Brazilian airline Gol is struggling. They reported losses last week of BRL 201 million (~$96mm) for the quarter, the fifth loss in six reporting periods. And the outlook for the company doesn’t look particularly promising. They’re seeing huge cost spikes in their fuel and aircraft rental/leasing costs and continued pressure on currency exchange due to foreign debt. But they have a glimmer of hope: an IPO for their Smiles loyalty program.
Gol is the latest carrier to consider such an approach to raising capital. And, by most accounts, spinning off the loyalty program is a great way to raise cash. The programs are generally profit centers in the companies and their value is not fully realized so long as they’re just another cog in the bigger company. But can they maintain their profitability once separated?
Aeroplan, the program spun off from Air Canada seems to be doing a reasonable job of remaining profitable since that transaction but even there it hasn’t been a particularly smooth road. The stock price is still 4% below where it opened trading in October 2006, and that’s after dropping to less than half the initial pricing in late 2009. Then again, relative to the airline itself, the performance of Aimia is actually tremendous:
And that’s the real risk associated with these spin-offs: What happens if the airline falters? What happens if the ability to redeem the points for the primary reward opportunity disappears or changes dramatically? The value of the programs is based mostly on the ability to sell the points to 3rd parties – banks in the United States for their credit card portfolios – and those points are only valuable to the 3rd parties if the customers believe they can be redeemed for something useful. There may be a bit of a lag on the timing of the issue but the general concept works pretty well. So while spinning off the program can create an influx of capital for the airline, that only can last so long. The airline must also be able to right itself long-term. Air Canada seems to be reasonably stable, at least for now. It is not clear if Gol will be able to achieve such stability.
As for the spin-off becoming a trend, it isn’t just Gol looking at the possibility. Management in Brazil says they’ll decide in Q2 2013 on whether to actually have an IPO for the Smiles division. Jet Airways of India will be in action before then based on their announced plans. They are pursuing a similar path with their JetPrivilege program. And some private investors are looking at the Qantas program as another where the spin-off could make for a quick return on investment for shareholders. The current challenging economic conditions and the profitability of the loyalty programs make them ripe targets for quick cash. And the fact that handful of airlines have completed such a transaction successfully is emboldening to others considering the same path.
Hopefully they don’t have to go back to that well again, because this is generally a one-time cash infusion.