Should you buy airline or hotel travel credits amid Covid-19?

With airlines and hotels desperate for cashflow amidst the Covid-19 pandemic, many are resorting to IOU arrangements - buy credits today at a discount, and redeem them for travel in the future.

This can represent a win-win for both companies and travellers. The former get to raise capital at a lower cost than through banks (and avoid restrictive debt covenants); the latter get to lock in a discount for future travel.

But what are the risks inherent in pre-purchasing travel credits, and is now the right time to be buying?

What offers are currently available?

Let's first take a look at the currently available offers.

Unsurprisingly, we're seeing a lot of hotels running sales on gift cards at the moment, with bonuses ranging from 20-50 per cent.

Airlines, on the other hand, have been relatively quieter. Only Etihad is offering a sale right now, but with a 50 per cent bonus, it's extremely generous.

These offers are, no doubt, designed to create a sense of FOMO (fear of missing out), and you may be tempted to pull the trigger.

While I think that 20-50 per cent bonuses can represent fantastic value, there are a few things you should carefully consider first.

When do the credits expire?

Needless to say, there's no point in buying credits if you won't have an opportunity to travel before they expire.

The problem is: It's still unclear when leisure travel will be possible again. The Singapore government has taken great pains to emphasise that travel in the near term will be 'essential-only', and subject to numerous restrictions.

We're still a long way from hopping on a plane for a weekend trip to Thailand or Vietnam, and that makes me hesitant to buy travel credits that expire at the end of 2020. While I'm cautiously optimistic about the prospect of leisure travel in 2021, I think 2020 may prove to be a bridge too far.

If you're going to buy travel credits, look for those that have at least 18 months of validity or value that does not expire.

How restricted are these credits?

There's a very big difference between buying a gift card for Marriott (these were on sale at a 20 per cent discount in May), and buying a gift certificate for a specific Marriott property.

The former can be used at thousands of Marriott properties worldwide; the latter is restricted to a specific one. Suppose you jump on the current Marriott Thailand offer and buy a gift certificate for the St. Regis Bangkok.

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You've basically committed to travel to Bangkok, and if leisure travel restrictions to Thailand aren't lifted in time, you may run into issues with expiry (see above).

In contrast, had I bought the Marriott gift cards, I'd be able to pick a property in any of the 131 countries it operates in. This hedges my bets - should Australia be the first to open its doors to leisure travellers from Singapore, I can use my gift card there. Should it be New Zealand, Taiwan, or Japan, I still have options.

Therefore, aim to buy travel credits that are not tied to a single property.

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What happens if the airline or hotel goes under?

With all the uncertainty surrounding the travel industry right now, it cannot be taken for granted that the hotel or airline will be around to honour your travel credit in the future.

After all, hotels and airlines are not selling credits at a discount because they like you. They're selling at a discount to reflect the potential risk of insolvency.

Should the company go under, travel credit holders become unsecured creditors, with a very low priority in the liquidation process. For all intents and purposes, it's as good as waving goodbye to your money.

Is it worth the risk? Only you can decide that. It's helpful to do some due diligence on the companies selling credits to the extent their financials are a matter of public record.

In the case of hotels, it's important to remember that there may be a financial disconnect between the parent entity and the individual properties.

For example, Marriott does not actually own most of its properties in Thailand. They're operated by local companies under franchise agreements. Should you purchase travel credit from a particular hotel and it closes, Marriott will almost certainly not step in to make you whole.

With some limited exceptions, none of the deals above will indemnify you against loss should the worst happen (Porter & Sail have undertaken to reimburse customers, should they purchase a gift card for a hotel that subsequently closes).

Do I have cashflow issues?

Covid-19 will lead to a significant slowdown in the Singapore economy with the MAS forecasting a contraction of 1 to 4 per cent.

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All of us will be affected in one way or another, and if you're taking second glances at your finances, this is definitely not the time to channel funds into non-essential purchases.

Travel credits are effectively a non-refundable, captive currency. They don't earn you any interest, and there is a very limited secondary market for them (some T&Cs even prohibit the resale of travel credits).

Before you even consider these deals, make sure your house is in order.

Conclusion

Travel credit sales can be an excellent opportunity to secure a discount on future travel, but like all deals, it's better to avoid impulse buying.

Always aim to buy credits with a long expiry period (or better yet, no expiry), which can be redeemed at multiple locations and are backed by a company whose going concern is, well, not a concern.

For the latest updates on the coronavirus, visit here.

This article was first published in SingSaver.com.sg.