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What if Qantas sold its frequent flyer program?

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Turbulence ahead for Qantas's Frequent Flyer scheme?

Turbulence ahead for Qantas's Frequent Flyer scheme? Photo: Tanya Lake

Qantas's 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 a "junk" credit rating, has set rumours of a sell-off of the Qantas Frequent Flyer scheme swirling.

In the past week, not a day has gone by without friends and worried frequent flyers asking me 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.

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 High Flyer.

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 of 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.

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's Frequent Flyer scheme sitting 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 Commonwealth Bank analyst Matt Crowe considers this is unlikely.

“Qantas Frequent Flyer is totally reliant on Qantas for seats so it makes sense for it to remain a subsidiary of the Qantas Group,” he told High Flyer.

“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, I suggest staying calm. Book some trips if you plan on travelling, but I don't see any need to panic over your points.

Will you continue to use your Qantas Frequent Flyer points in the the same way as before?

David Flynn is a business travel expert and editor of Australian Business Traveller.

Twitter: @AusBT

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109 comments

  • I agree but also what this article misses is that there are millions and millions of unused points out there which could be looked at as an unfunded liability. So anyone who took over the program would be taking over the debt. If Qantas sold off the program it could only do so by offering seats at a special price which the buyer would have to redeem. There's no way they'd write a blank cheque for a future buyer to supply an unending number of flights for however many points they decided to give away. That would be a licence to print money.

    Commenter
    Andrew Stein
    Location
    Northcote
    Date and time
    December 11, 2013, 8:31AM
    • Nobody I know even fly with Qantas for YEARS. They remained over priced, faulty, late so welcome the likes of fresh airlines that remain competitive and on time and up to date with technology! Virgin rocks. Who fly Qantas anymore???? No wonder it's got issues they didn't remain competitive.

      Commenter
      The Other Guy1
      Date and time
      December 11, 2013, 11:25AM
    • "The other guy" needs to get a wider circle of associates. Plenty of people fly QANTAS every day. Just go to an airport & look around.

      Commenter
      Mr Irony
      Location
      Out There
      Date and time
      December 11, 2013, 12:13PM
    • TOG1: my last trip to Europe this year was with Qantas - because they were the cheapest! And looking good again for next year (Feb), courtesy of their linkup with Emirates. So maybe Joyce has achieved something?

      Commenter
      Jim
      Location
      Melbourne
      Date and time
      December 11, 2013, 1:08PM
    • Hey, c'mon, Mr Irony. The Other Guy does have a wide circle of friends. Apparently they now tag themselves The Shark Cult People. (Seriously!) We fly QANTAS less than we did, JestStar never again. To improve QANTAS, we need to swap our CEO with Air NZ's CEO. Or gift him to NZ.

      Commenter
      SV
      Location
      WA
      Date and time
      December 11, 2013, 1:29PM
    • I travel every week domestic and at least 5 times each year International. My preference is either SQ or QF. My last two flights to USA in past three months I could not get a business class seat on QF on any of my required days of travel and unfortunately travelled on Virgin once, which seemed like play school in the cabin .... I won't b e travelling Virgin again internationally. The other occasion I used United, which was even worse.
      Domestic I travel frequently to Perth, and only last week I could not get a business seat until three flights later than my preferred, which I chose to do rather than experience childish cabin crew behaviour.
      So hence, Qantas are filling their seats, but I wonder at what yield ?, which is of course due to the air fare war. An airfare war is in the long run not good for the airline or the consumer, as when it ends, there is less choice. I personally believe it should be illegal to sell seats at a loss, as if there was a normal margin of profit which in any other business would be essential, then everyone would be treated fairly.

      Commenter
      Pistol Pete
      Date and time
      December 11, 2013, 1:59PM
    • Not really an unfunded liability at all. The cost of FF points is factored in to the ticket price (i theory at least).Yes, when price cutting occurs that dynamic can be upset; but that is at least how it is based. What they are in reality therefore is a contingent gain for the airline. They have included the cost in their ticket oprice but may never have to pay out on it for many.

      Commenter
      Winfall Gain
      Date and time
      December 11, 2013, 2:07PM
    • Unfunded in the sense that they've given millions of points away not just on flights but through shopping and credit cards and anyone who purchased the program would have to honor those or be compensated by Qantas which would reduce the net value of any sale

      Commenter
      Andrew Stein
      Location
      Northcote
      Date and time
      December 11, 2013, 2:51PM
    • To "The Other Guy 1" my experience with Virgin this week, son was booked to fly to the Gold coast (direct through) for a week with his Dad. I logged in on Sunday at 4.pm to allocate seat for his 8.30pm flight. My reference number would not work, even with a copy/paste from the actual ticket. So I called them I get "ohh there seems to be a problem with that flight" hold on....then "that flight has been cancelled"!! Why...operational difficulties!!!! I ask, logically...when were you going to advise me??? He could't tell me. They have my email and my mobiile. So far service is crap.So, the new flight is on Monday...with a 4 hour stopover in sydney. I tell them this is crap. He rebooks my son on to a direct through flight on Monday night.
      So Monday night, get to the airport in plenty of time...and there is an hours delay, just hanging around in the airport...then, he gets on the plane, and another 30 mins delay.
      I have been flying with work and for pleasure for years, mostly with Qantas...and honestly, Qantas has not given me this kind of crappy experience...yet....I have had some delayed flights...but not like this recent Virgin experience.

      Commenter
      jewels
      Location
      Canberra
      Date and time
      December 11, 2013, 3:39PM
    • Never mind about selling off the Frequent Flyer Program, QANTAS needs to cut loose it's money pit JETSTAR. Ever since it's creation at the hands of the Board, Geoffrey Dixon and it's then CEO Alan Joyce they have lived "High on the Hog" and drained QANTAS of it's money, assets, International Routes, Engineering facilties (I could go on) to where it is now. Dixon claimed that JETSTAR would be nothing more than a Domestic cheap fare airline and wouldn't impact on QANTAS routes. LIE!!!!!. Have a close look at the QANTAS network and see exactly where we fly to. All the Sun, Sand and Surf destinations are JETSTAR routes. We have had failed venture after useless venture into Asia with JETSTAR now we have seen the biggest blunder of all getting into bed with Emirates. We use to fly 3 flights a day to Europe from Sydney via Singapore and Bangkok now we have 1 whilst Emirates flies on average 5 flights a day into here. They tell you it's great for QANTAS , but not really if you arrive in Dubai on an Emirates flight your connection is there waiting for you and it's almost seamless QANTAS timetable gets you to Dubai to late for the connections and you have to wait around for anything up to 5 hours for your flight. Why would you fly QANTAS. This Board and it's CEO have to go if we have any chance of saving this once proud airline.

      Commenter
      AngryLAME
      Date and time
      December 11, 2013, 7:14PM

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