Could Qantas sell off its frequent flyer program?

Could Qantas sell off its frequent flyer program?

It’s enough to make frequent flyers think the sky is falling.

Qantas’ warning of a loss of up to $300 million over the past six months and even tougher times ahead, coupled with the dramatic (if not over-dramatised) downgrade to ‘junk’ status, has set rumours of a sell-off of the Qantas Frequent Flyer scheme swirling.

Worried friend and frequent flyers alike are asking if they should spend all of their Qantas points now, booking a handful of trips or even one around-the-world first class junket to empty their account ahead of some impending points apocalypse.

So what’s the story? Where do you and your precious Qantas points stand?

It’s true that Qantas CEO Alan Joyce has declared that “all options are on the table”, including putting part or all of the airline’s lucrative frequent flyer program on the auction block.

And if Joyce is looking for a quick way to inject cash into the Flying Kangaroo, the Qantas Frequent Flyer scheme is perhaps the shiniest silverware in the drawer.

With almost 10 million members on the books, the scheme’s parent Qantas Loyalty division took a record $1.2 billion in billings across the 2013 financial year to contribute $260 million (before interest and tax) to the Qantas purse.

That’s a much-needed river of revenue when Qantas is facing a high tide of red ink.

QFF worth up to $2.5bn

But the haul from selling the entire scheme, or even a sizeable chunk of it, would be many magnitudes greater and provide a quick fix for Qantas’ financial woes.

John O’Shea, analyst with Bell Potter Securities, believes that as a stand-alone business, Qantas Frequent Flyer would be valued at “somewhere in the $1.5 billion to $2.5 billion range”, he told Australian Business Traveller.

That’s a staggering amount in anybody’s terms. How can a frequent flyer program possibly be worth so much?

If you consider points as currency – and Qantas Points are Australia’s de facto second currency, after the Aussie dollar – then a frequent flyer scheme is effectively a license to print money.

The airline creates the points, conjuring them up from thin air at the press of a spreadsheet key to sell to retail partners – credit card companies, supermarkets, hotel chains, insurance and utility suppliers, restaurants and so on.

Those businesses dangle the bait of earning points for every dollar you spend as a way to attract customers.

Having amassed a sackful points, those customers swap them back to the airline for free flights, business class upgrades and assorted products sold through the airline’s online frequent flyer store.

A licence to print virtual money?

In short, this is a closed economy over which the airline has total control.

It determines the price of points sold to partners as well as the 'exchange rate' when it comes to the public trading in their points.

And one can’t help but get the impression that they’re the least messy part of running an airline.

There are no pesky passengers, no expensive planes with their bothersome fuel bills and unionised cabin crew… just the whoosh of credit cards dispatching invisible frequent flyer points from Qantas to businesses to shoppers and, in the end, back to Qantas again.

They're also unparalleled for data-mining, with Qantas Frequent Flyer based on arguably Australia's largest and richest database of customer details and spending patterns.

Little wonder, then, that a well-run frequent flyer scheme is not just a cash cow but a super-profitable businesses in its own right, and one that’s ripe fruit for the plucking.

So what’s the forecast for Qantas Frequent Flyer?

A full sale might deliver a $2.5 billion windfall for Qantas but analysts consider this is unlikely.

“Qantas Frequent Flyer is totally reliant of Qantas for seats so it makes sense for it to remain a subsidiary of the Qantas Group” Commonwealth Bank analyst Matt Crowe told Australian Business Traveller.

“Any potential owner would face the risk that Qantas increases the ‘price’ at which it supplies seats or even cuts off the supply of seats altogether.”

For the same reason it’s felt that a minority stake in QFF would also be less attractive, as it would deliver a reliable income stream but without any real control over the vital supply side of the business.

Qantas isn’t expected to announce any asset sale plans until February 2014, and at this stage nobody knows exactly what shape they’ll take.

But if you’re puzzled over the fate of your Qantas points, Australian Business Traveller suggests staying calm. Book some trips if you plan on travelling, but in our opinion there's no need to panic over your points.

What's your take – will Qantas sell part or all of its frequent flyer scheme? And if so, how will that play out in terms of the future of the program?

Follow Australian Business Traveller on Twitter: we're @AusBT

David Flynn
David Flynn is the editor of Australian Business Traveller and a bit of a travel tragic with a weakness for good coffee, shopping and lychee martinis.
 

18 comments

  • AusFlyer

    AusFlyer

    10 Dec, 2013 01:41 pm

    I did wonder what panic there was out there with regards to QF FF points. Glad someone has taken the initiative to let people know the reality of the situation and that there isn't any need to panic!

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  • TheRealBabushka

    TheRealBabushka

    10 Dec, 2013 01:43 pm

    So it can be valued and has a high valuation; does it mean it should be sold?

    It is one thing to sell an airline's catering and engineering arms but to sell the FF programme?

    Can anyone enlighten me as to the business model for an independently owned FF programme?

    What sort of contractual obligations would this independent entity have with Qantas?

    Will this entity be self-sustaining with any future demise of Qantas?

    Should an investor re-forecast the future cash flow, and therefor value of the new entity if it unhinges from Qantas?

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  • KG

    KG

    10 Dec, 2013 02:16 pm

    TRB: Google for Aeroplan and you will find case studies on how and why AC sold off their FF business and what the rationale is for a company to buy it and operate it standalone. Pretty interesting business and highly profitable. Aeroplan is wholly owned by AC which is pretty crucial (as stated in this AUSBT article)

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  • TheRealBabushka

    TheRealBabushka

    10 Dec, 2013 02:19 pm

    How do you wholly own something you have sold off?

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  • KG

    KG

    10 Dec, 2013 02:23 pm

    Via holding companies and by selling off shares to companies and taking a stake in those companies. You only have to have / control more than half of the shares to be wholly owned as far as I know (as then you effectively control the whole company).

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  • TheRealBabushka

    TheRealBabushka

    10 Dec, 2013 02:28 pm

    Who wrote the case study? I only found the wikipedia link, which doesn't give much info on the business model. Thanks KG. Exciting stuff.

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  • KG

    KG

    10 Dec, 2013 02:33 pm

    There is one from Carlson Marketing (written by Evert de Boer - not the newest publication - he worked for KL, after Carlson and now AIMIA) and one by AIMIA (which can not be seen as truly objective IMHO as they are a marketing company who was involved in AC spin off - still an interesting read). Enjoy!

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  • Serg

    Serg

    10 Dec, 2013 03:45 pm

    I have almost empty balance - just booked next flight - and thinking to migrate to other program, either velocity or kris.

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  • ezihose

    ezihose

    10 Dec, 2013 04:59 pm

    Qantas with Alan got out classed! Domestic Business Class is not International Premium Economy! So what does that make Domestic Economy??

    Why put new A330-300's on with Jetstar and leave Qantas with 30 year old 767's? 

    They wanted the bottom end of the business and they had to give away the top end to get it! So good luck! 10% GP on $100.00 dollar seat or 10% GP on a $990.00 seat? Guess which one Alan picked?

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  • TAADC9

    TAADC9

    10 Dec, 2013 06:26 pm

    The ad isnt slick enough compared to Virgins bringing back the glamour to flying. It is all over the place. Also the staff members are a little tired looking (even with the new uniforms, no offence to them).

    At the end of the day qantas's wants to look fresh and new?? Yet its product is old and tired, especially when you set foot onto their planes. There is a feeling of complacency and that your just another number.  I don't feel I get value for what I pay for (especially in Business class)

    Based on this ad of trying to Show glamour, a feeling of escape and fresh looking people in the ads etc??? Its a big fail!!!!.  Flying is about the illusion, glamour, feeling and experience of escape and a flyer feeling important.  A change in Uniform put on an old staff member doesn't mean the product is any greater. Bring in fresh planes (feel of aircraft)/product and staff/service, a feeling of importants (at competitive prices) and then you may get somewhere.

    I hate to say it, but Virgins Fligt attendents and their service every time I have flown business class??? I can't fault. From the music playing as you enter the aircraft, to the fresh clean cut uniforms, to the personal service when I sit down. It brings back the feeling of TAA, Ansett, old Qantas and even Pan Am (eeven though Virgins Business product is quite basic).  Style, Service and Glamour On qantas today???  I feel I'm just another number, thats paying over rated prices for a complacent company. Even First class, to which I recently flew on the A380 to LAX is tired and old and dirty. Compare this to Emirates, Singapore, Cathay etc etc etc etc (which I've flown) ????Amazing products.

    Besides all of the above stated??? The biggest joke is the timing of the ads.

    It doesn't help with putting new ads and saying all is new etc, when all you hear on the news are job losses, $300 million financial losses, blaming competition and staff for their problems and a frequent flyer program that could be sold off etc etc. The flying public aren't stupid.  It gives a feeling of another Ansett maybe happening (even though I'm sure this won't happen). So Get some international investment into Qantas (if the government won't), stop blaming competition, become a lower cost base (like Virgin) and create an illusion/feeling of style, escapism, glamour and service when you set foot on the aircraft (at a competitive price), then you'll have something to offer. (PS. You can't keep using your safety record as the reason to fly). Especially when the planes, product is old, is just plain old.

    So finally, Qantas and its past complacency and reactionary beahaviour?? is becoming like the grumpy old man not moving with the times, blaming everyone else but themselves for not reacting fast enough in response to their competitors. They have to stop thinking as if its the old days (as a government airline) before deregulation came in and start thinking competively and proactively, both domestically and internationally. 

     

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  • PLATY

    PLATY

    10 Dec, 2013 08:14 pm

    Nice article, thanks, David.

    "...this is a closed economy over which the airline has total control..."

    That's the big rub. It is worth QF devaluing redemptions pre-sale. It is worth QF devaluing redemptions in the short term with or without sale to augment whatever cost cutting initiatives eventuate. So the devaluation issue could perhaps complete the review (?).

    Yep...whereas it may not be time to "panic", it is certainy time for QF FFers to review their point earn/redeem strategy based on a shift of the risk profile in the wronf direction.

    Now since it only costs 5,000 pts to cancel a redemption, it may be worth it for those of us with high point totals to  book up some premium flights - they can be canceled if the winds of change favour the customer (although I predict this to be highly unlikely given Joyce at the helm and the structural and strategic problems faced by QF).

    Those who doubt the continuing mismanagement at QF could ponder that QF continues to miss the opportunity to market and brand itself on its points of differentiation to VA - one is the international network...clang...message to Joyce, you have an international network which doesn'tv have Jetstar on the tailfin...

    ...the point is that so long as Clifford and Joyce are teetering on top of the ivory tower nobody's points are safe...

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  • gippsflyer

    gippsflyer

    10 Dec, 2013 11:26 pm

    I'm of the view that the worst thing that happened to Qantas is Alan Joyce - this artificial panic he has created is yet another nail in the coffin. Nearly all the business section commentary is that this latest crisis is all of his making, through his overly ambitious Jetstar expansion, which he hides the true cost of by dumping expenses on Qantas International - not to mention the flawed domestic capacity war he stupidly engaged in (almost killing the golden goose, Qantas Domestic).

    Here's hoping he's not long for losing his own job, before he pulls Qantas down around his ears.

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  • TheRealBabushka

    TheRealBabushka

    11 Dec, 2013 06:32 am

    Has anyone analysed the tangible benefits of keeping that extra 15% of the market? Persumably in a duopoly if QF and VA agree on 50% each, they can milk the market for all it's worth. We can then move on from this BS drama.

    What is so special about this 15% that's worth risking your entire business?

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  • gippsflyer

    gippsflyer

    11 Dec, 2013 05:20 pm

    I suspect it's much to do with Alan's Little Man Syndrome, trying to damage John Borgetti's business (and unfortunely killing Qantas in the process), rather than any *real* business reason to flood the market with capacity.

    After all, one of the great leverages Qantas has had is its domestic Platinums flyers, who used to stick loyally with Qantas for international flights to keep their status perks. Putting on more domestic capacity didn't change this, or the number of Platinums - it just raised costs! Worse, now that they are given the same status for Emirates metal, you find people taking their flights overseas, with little benefit to show for Qantas.

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  • eminere

    eminere

    11 Dec, 2013 12:13 am

    I'm hoping my international flight upgrade request goes through...

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  • paa

    paa

    11 Dec, 2013 01:23 pm

    David I think you are being a little too generous about the richness of the QF loyalty database in comparison to others. Yes, it will be a reasonable list of customers, but it lacks thew depth of customer transactions that a certain four financial institutions in Australia hold. Where QF knows how much a customer spent on a credit card in month, the banks know exactly where and when you made those purchases. And they may also know what you are paid, what you owe, what benefits the government gives you, what investments you hold, and so on. Qantas only knows a bit about your travel patterns, a little bit about your monthly spend, a little bit about where you shop (if with their partners), etc.  I understand QF want to talk up the value hidden in their data to investors, but I don't buy it.

    On another note, I question the value and possibly long term existance of the airline and the loyalty programs if separated. I would not be surprised to see one or both dissappear if this occurs (excluding of course taxpayer funded intervention on the airline side).

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  • Al Glidden

    AlG

    11 Dec, 2013 01:33 pm

    paa, the banks with their credit cards cettainly know a lot more than Qantas but now that Qantas has its Qantas Travel Money card the airline is in a better position to track customer spending habits.

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  • paa

    paa

    12 Dec, 2013 11:29 am

    Qantas Travel Money is just one of the many attempts at disintermediation in the payments space. I doubt it will gain a market share to ever rival the banks. Also, as it's transactions flow through the EFT networks and switches, and the transfers of credit to travel money accounts will originate from accounts at other institutions, a good deal of that transactional data will be identifiable for the big four.

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