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Qantas Loyalty Program May Be Worth $2b

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crazydave98

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from today's AFR:

Loyalty program may be worth $2bn
JAMES HALL
14 December 2006

FREQUENT FLYERS QANTAS ON THE BLOCK
The Macquarie Bank-led consortium planning a private equity buy-out of Qantas will review ownership of the airline's Frequent Flyer scheme before a potential sale, valuing the loyalty program at as much as $2 billion.
The plan - modelled on Air Canada's separately listed Aeroplan scheme - could result in Frequent Flyer becoming a stand-alone financial services business responsible for managing hundreds of millions of dollars a year in revenue.

The Frequent Flyer program is the most lucrative sell-off option available, and it's understood the buying group will complete a review of the business within 18 months if it succeeds. Other likely asset sales include Qantas's catering and holiday units.

A stand-alone Frequent Flyer business would have a mandate to expand by selling broader loyalty and financial services products and other marketing products, drawing on its database of more than 4.6 million members.
However, Deutsche Bank analyst Jason Bloom said that while separating the Frequent Flyer business made sense in theory, it could prove extremely complex in practice.

"It's incredibly complicated," Mr Bloom said.
"On the one hand, you have a huge and loyal customer base that you can access, but on the other there is this huge potential liability of points."
At present, Qantas generates revenue by selling Frequent Flyer points to more than 140 program partners such as credit card issuers and hotels that offer them as incentives to their own customers.

Since the introduction of the Australian equivalent of international financial reporting standards (AIFRS) in 2005-06, the only revenue Qantas recognises immediately relates to the share of these points it considers holders will never redeem.

The rest it defers, booking it as revenue only when passengers "spend" the points and recognising it as a liability that, according to Qantas annual report for 2005-06, was just short of $1 billion when it switched to AIFRS.
As long as Qantas owns Frequent Flyer and the plan keeps growing, this liability never crystallises. But if Qantas were to spin off Frequent Flyer, it would have to recognise the liability against its bottom line.

JPMorgan analyst Matt Crowe said while this would not go down well with shareholders focused on short-term returns, it wouldn't matter to private equity owners.

"It's just a big accounting hit," Mr Crowe said, while private equity firms care only about cash generation - which Frequent Flyer could do better outside Qantas.

"The real potential value is that the Frequent Flyer program can also use the points to sell other products. And provided they can create a spread between what they pay Qantas for them and what they sell them for, they should do OK," Mr Crowe said.

"And the thing is, an airline might not be the best business to do that."
An analyst with Canadian investment group Wellington West who covers Aeroplan, Wui-Seng Kon, said that cash was certainly king when the separation of a loyalty scheme took place.

"The main advantage is you can see the cash," Mr Kon said. "Right now it's under the airline: you can't see the cash and you can't see how profitable the entity is. I'm surprised it's taken [other airlines] so long to think of doing this, because Aeroplan has been listed for a year now.

"And when people started realising how much cash the business was generating over the past few months, the share price really started moving."
Indeed, after issue at $C10 ($11) a share in June 2005, stock in Aeroplan Income Fund is trading in record territory above $C17 a share.

He said Aeroplan - with more than 5 million members - was issuing more miles every year, as spending on air travel increased and the use of credit cards and other financial products through which customers earned points grew.
Aeroplan was beginning to generate new revenue by selling products derived from its enormous database of consumers.

Some observers consider ACE Aviation Holdings, the Toronto-listed parent of Air Canada and Aeroplan - each of which are also separately listed - to be the model on which Macquarie might build a new Qantas focused on global alliances.

While Air Canada is a pure airline business and Aeroplan a pure loyalty and marketing business, ACE Aviation is bulking up its services arm, last week agreeing to buy 80 per cent of El Salvadorean maintenance company Grupo TACA Holdings for $US44.7 million ($56.7 million).

Mr Kon believes Aeroplan might even consider Frequent Flyer an attractive investment, while Qantas chief executive Geoff Dixon has made no secret of his desire to form closer links with other airlines.

ACE still owns a 6 per cent stake in US Airways - which itself emerged from bankruptcy protection in 2005, thanks in part to a $US200 million investment by Texas Pacific Group.

Another member of Macquarie's consortium, Onex, also has links to Air Canada, having attempted and failed in 1999 to buy both it and Canadian Airlines, then merge them.

However Air Canada bought Canadian Airlines anyway, in 2001. Butler Caroye principal consultant Tony O'Connor, whose company consults on corporate travel, said this kind of global consolidation was likely to be at the heart of the grand plan for Qantas - whether the Macquarie consortium bought it or not.

But turning Frequent Flyer into a separate company could be problematic.
"The minute there's some sort of glass wall between the Frequent Flyer business and the airline you have diverging interests, because all the airline wants to do is minimise the number of Frequent Flyer seats it gives away so it can give them to paying passengers instead," he said.
"If I'm an airline, it's in my interest to choke off supply."
 

browski

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crazydave98 said:
"The minute there's some sort of glass wall between the Frequent Flyer business and the airline you have diverging interests, because all the airline wants to do is minimise the number of Frequent Flyer seats it gives away so it can give them to paying passengers instead," he said.
"If I'm an airline, it's in my interest to choke off supply."
Qantas did not even bother waiting til they sold off the program - they've been choking supply of award seats for years.

The king is dead, long live............Krisflyer
 

Yada Yada

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Dave - thanks for the post. Interesting info... AIFRS certainly puts the magnifying glass on assets of questionable value!

I'd like to suggest that Virgin Blue consider purchasing Qantas Frequent Flyer. I reckon that would be kinda funny. :mrgreen: Richard Branson and Paul Little would have the cash, wouldn't they? :D
 

simongr

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Interesting that a liability of A$1bn is worth A$2bn if sold. Wow those accounting standards really help the user understand the underlying performance of the business...
 

Gazza

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If my experience with Asia Mile/Cathay is any guide this will be a bloody disaster for the consumer.

The reality is that there is a balance needed to ensure that loyalty programs generate brand loyalty as well as GP.

If it is separated out from the airlines core business the bias will be more towards GP than brand loyalty.

Gazza
 

codash1099

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Well I'll be leaving my points in the relative safety of Amex and Diners, and review spending on ANZ Visa where points go direct to QF.

This might be an ideal time for those airlines with 2 for 1 conversion rates to reassess their arrangements with the CC companies.
 

jasonja3

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I wonder if/when Qantas will call this move an "enhancement"

As a member of the FF program, I cannot see many +ives from this potential move, the value of the points will more than likely decrease, and as a "loyal customer" I don't know that I see this move as reciprocated loyalty.

Time will tell.
 

Kiwi Flyer

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jasonja3 said:
I wonder if/when Qantas will call this move an "enhancement"

As a member of the FF program, I cannot see many +ives from this potential move, the value of the points will more than likely decrease, and as a "loyal customer" I don't know that I see this move as reciprocated loyalty.

Time will tell.
Why does everyone assume it has to decrease the value? The Aeroplan experience is mixed impact to members following privatisation of the FFP - some significant improvements (eg any seat awards) as well as some "enhancements".
 

dajop

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Agree with Kiwiflyer, lot of assumptions being made here. Wait and see may be the best approach. Who knows it may even lead to an increased availability, after all the FF program operator will have to pay QF for access to award seats, therefore it may be QF's interests to make more availabe.

Having said (after the AN experience) I think it is always prudent to retain points in credit card providers programs until such time as they are needed or until they are going to be significantly devalued by the credit card provider.
 

drron

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dajop said:
Having said (after the AN experience) I think it is always prudent to retain points in credit card providers programs until such time as they are needed or until they are going to be significantly devalued by the credit card provider.
Well if you have lots of diners points and aim to transfer them to AA it may be time to do so.I have been transferring mine because of a rumour about changes to the million miles unstated benefits.Last Sunday i transferred points on the website but did not go through as usual.Therefore rang diners.The first agent said it was because AA was no longer a partner but I insisted the deal was still listed on the website so put through to a supervisor who said the rewards website was down(it wasnt) so that she would put through the award manually.Paranoid me suspects that indeed it may not be too long before this award disappears from DC.
 

JohnK

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So many questions and no answers.

I just hope the loyalty I have shown the last few years does not go to waste. It will be much harder trying to start fresh in another FF program.
 

Tooner

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As I think Kiwi has pointed out before - annoying every FF in one fell swoop with massive "enhancements" is not sensible. A slow drip works a lot better!:cool:
 

simongr

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JohnK said:
So many questions and no answers.

I just hope the loyalty I have shown the last few years does not go to waste. It will be much harder trying to start fresh in another FF program.
I wouldnt start getting despondent John - nothing is decided yet (well it is - they just havent told us what it is yet) and I really dont see them either closing this down or eroding it substantially. They would have to leave oneworld for a start...
 

Yada Yada

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I just received an email from Geoff (sent out to all FF's) advising that it was business as usual at QF. :-|
 

oz_mark

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Yada Yada said:
I just received an email from Geoff (sent out to all FF's) advising that it was business as usual at QF. :-|
From a customer perspective, we should not expect any changes from these announcements for some time.
 

dajop

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Yada Yada said:
I just received an email from Geoff (sent out to all FF's) advising that it was business as usual at QF. :-|
Which of course means, there must be some more enhancements due to be announced in the next month or two to take effect around the middle of '07 if the 20-30 month cycle of enhancements continues.;)
 

Yada Yada

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I also received an invitation to complete an online customer survey from QFF today. Essentially, it wanted to know the following information:
  • What credit cards I used that had loyalty programs linked to QFF
  • The percentage of total spend that I used on each card
  • The percentage of points used on these cards for flights, shopping vouchers, purchases, etc
  • Would I like it if all points on my cards were automatically transferred to QFF each month
  • If all award seats on a flight are taken, would I like a "points + pay" system that would make all other seats available?
...and various permutations of some of the above questions.

Suffice to say that I told them I did NOT want all my cc points transferred to QFF each month! Pity there was no place to write comments on the survey - I would have asked if they'd heard about AN Global Rewards! :rolleyes:
 

JohnK

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simongr said:
I wouldnt start getting despondent John - nothing is decided yet (well it is - they just havent told us what it is yet) and I really dont see them either closing this down or eroding it substantially. They would have to leave oneworld for a start...
Yes I know it is months away from decisions, if any, on the FF program. I am not expecting any major "enhancements" but by the same token I don't want to start comitting to another year of striving for QF Platinum and find that the goal posts have shifted part way through.

My biggest concern is that I am spending my money on additional travel, otherwise unnecessary, for the purpose of maintaining status and would hate to see this wasted.
 

Kiwi Flyer

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JohnK said:
Yes I know it is months away from decisions, if any, on the FF program. I am not expecting any major "enhancements" but by the same token I don't want to start comitting to another year of striving for QF Platinum and find that the goal posts have shifted part way through.

My biggest concern is that I am spending my money on additional travel, otherwise unnecessary, for the purpose of maintaining status and would hate to see this wasted.
Realistically no way to avoid unexpected changes, other than not using FFPs at all. They all have wording that allows changes at any time. We have been fortunate lately that big changes have been announced with a lead-in time that provides an opportunity for us to adjust, however we cannot expect this will always be the case.

Don't forget changes can be beneficial also. Eg airpoints changes in 2004 were good (for me) - easier to qualify status and made any seat available for use as award, the incremental tweaks since have been less good - upgrades now virtually impossible to get on worthwhile routes, lowered earning rates etc.
 
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