Want to help out a struggling airline and get your hands on their most profitable business unit? Australia is no longer a viable option. Qantas seriously needs the help financially and they’ve previously considered selling off their frequent flyer program to help finance the effort. That option is now off the table according to reports out of Oz. The formal decision is expected to be announced on Thursday.
The explanation for the decision is actually a relatively sound one. The airline was looking to unload only 30-40% of the multi-billion dollar operation. It hoped to bridge short-term losses with those funds and still maintain control over the day-to-day operation of the group. Not surprisingly, those considering spending that much cash to acquire the program don’t want to be so limited by Qantas; they wanted broader control over the operation of the program.
The loyalty marketing group’s valuation is higher than the overall market cap of the entire airline as a combined operation. For an airline losing a lot of money unlocking that potential seems to be very attractive. And there have been a number of similar divestitures in the past; perhaps the most successful was the Air Canada/Aeroplan split. But the move also comes with a number of challenges. Perhaps the most significant is the need to ensure that the points continue to have value to the members so that they continue to acquire them at a favorable rate to the program. Much of that comes from having travel awards available and when the program and the airline decouple that becomes a significant challenge. The successful versions of these transactions have found that balance but it is decidedly not guaranteed, especially when the airline is facing significant financial pressures.
Airlines are offering more options than ever for redemptions these days, much of it not specifically tied to air travel. Auctions, merchandise, gift cards, hotels and rental cars are all options these days. And it is entirely possible for an independent loyalty program to offer all those same awards. So why fret about the airline travel awards? Mostly because that’s still where the vast majority of points are being redeemed. Even with all the other choices available the consumers still see the airline redemption options as the key to the programs. Plenty of other loyalty schemes exist but the airlines seem to be doing the best at profiting from them.
So, why does the topic keep coming up? Financial advisors have been pushing for years to get airlines to spin off their loyalty programs (see this NYT story from 2007, for example). They are often the most profitable unit within the legacy carriers and the bankers want their chance to earn something off the transactions. Plus the cash infusion is often seen as a means to finance changes in the underlying airline operations which would theoretically provide long-term returns. Despite those efforts from the money guys, however, there have not been many such transactions. The Lufthansa Group is looking at such an option for the Miles & More program and expects to successfully complete the transaction later this year, though details have been relatively light since the initial announcement of those plans. Their focus (at least in public statements) is on adding more partners and increasing the value of the program to its members. It already operates at (more than) arm’s length from the airline so it is not clear that greater separation is really necessary to make that work, but it is what they’re talking about these days.
As for me, I get the desire to raise capital and benefit from the short-term bump a spin-off presents to the airline. But I’m also very, very skeptical of the long-term value proposition which comes from such a transaction. Air Canada still runs its own loyalty program separate from Aeroplan to recognize frequent flyers, for example, so it isn’t like the admin costs go to nil and the airline is making money hand over fist over time with such a move. Short-term fixes rarely last without a solid underlying business plan. And that’s an incredibly challenging thing to produce and stick to in the airline world.
This report from 2009 about the pros & cons of a spin-off is still an interesting read today.
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