how do FF programmes and code-shares make money?

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katiebell

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Could someone please expalin how the FF programmes make money? Sorry if this has been asked before but not sure how to search for this topic.

On a similar vein, how do codeshares make money for the airline that does not operate the flight?

Finally, what are the financial benefits for an airline being in an alliance (other than attracting other airlines' ff to book flights)?

Many thanks for any answers

KB
 
The first two I believe are real moolah transactions, the amounts however a commercial matter.

1. ike the restaurant, credit card company, the other airline buys the ff points.

2. Codeshare is definitely a cash transacton, although may come with liabilities if guarantees or mins are provided.

3. All about creating more loyalty, increase lounge access etc
 
To answer in a little more detail if you're interested:

1) Every time that points are added to your account, someone is paying for it. For Qantas restaurants that award 3 points per $1 spent, they are charged a fee of 6% of the purchase value (which means they are essentially 'buying' points for 2c each). In a similar way, credit card companies are also charged a fee per point that they buy, though they obviously pay a much more competitive rate. The same applies for airlines, who typically award points based on the number of miles flown. As the airline that the passenger is flying on has to pay for the points, you'll find that some (eg. Cathay Pacific) award NO points at all on the cheapest fares, as there is no real margin to do so at that price. Others (eg. British Airways) do still award points on the cheap fares, though at 1/4 of the earn rate of a more expensive ticket. The frequent flyer program essentially gets to sit on these funds (or reinvest them etc) while you have a positive points balance. When you go to redeem these points, you pay essentially 'pay' with points, but in the background, the FF program is paying the supplier in cash - usually at a cheaper bulk/industry discount rate. The gross profit made is the difference between the financial income from their earning partners that are buying points (eg other airlines, credit card companies etc), and the amount of money that they spend on funding award redemptions.

2) Codeshares usually take place in one of two ways. The first, is that the codeshare partner 'buys' a specific number of physical seats on that flight, and it is up to them to sell those seats. In this situation, the codeshare partner (such as South African Airways) could buy themselves, say, 10 seats on the QF SYD-JNB (Johannesburg) service, using the SAA flight code. As these seats 'belong' to SAA, QF cannot sell them themselves. If SAA sell a certain percentage of these seats on their code, they make a profit, as the amount received for the seats will be more than the amount paid to QF. If SAA don't sell enough, they make a loss on that flight, as they will be paying for seats that nobody is travelling in. Provisions may be made between the airlines that the operating carrier may sell those seats within a certain number of hours before departure, though even if that's not the case, they are almost certainly then available to standby passengers that have booked directly with Qantas. QF would then earn twice - the fixed payment from SAA, and then being paid to fill the seats themselves. Alternately, codeshare seating may be flexible, in that each airline can sell as many or as few seats on the plane as they are able (though some limits may be applied). This allows an airline to put their code on a flight without taking too much of a financial risk - as the operating carrier is simply receiving extra passengers in order to fill up seats. While this model would benefit a codeshare partner if demand was light, the profit margin is likely lower than the 'fixed' codesharing model.

3) Alliances exist not just for lounge access benefits, but also usually simplify a set of rules across the alliance (eg. baggage interlining and transit passengers). They make it much easier for one airline to get their passengers to a final destination that the airline doesn't fly to (such as Qantas Sydney-Hong Kong, connecting to Cathay Pacific Hong Kong-Beijing), as they can easily sell this on the one ticket, and usually issue the boarding passes when the customer checks in for their first flight, as well as check their luggage through to their final destination. While this is of course all possible without a formal alliance, it makes it much more simplified. There are a great number of other aspects involved that I won't go into, but alliances are a two-way street. For example, if an American Airlines Executive Platinum passenger is flying with Qantas, Qantas benefits as they will receive payment from AA when that passenger accesses one of their lounges using their AA membership. Then once the passenger has completed their flight, Qantas then 'purchase' the AA miles for that customer, which takes us back to question 1! :)

Note: the info above is all available publicly, I have merely collated it (I was interested in the same thing myself not too long ago). As to exact payment figures for the various activities (besides the charges for QFF restaurant partners), this would be commercially sensitive information, to which I'm not privy (I don't work for the airlines, so I only know what is available online). :)
 
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Excellent explanation. I was going to post a subset of that but the question has been answered well already.

Sent from my GT-I9100 using AustFreqFly
 
Wow- what an awesome detailed answer! This is exactly the kind of stuff why I LOVE this website! :p
 
To answer in a little more detail if you're interested:

1) Every time that points are added to your account, someone is paying for it. For Qantas restaurants that award 3 points per $1 spent, they are charged a fee of 6% of the purchase value (which means they are essentially 'buying' points for 2c each). In a similar way, credit card companies are also charged a fee per point that they buy, though they obviously pay a much more competitive rate. The same applies for airlines, who typically award points based on the number of miles flown. As the airline that the passenger is flying on has to pay for the points, you'll find that some (eg. Cathay Pacific) award NO points at all on the cheapest fares, as there is no real margin to do so at that price. Others (eg. British Airways) do still award points on the cheap fares, though at 1/4 of the earn rate of a more expensive ticket. The frequent flyer program essentially gets to sit on these funds (or reinvest them etc) while you have a positive points balance. When you go to redeem these points, you pay essentially 'pay' with points, but in the background, the FF program is paying the supplier in cash - usually at a cheaper bulk/industry discount rate. The gross profit made is the difference between the financial income from their earning partners that are buying points (eg other airlines, credit card companies etc), and the amount of money that they spend on funding award redemptions.

The interesting thing is that airlines only report the profit on the points when the award is redeemed or the points expire. The FF programs are sat with large liabilities on their balance sheets built up from the sale of the points (Asset received is cash, liability created is the points liability) which only reduces when the points disappear either through redemption or expiry.
 
Happy to help! :)

The interesting thing is that airlines only report the profit on the points when the award is redeemed or the points expire. The FF programs are sat with large liabilities on their balance sheets built up from the sale of the points (Asset received is cash, liability created is the points liability) which only reduces when the points disappear either through redemption or expiry.

Indeed - though I suppose it would also be difficult to quantify the actual dollar value of their liabilities, as they aren't really known until redemption - as some awards that sell for the same points value will no doubt have much greater cost differences to the airline. I had also forgotten about points expiry and account closures when deceased - a nice little earner for airlines as well. :)
 
... I had also forgotten about points expiry and account closures when deceased - a nice little earner for airlines as well. :)
The industry term is "Breakage" and is certainly factored in by their Actuaries ...
 
The other "breakage" is the one-off flyer who lets there miles expire.
Harder on Qantas where you need activity to reset on all miles, easier on programs like Singapore where each point has an individual life.
 
Alternately, codeshare seating may be flexible, in that each airline can sell as many or as few seats on the plane as they are able (though some limits may be applied). This allows an airline to put their code on a flight without taking too much of a financial risk - as the operating carrier is simply receiving extra passengers in order to fill up seats. While this model would benefit a codeshare partner if demand was light, the profit margin is likely lower than the 'fixed' codesharing model.

In a freesale codeshare scenario as you described here (as opposed to a block codeshare), the marketing carrier's inventory availability is directly dependent on that of the operating carrier's. The operating carrier retains full control and revenue management of the inventory on its aircraft. So if there isn't a particular fare bucket available for sale under the operating carrier's prime flight number, the corresponding fare bucket will most definitely not be available for sale under the marketing carrier's flight number. Also, unless otherwise allowed by ACCC (and/or its counterparts), both marketing and operating carriers are still technically competing to sell seats on the same aircraft.
 
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The interesting thing is that airlines only report the profit on the points when the award is redeemed or the points expire. The FF programs are sat with large liabilities on their balance sheets built up from the sale of the points (Asset received is cash, liability created is the points liability) which only reduces when the points disappear either through redemption or expiry.

Which is why the $4bn of cash that Qantas has (that Singo would love to get his hands on) is not real free cash - a substantial portion of it is matched with an FF liability, which if everyone suddenly decided to redeem for say gift cards, would me a large cash drain on Qantas.

I think Qantas now books some element of profit when the point it is created (was either an estimated profit or breakage), but simongr is correct on the remainder - this changed a few years ago.
 
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Top answers guys no wonder Qantas spun this business off to a separate entity!
 
Wouldn't use the words "spun off"
QFF is 100% owned by Qantas.

Yes it's a separate corporate entity, but Qantas is made up of 100+ of these.
It is also reported as a separate business unit.
 
Alternately, codeshare seating may be flexible, in that each airline can sell as many or as few seats on the plane as they are able (though some limits may be applied). This allows an airline to put their code on a flight without taking too much of a financial risk - as the operating carrier is simply receiving extra passengers in order to fill up seats. While this model would benefit a codeshare partner if demand was light, the profit margin is likely lower than the 'fixed' codesharing model.

A good example of this is Air Pacific (FJ) which funnily enough is 46% owned by Qantas, however the inventory for sale seems to be identical whether booking directly through Air Pacific on FJ flight number, or whether booked through Qantas on a QF flight number. (Checked this on Expert Flyer, available classes are the same, only thing that differs is QF use slightly different fare class buckets letters to FJ).
 
So in reality the FF business could build up huge liabilities and go bust and QF could walk away and start again?
 
A good example of this is Air Pacific (FJ) which funnily enough is 46% owned by Qantas, however the inventory for sale seems to be identical whether booking directly through Air Pacific on FJ flight number, or whether booked through Qantas on a QF flight number. (Checked this on Expert Flyer, available classes are the same, only thing that differs is QF use slightly different fare class buckets letters to FJ).

The inventory availability is identical because both marketing and operating carriers have to class map their respective fare buckets. Class strings differ between carriers so classes are mapped from the marketing carrier's to the operating carrier's in accordance with fare product parity to ensure the appropriate pricing and inventory controls by the operating carrier in a freesale codeshare arrangement. Eg, a discount economy class fare bucket on QF is mapped to the equivalent fare bucket on FJ.
 
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I think you will also find that there is huge value in the database of FF. think about it - Qantas have something like 9 million FFs. They have their address phone number email, flying patterns, credit card spend, etc. all very handy for targeted offers.

And of course most of the 9 million would be in the top 50% of disposable income individuals so less wasting time and money targeting people who can't afford your product.
 
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