Fears for points as QF considers selling Qantas Frequent Flyer

[markis10]

There is mounting speculation that Qantas is considering a partial float of the rewards scheme, which is valued at up to $3 billion.Qantas spokesman Andrew McGinnes said no decisions had been made and "there are no plans to change the fundamental elements of the Frequent Flyer program"......Clifford Reichlin, director of online travel resource The Australian Frequent Flyer, believed there would be little consumer impact under a partial frequent flyer float given the risk of defections to rival Virgin's improved scheme and competition from foreign airlines.

Fears for points as Qantas considers selling part of $3b frequent flyer scheme | News.com.au

 

[yohy?!]

id say the quoted value of 3 billion falling everyday now! do they really think they can keep trashing QF and QFF will be unaffected, I must spend some more time in the QFF store...

 

[lovestotravel]

I have restricted my QFF points earning, as I have a good supply to last 2 years or so with planned F/J trips/upgrades etc

My main points earning is now with SQ c/o the SQ Westpac Amex/Visa

 

[SeatBackForward]

There's only so far fuel surcharges and credit card fees can go without a frequent flyer program. How will QF make any money now?

 

[TomVexille]

This sounds like a way to piss off loyal customers

 

[RooFlyer]

Sorry Cliff, this consumer will be impacted by booking QFi award flights to 'use' as many points as possible before the rush and the devaluation. And I'm caring less about earning QF points as its likely other airlines redemptions will be more value in the future.

"Buy on the rumor, sell on the fact."

 

[dalereardon]

Can someone explain to me how the FF scheme is worth anything substantial at all.

Isn't QF selling a heap of liabilities? When someone redeems their points the new owners would have to buy the flights from QF, CX, EK etc. So why would you pay lots of money to buy a ton of liabilities?

Just doesn't make sense to me.

What would be more sensible would be selling points perhaps like the US programs to raise some money and keep ownership.

Dale.

 

[markis10]

Can someone explain to me how the FF scheme is worth anything substantial at all.

Isn't QF selling a heap of liabilities? When someone redeems their points the new owners would have to buy the flights from QF, CX, EK etc. So why would you pay lots of money to buy a ton of liabilities?

Just doesn't make sense to me.

What would be more sensible would be selling points perhaps like the US programs to raise some money and keep ownership.

Dale.

The concept that a point balance is a liability is one that is somewhat outdated with regard the current QF loyalty modus operandi. While points have a value, QF loyalty make a margin on both earn and burn, so if its sold to say a VC group, part of that sale will no doubt be the right to redeem with QF group points at a discount to their retail value, allowing the group to continue to make a margin on earn and burn.

I suspect QF loyalty probably make 20-30% on an earn and a similar margin on a burn! that's a good business.

 

[moa999]

The issue with FF is that the points are a massive liability.
This is currently offset by the massive cash balance that QFF - this comes from two areas - FF liability (ie percentage of fares held back to pay for redemption, and points bought by partners) and advance bookings.

If QF separates FF I would think they would need to divert a huge chunk of cash to offset the liabilities, otherwise the FF balance sheet is going to look very sick for a number of years

 

[SeatBackForward]

Can someone explain to me how the FF scheme is worth anything substantial at all.

Think of how profitable banks are, and think of profitable they'd be if they weren't hamstrung by banking regulations, there's your FF program.

 

[RooFlyer]

The issue with FF is that the points are a massive liability.
This is currently offset by the massive cash balance that QFF - this comes from two areas - FF liability (ie percentage of fares held back to pay for redemption, and points bought by partners) and advance bookings.

If QF separates FF I would think they would need to divert a huge chunk of cash to offset the liabilities, otherwise the FF balance sheet is going to look very sick for a number of years

Sorry, I don't think this is correct.

I once did study (externally) the QFF scheme from an Advisory point of view, but that was so long ago now I can't strictly call on the lessons, as most of the relevant laws and accounting standards have changed.

But regarding points liability, its all about accounting. Qantas does not have to account for the 'liability' of everyone redeeming their points for flights or even the % of total points that traditionally gets redeemed for flights. IIRC this is because much of the 'cost' to Qantas of giving 'free' flights earned via prior flying on Qantas is extremely low, as the Award seats would be priced as otherwise unsold 9or some low%). As we all know, 'free' flights aren't free, as there are still the fuel fines. Qantas announced recently that fuel fines would go up $50 or so per flight for certain sectors.

I don't think it's impossible that Qantas may make a small profit on Award seats, if it calculates that the seat would otherwise be empty (nil revenue) Vs it getting some fuel fines etc on the 'Award' seat.

The QFF scheme is mainly profitable because QF sells points to its partners to give to the partner's customers (eg Woolworths). There would be some fancy actuarial calcs as to how many of those points would be redeemed for flights but the cost of the points to the merchants would be more than their average value being redeemed. (Again, cost of redemptions probably very low for reasons given above.)

If QFF was floated the Advisors would crunch the value of the business (the value of the goodwill would be a cracker! KER_CHING!!), and its separation impact on QF, and then come up with a valuation of the enterprise, both geared and ungeared. It would come up with a capital structure and a price per share of FF Co. Qantas would get cash for the shares in the float (one would think a small mountain, given its notional present P/E).

At the time of the float one would think that its frequent flyer related asset/liability situation wouldn't change. Existing points are out with the punters and Qantas has whatever accruals it needs to cover these. The new FF Co would still buy points from Qantas, to sell them to other clients.

So the net result: Qantas gets a lump of cash to help with its overall capital situation, having sold off the FF business. FF Co. is in possession of a valuable asset and sells points to clients at a profit.

Everyone's happy, except the actual frequent flyers who will get screwed by FF Co. as it tries to up profits so the management can get their bonus and they will get screwed by FF Co again as flying redemptions will be only one part of their business focus and you'll get treated the same as the person who wants to redeem for a gym session. And Qantas will love you a lot less operationally and you are probably flying on them today courtesy of something other than prior frequent flying on them.

 

[drewbles]

Interestingly enough, I got a survey request from QF today about the Frequent Flyer program. Most of it focused on it vs Velocity, and one of the questions was in direct relation to taxes and surcharges on award flights, along with others about how easy it was to get seats and value of the overall program compared with VA.

I was brutally honest, and hope anyone else who gets the survey does similarly. My main gripe is the never ending devaluation of points and ever increasing surcharges and taxes when VA and AA quite clearly can manage to make money without imposing such fines.

 

[Kieran2274]

QFF is a licence to print money, because it's a virtual form of currency that QF has absolute control over. There is nothing to stop QF from handing out bucketload of points while also devaluing it at the same time. Indeed, ithe healthiest part of the Qantas business is its QFF (which is why I am sure QF will never sell or spin it off).

Frankly, as a business operation, it doesn't get better than QFF (although obviously those who hold points may have alternative views due to their standpoint)

 

[RooFlyer]

<snip> Indeed, ithe healthiest part of the Qantas business is its QFF (which is why I am sure QF will never sell or spin it off).

<snip>

There are several scenarios where QFF would be spun off, even if the Board didn't really want to. Most obvious and current one is access to capital, which might be exacerbated by key shareholders putting private pressure on the board and management to lift performance (... or else ...)

Floating an asset is basically exchanging a long term cash flow for a lump of cash now, theoretically of equal Present Value (or better, depending on your assumptions).

 

[JohnK]

I hope there isn't too much devaluation if selling the QFF business becomes a reality.

Sitting on a lot of points I cannot use for at least ~18 months.

 

[RooFlyer]

I hope there isn't too much devaluation if selling the QFF business becomes a reality.

Sitting on a lot of points I cannot use for at least ~18 months.

If genuinely concerned (and I'm not there yet), you could make a dummy booking, then change it later for (IIRC 6,000 points).

 

[markis10]

If genuinely concerned (and I'm not there yet), you could make a dummy booking, then change it later for (IIRC 6,000 points).

Huh, the OP has 1000000 points to be worried about.

 

[zainman]

Huh, the OP has 1000000 points to be worried about.

How about 3 one world F awards?

 

[JohnK]

If genuinely concerned (and I'm not there yet), you could make a dummy booking, then change it later for (IIRC 6,000 points).

Close to 1.2 million QFF points so that is a lot of bookings I would need to make.

 

[RooFlyer]

Huh, the OP has 1000000 points to be worried about.

Huh? I'm not aware of JohnK's points balance (until he posted it . So he could make a number of high priced bookings if genuinely worried.