Last week, as rumours of Virgin Australia’s potential collapse circulated, Velocity members scrambled to unload their points. Desperate not to be left with stacks of Velocity Points that could possibly be worthless if Virgin Australia went under, members frantically attempted to either convert their Velocity Points to partner Singapore Airlines’ KrisFlyer program, or to cash out their points in the Velocity Store.
Overwhelmed by the demand, the Velocity Store inevitably crashed. So, knowing it had to shore up its incredibly valuable frequent flyer program, Virgin Australia took steps to prevent its members from unloading all their points and leaving it if not worthless, then a lot less valuable than it had been the previous week. On April 20, Virgin called a halt to all Velocity Points transfers to KrisFlyer. Then on April 21, the company advised members of a four-week ‘pause’ on all Velocity Points redemptions, following the news that Virgin Australia had entered into voluntary administration.
This news obviously didn’t come out of the blue. Like so many airlines, Virgin Australia had been doing it tough. Forced to stand down 8,000 of its 10,000 employees, the airline had grounded much of its fleet as demand for air travel plummeted as a result of the coronavirus pandemic. Calling for a $1.4 billion government bailout – and not receiving it – Virgin Australia’s situation was dire. Add that to the fact that the airline had racked up several years of losses alongside $4.4 billion in debt, and it was only a matter of time before the wheels fell off.
Back in 2001, Australian airline Ansett collapsed, taking with it its incredibly popular Global Rewards frequent flyer program. At the time of the collapse, members of the program had around $700 million worth of Global Rewards Points. And, while there was some to-ing and fro-ing as to the fate of the program at the time, it went under too, leaving members with 70 billion points that were essentially worthless. To say those members were angry is probably something of an understatement.
Which is why, almost 20 years later, frequent flyer members of what became Ansett’s replacement are rightfully worried about what will happen next. Will Virgin Australia collapse? Will the Velocity program go under? Will those Velocity Points members worked so long and so hard to accumulate end up being worthless?
Let’s start with Virgin. Virgin Australia has not collapsed. Or, not yet, at least. With hopes of avoiding collapse, the airline entered into voluntary administration. While Virgin planes remain in the air, delivering freight and flying Australians home, the administrator Deloitte says its intention is to “restructure and re-finance” the business to “bring it out of administration as soon as possible”. So, while we don’t yet know what the future holds for Virgin Australia, this isn’t the end just yet.
As to what will happen to the Velocity program – and its estimated $2 billion worth of Velocity Points – let’s get into that now.
Following news of its entering voluntary administration, Virgin Australia announced a ‘pause’ on Velocity redemptions, basically asking its members to sit tight as the airline – or at least its administrators – work out what the future holds.
Published both on its website and sent out as an email to members, Virgin explained this pause and all it entails.
We’re committed to keeping our members updated throughout these uncertain times of coronavirus and reduced travel.
We wanted to share some information regarding temporary changes to the Velocity program and what this means for our members.
You may be aware that some of the Virgin Australia Group companies have entered Voluntary Administration. Deloitte has been appointed as the administrators, meaning they have assumed responsibility for the business and operations of those companies in administration.
The intention of the administrators is to bring the relevant Virgin Australia Group companies out of administration as quickly as possible and return to normal operations.
Although Velocity is owned by the Virgin Australia Group, it is a separate company and it is not in administration. That means we’re still operating, but we’ve made some temporary program changes in the interests of members.
We’ve made the difficult decision to pause all redemptions for an initial period of four weeks, effective immediately. This means our members won’t be able to redeem their Points for rewards during the pause.
We know how much our members love to plan their travel and use their Points to redeem flights, however the ongoing travel restrictions and reduced flights have limited the options for them to use Points for flights. We’re seeing more members use Points to shop online for items such as gift cards, electronic goods, and wine. This unexpected demand has made it difficult for our suppliers to provide these offers and limits the availability for all members to redeem their Points.
What our members need to know:
Velocity has a trustee in place to look after the interests of members. We will continue to assess a range of options for the program and we want that to include a continuation of our long-standing partnership with Virgin Australia.
We thank you for your patience, loyalty and understanding in these challenging times.
The Velocity Frequent Flyer team
There are two likely reasons why Virgin Australia would choose to pause Velocity Points redemptions.
As news of Virgin Australia’s woes circulated, Velocity members tried to cash in their points on the Velocity Store. As Virgin points out in the above notice, this unexpected demand made it difficult for suppliers to keep up. The Store’s servers also appeared unable to cope, with the site crashing due to the increase in traffic.
In a statement, Virgin Australia CEO Paul Scurrah said that after a “run” on Velocity Points, the company decided to place a pause on redemptions in an effort to instil “confidence” in the program. Following on from that, he said, “We need to make sure we preserve as much value as we can as we get through this process”.
Whether he was referring to the value of the Velocity program as an asset, or the value of points from a member’s perspective is unclear.
If we’re being pessimistic, we could say it’s the former. After all, while Velocity is owned by the Virgin Australia Group, it is a separate company and not in administration. If the plan was to sell Velocity off – or to have Velocity as a bargaining chip to make the airline more appealing to buyers – Virgin Australia would want the program to retain as much value as possible prior to its sale.
On the other hand, being slightly more optimistic, we could say that Virgin was acting in its members’ best interests. It’s no secret that the value of points in any frequent flyer program depends on how members choose to redeem them. Redeeming points for air travel offers the best value by far, but that’s not an option right now. By preventing members from cashing out their points on rewards that are less valuable, Virgin could be seen as doing them a favour.
So, while we can’t do anything with our Velocity Points right now, we can speculate over what will happen next. Let’s take a look at some likely scenarios regarding what may play out over the next few weeks – or months.
While many members fear the worst for Velocity – especially with Ansett as an example – what happened to Ansett’s Global Rewards program actually encouraged change within the industry after its collapse. According to loyalty program expert Phil Gunter, the fate of the Velocity program will likely be different for that reason.
In an interview with Executive Traveller, Gunter states, “Nineteen years ago, the frequent flyer schemes and the loyalty industry were very, very different, and in fact many companies looked at what happened with Ansett and tried to put more protections in place for members”. (1)
So, where previously, loyalty programs were run as a division within the airline, similar to say, the human resources department, they are now run as a separate business. This is highlighted by Virgin Australia in its statement to Velocity members: “Although Velocity is owned by the Virgin Australia Group, it is a separate company and it is not in administration”.
As Velocity is a separate business, that creates potential for a variety of possible scenarios.
Theoretically, this sell-off scenario could go one of two ways. If the Virgin Australia Group finds a buyer, the Velocity program could be sold alongside the airline. The company’s insolvency administrators, Deloitte, have indicated that if the airline is to be sold, they’d prefer to sell the Velocity program alongside it. However, if this does happen, it’s unknown whether Velocity Points will retain their current value with the new owner.
Founder and CEO of iFlyFlat, Steve Hui, said, “I believe Velocity Points will continue to have a life even if Virgin the airline changes, but the value of the points and the redemption options and airline partners might change a little depending on who buys the Velocity business”. (2)
Nevertheless, while the airline that emerges from the ashes of Virgin Australia is unlikely to follow the same path as its predecessor in terms of its offering, it will need the support of its frequent flyers if it wants to succeed. With a desire to keep those customers onside, this new airline would likely carry Velocity members’ balances forward as a goodwill gesture.
Another possibility could potentially involve the Velocity program being sold off without the airline. Considering its value, this could seem like a worthy option, especially to Virgin Australia’s creditors. So, how valuable is Velocity?
In 2014, Virgin Australia sold a 35% stake in Velocity to Affinity Equity Partners for $323 million. Then, last year, the airline bought back its stake, paying Affinity about $710 million to do so. While the purchase no doubt added to Virgin Australia’s debt levels – which then became a driver in pushing it towards voluntary administration – the example does serve to underline the potential value of the program.
It’s worth pointing out how a scenario such as this has worked out well for loyalty program members in the past. When Air Berlin filed for insolvency in August 2017, its loyalty program TopBonus was eventually bought by Etihad, which allowed TopBonus members to use their earned miles within the Etihad program in the subsequent months following the sale.
With that being said, Deloitte has stated it won’t sell off Velocity without Virgin Australia, restructured or otherwise. Speaking to the media after Virgin Australia confirmed its move into voluntary administration, Vaughan Strawbridge of Deloitte ruled out selling off the program “as an individual asset”, stressing Velocity would be offered to Virgin’s new owner as part of the overall airline deal.
“Velocity is an important part of the group and it’s intended that as we go through the restructuring process that we offer that up as part of the package,” he said. “There is no intent to run a separate process to look at selling that”.
According to David Flynn, the editor-in-chief of the Executive Traveller website, the ideal scenario – for both the airline and its loyalty program members – would be that a restructured Virgin Australia emerges with Velocity Points untouched. “It [Velocity] could be sold off, but it won’t make nearly as much money if it’s sold off to a company that doesn’t have the ability to turn those points into free flights,” he said.
In this scenario, Virgin Australia is restructured to become a more profitable business, finding its feet within the industry once again when travel restrictions ease. And, as we’re in a perfect world here, Velocity members continue to earn and redeem within the program, and see no reduction in the value of their Velocity Points.
What happens to your Velocity Points will really depend on what happens next with Virgin Australia.
If Virgin Australia truly does go under, Velocity remains a separate business, which means it is more than likely to have a future. What your points will be worth will depend on which company snaps up the program. If Velocity is not bought by an airline, points may not be as valuable, as members would be unable to redeem them for high value travel rewards.
If Virgin Australia is restructured for sale, and is purchased by another airline, it’s likely that new airline will want to keep its valuable program members onside. However, while members’ balances would potentially remain the same, the value of those points when redeemed may not be the same as when Virgin Australia was in charge.
If Virgin Australia is successfully restructured, its Velocity program will likely remain unchanged. However, there is the chance that points may not have the same value as previously, especially given the changed conditions within the travel industry, and the reduced opportunity to turn a profit as people shy away from travel.
With the current ‘pause’ in redemptions in place, it will be at least another three weeks before you can start redeeming your Velocity Points. Don’t get excited though, it may be even longer than that. In its statement to members, Virgin Australia says the four-week pause period may be extended. We assume this will depend on the outcome of the administrator’s efforts.
With that being said, even if you can start redeeming points again in May, is it the right thing to do? Value is an important concept in rewards programs such as these, and the best way to see true value on frequent flyer points is to redeem them for travel. Which you currently cannot do. Domestic air travel is currently at a standstill, and experts believe it will be at least the end of the year before we can travel internationally again.
So, what other options does that leave you?
The Velocity program as it was before redemptions were paused offered a number of options to members looking to redeem their points. Obviously, travel was up there. Redeeming points for flights or upgrades generally offered the most in terms of dollar value, but there were other options on the table.
Gift cards provided a way for members to turn their points into quasi-cash. Meanwhile, the Velocity Store was packed full of gadgets, sports gear, kitchen appliances, and everything in between. For those who earned Velocity Points on their credit card, there was also the option to use their points to cover their annual fee, or to pay down their balance.
So to the subject of value. Depending on the situation in which we find ourselves when redemptions resume, some members may rush to cash in their points in any way they can. While we cannot provide advice one way another, it may not be the best idea to burn points on low value rewards now, if higher value rewards become available again in the future. On the other hand, if Velocity Points tank in value in the future, cashing out now on lower value rewards may be the better option.
In its statement to members, Virgin Australia says that while you may not be able to redeem Velocity Points for now, you can continue to earn them. Obviously, earning points on flight purchases is not really an option until we know when we will be able to travel, but there are other ways to earn Velocity Points, either by using a Velocity Points earning credit card, or by spending at Velocity partners.
But, is it worthwhile doing so? Virgin Australia’s CEO said the redemption pause was put in place to instil confidence. However, with the program’s future up in the air, it’s unlikely many of Velocity’s nearly ten million members are feeling that confident about the situation. So, what are your options as one of those ten million?
With this option, you’re basically crossing your fingers and hoping for the best. You’ve already got Velocity Points accumulated, you can’t do anything with them, but you might as well keep adding to them.
If you have a Velocity credit card, you may have no choice but to continue earning, especially if it’s a direct earn card (this is where the card is set up so that any points you earn on your spending go directly to your Velocity account).
With this option, you opt to ‘pause’ your points earning until Virgin’s pause on redemptions is lifted. As you’re not in a position to earn points on flights at the moment, this will mean stopping using your Velocity credit card, and no longer picking up points with Velocity partners.
TIP: If you decide to pause your Velocity Points earning by stopping using your Velocity credit card, consider whether it is worth continuing to pay the card’s annual fee. Rewards cards typically have a higher annual fee, and if you’re not earning points on your spending, you will find it difficult to see any real value on your card.
With this option, you switch to another rewards program. You may find that your card provider lets you simply switch programs and keep the same card, as may be the case if you have a big bank card that allows you to opt in to earn on either the Velocity program or the bank’s own program. Other providers, such as American Express, may not.
American Express expands on this subject in its Help Centre:
Q. I’m an American Express Velocity card member, I want to stop my points going to my Velocity account automatically?
A. While at this time we can’t stop the automatic transfer of points on your American Express Velocity product you have the option of taking up an alternative card.
So, if you decide to switch rewards programs, which one should you choose? In Australia, the main contender in the frequent flyer space is obviously Qantas. As with Virgin, there’s not much opportunity to earn points flying with Qantas right now, but you could earn Qantas Points day to day, to then redeem them at a later date.
Needless to say, there are a number of other rewards programs to choose from as well. You could choose to earn Flybuys as a Coles shopper or Woolworths Rewards as a Woolies shopper. You could opt for one of the Big Bank rewards programs, such as NAB Rewards, CommBank Awards, ANZ Rewards, or Westpac Altitude Rewards. Or, you could choose to earn American Express Membership Rewards.
TIP: If you decide to switch cards, think carefully about your current financial situation. If you have been stood down or your income is significantly lowered, you may find it more difficult to get approved for a new card.
Decided enough is enough? If after all this uncertainty, you decide you don’t want to bother with rewards programs any more, this may be time to switch cards to a more basic option. No matter what happens with Virgin Australia – and to the Velocity program – your accumulated Velocity Points will be there to redeem (when that becomes an option again), but in the meantime, you will be using a different card that doesn’t earn rewards.
TIP: A basic, no frills card could be a worthy option right now. Premium cards packed with travel features are all well and good while you can actually travel, but if travel restrictions continue, you may not get much chance to use them, which essentially lowers the value you get from the card.
Time to compare your options? Whether you want to switch cards to earn on a different rewards program, switch cards to find a more basic, low cost option, or simply see what’s out there, CreditCard.com.au is the place to go. Check out what’s on offer within a range of categories, from feature-packed rewards cards to simple cards with no frills at all. Get comparing now.
Disclaimer: The information contained within this post is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Founder of Creditcard.com.au. Roland has extensive knowledge about credit cards in Australia. Known as a credit card expert, he has been featured on tv and in various publications. Some popular offers on our site right now include the ANZ Low Rate. Ever popular with no annual fee first year, low purchase rate and 0% balance transfer. Have a look also at the 0% balance transfer HSBC offer with no balance transfer fee, plus an annual fee waiver each year you meet a spend criteria.