roundabouts, generally, with points, you will win more than you lose.
"Don't be like that Ansett guy who told me he lost 500,000 Ansett points back in the day and had shyed away from points since then" - My prediction is that gentleman probably missed out on saving at least $90,000 in travel over that 10 years.
I hope it doesn’t take a drastic event like this to let you know that you should use your points sooner rather than later.
Rather than sit on your points, use them to sit at the pointy-end of the plane. After all, points were made to fly. Life is short, use them or lose them.
I encourage you to apply this philosophy to all your points and not just Velocity.
If this inspires you to plan a trip in 2021, talk to our team.
Steve Hui
Founder & CEO iFLYflat - The Points Whisperer
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If you need assistance with cancelling your existing travel plans (cash or points) contact our Travel Assist Concierge team. We’re here to help.