BankDirect: With Rates So Low, Should You Opt for American Airlines Airmiles?

BankDirect, a subsidiary of Texas Capital Bank, has offered a Mileage Checking with Interest program for many years. The program is structured so that it pays you interest in miles instead of cash (there is a virtually meaningless cash interest component of 0.01% APY). For each $1,000 on deposit each month, you receive 100 American Airlines miles, up to $200,000 on deposit. Hence, a $200,000 deposit will generate 20,000 American miles each month and 240,000 each year. When interest rates were higher, the program made little sense although it often drew the attention of commentators in the financial space, including Ron Lieber of the New York Times.

With interest rates very low, the program is very interesting, particularly to those who can extract real value from frequent flier miles. In the past, I’ve been able to use frequent flier miles at a value over 8 cents per mile (mainly by redeeming them for business class seats on transcontinental flights), giving the 240,000 miles that I could earn on $200,000 deposited at BankDirect over a year an imputed value of $19,200. With the best savings rates at 1%, the miles can create more value than the $2,000 (probably closer to $1000 depending on your tax bracket) that your $200,000 will generate in a savings account over the next 24 months. To boot, the $19,200 mileage value is tax free (BankDirect takes the position that frequent flier miles are the property of the airline as stated in the terms and conditions and does not report their issuance to the IRS).

However, there are some good reasons not to get too excited about the BankDirect program. These include the following:

1) American Airlines is in bankruptcy. Your frequent flier miles are not only the property of the airline (they are not “yours”) and they are a credit of the airline. While United and Delta went through bankruptcies and their mileage programs were not adversely affected, there is no certainty that American Airlines will remain a going concern, and it is entirely possible that, whatever the outcome, its miles will have no value or a lesser value than they have today.

2) American Airlines has already followed Delta’s lead in dramatically decreasing the value of their frequent flier program. Round-trip domestic tickets can already rarely be had for fewer than 50,000 miles. If you are planning to use your miles to redeem tickets for the family to go to Disney World in low season, you may in fact be better off getting interest in a high yielding online savings account.

3) Whereas previously miles earned through BankDirect went towards meeting American's annual status qualification and to its Million Miler status qualification, that policy changed in December 2011. If you are an airline status hog like me, this program is no longer a shortcut to getting status.

4) BankDirect implemented a $12 monthly service fee on all mileage accounts. This charge can rapidly deplete accounts with smaller balances and offset the value of the miles you receive.

In short, if you can extract a lot of value out of American Airlines miles and have a lot of cash on hand, you might want to consider putting as much as $200,000 in a BankDirect account. You should take the risks of American’s bankruptcy into account, and you should check the best online savings rates and local savings rates first.