QFF programme changes - AGAIN! Can't be good news?

[NM]

FF points are a HUGE cost to Qantas. They are a liability that they have to hold on their books.

Quite the opposite as I see it. All the points earned from partners, including the huge number of points from Credit Card partners, are purchased from QF by the partner. This is a huge source of income for QF. Then remember that unlike many other loyalty schemes, QF FF points cannot be transferred out to another program, so QF does not have to pay anyone else if we chose to use QF FF points to purchase someone else's points.

And if QF get their yield management right, the FF awards (we can only use our QF FF points for free award flights or upgrades) should be minimal incremental cost to QF, by filling otherwise empty seats.

Meanwhile, as we sit on our huge FF account balances, QF has the benefit of the cash paid by their partners and have already accrued the points costs from the fares we paid for flights flown. This "cash" is then available to QF to invest in their airline while we sit and watch our points devalue.

I think QF are winners from the FF points, not sitting on a liability. FF points were not seen a liability by the Ansett administrators. How much compensation was paid to Ansett FF members for their FF points balance through the receivers? FF points are a cash injection for the airline, not an outstanding liability.

Imagine how many points us FF members have stored away for a rainy day. With this change I estimate that points have been de-valued overall by around 20%, not a bad way to reduce your liabilities and costs in one easy swoop. It must look really good on the bottom line, so I hope Qantas management are getting nice big bonuses for Christmas. It seems like a good short term strategy but as a shareholder as well as FF I question the longer term benefits.

I think the program changes (read points devaluation) was a direct response to the successful promotion of points-earning credit cards, where people who fly very infrequently were still able to accumulate large points balances and hence valuable rewards on QF. Remember that the FF program is supposed to instill customer loyalty and hence part of the reason for providing valuable rewards such as long-haul international premium cabin flights or upgrades is to recognise and promote customer loyalty. I think QF were finding they had many FF members with large points balances earned through Credit Card or magazine purchases and very little flying loyalty. So they looked to realign rewards with actual flying loyalty - hence all international upgrades are now waitlisted and cleared based on FF status. Though I will reserve judgment on the success of that part of the changes until my first upgrade waitlist after May.

Qantas international are doing really well and all of my flights recently have been almost full in economy and business. Qantas domestic is another story. Using 767-300s, A330-2/300s and 737-800s domestically has added thousands of seats a day on domestic routes.

This is not backed up by the official traffic figures. See here for the published October numbers. This shows that load factors on international (75.6%) are in fact lower than domestic (81.5%). On my last QF international flight (early December), only 2 of 25 J seats taken, and economy cabin was less than 50%, which shows how we can't rely on what we see on individual flights, but should be able to trust the published traffic figures.

Yes, domestic capacity is up from 12 months ago. However, looking at the domestic financial year to date ASK numbers, there is almost no change from the same period 2003/04 and 2004/05. Of course this is not including JQ's 1687 ASK's, but none of them are on 767, A330, 738 aircraft and are using the aircraft previously operated by QF Link which are excluded from these figures. Remember also that several 762's have gone from QF service as A330's have entered.

For the same FY year to date comparison for QF mainline international, we see an increase of 17.3% for ASK.

 

[dajop]

(we can only use our QF FF points for free award flights or upgrades)

NM agree totally with the thrust of what you're saying re liability argument - the Ansett adminstrators valued our GR points as being worth a big fat $0. However I must point a factual error in your statement above - QF FF points can be used for car hire & hotel bookings http://www.qantas.com.au/fflyer/dyn/program/usingPoints/hotelAndCar - although it puzzles me why anyone would want to spend 45,000 pts for a night at a hotel when the points don't expire and you can use almost the same no of points on a $1000 airfare or (theoretically) an Australia- Asia upgrade to discount Y to J upgrade. Makes it a very expensive nights accomodation!

 

[NM]

However I must point a factual error in your statement above - QF FF points can be used for car hire & hotel bookings http://www.qantas.com.au/fflyer/dyn/program/usingPoints/hotelAndCar - although it puzzles me why anyone would want to spend 45,000 pts for a night at a hotel when the points don't expire and you can use almost the same no of points on a $1000 airfare or (theoretically) an Australia- Asia upgrade to discount Y to J upgrade. Makes it a very expensive nights accomodation!

True. I wonder if anyone has actually made such a redemption?

 

[jazzop]

Thanks for your input NM and dajop.

There are a multitude of ways to reduce the cost Qantas incurs as a result of issuing and selling FF points. Yield management being one of the ways and I’m confident that Qantas like most airlines have this down to a fine art. Reducing the value of those points in the first place is easier to do and has more immediate results. It’s just treating FF points like a commodity. Qantas earned somewhere between $600 - $800M last financial year selling FF points to the credit/debit card providers, therefore the points have a per unit value. Qantas don’t list their liabilities in detail but discuss this point in the 2003/2004 Annual Financial Statement in 1(r). It’s all quite broad but that’s what you would expect.

Yes the points accumulated through the use of credit/debit cards is enormous, but Qantas get good money for those points and it fills seats that might have gone empty (good yield management). Issuing points is just like selling a gift voucher. You get the money but you have to register that voucher as a liability until it’s used. If the company/airline goes bust (Ansett) then the voucher is useless and there is no requirement to pay the money back. Sad but true.

Thanks for the link it was interesting reading. I’m surprised that ASKs are almost neutral but what I found more interesting is that yields are down (as a group) but passengers are up (as a group). I imagine that this has a lot to do with domestic competition, and makes sense that Qantas encourage us to use our points domestically. You’re lucky to be on such an empty flight. My two MEL – LHR and two MEL/SYD – LA flights this year have been absolutely full as have most of my domestic flights. The only half full flight I’ve experienced on Qantas this year was a PER – MEL flight on a A330.

Even though Qantas are justifying their decision for all sorts of reasons I still think the real one is as I’ve mentioned above. As Geoff says, they have to get their costs down to be more ‘competitive’ and maximise shareholder value. Like I said it makes the bottom line look good (for the short term) so bring on the bonuses!

 

[NM]

Thanks for the link it was interesting reading. I’m surprised that ASKs are almost neutral but what I found more interesting is that yields are down (as a group) but passengers are up (as a group). I imagine that this has a lot to do with domestic competition, and makes sense that Qantas encourage us to use our points domestically. You’re lucky to be on such an empty flight. My two MEL – LHR and two MEL/SYD – LA flights this year have been absolutely full as have most of my domestic flights. The only half full flight I’ve experienced on Qantas this year was a PER – MEL flight on a A330.

Part of the reason for the increased passengers and reduced load factor is the increased capacity across the board. Remember that QF has taken two 747-300's out of mothballs and re-entered into service in the last 6 months, as well as received several A330's into the fleet in the last 12 months. And in that time they have retired the last few 767-200's and perhaps sent a few 737-300's over to JetConnect.

If you want to see the affect of increased capacity on loads, then have a look at Virgin Blue's numbers for the last 12 months! Not a pretty sight as far a load factors go. 12 months ago they were in the mid 80's, which is pretty healthy. Then they have grown capacity by something like 30% in 12 months, and even though the number of passengers has grown substantially, their average load factor has dropped by something like 6% (can;t remember the exact numbers). Of course, the introduction of JQ has also affected their ability to gown customers at the same rate as capacity.

However, I expect this is just a statistical glitch that is a result of a large step increase in capacity, and it will sort itself out in the next 12 months as the market settles into some sort of normality (whatever normal is??).