Flying in the face of turbulence

Frequent flyer programmes can rake in sky-high rewards, but just who is profiting? Annich McIntosh reports

The airline industry has seen its fair share of stormy weather over the past few years.

Challenges include record-high fuel costs, falling business customer numbers, plunging budgets, a constant stream of bankruptcies, and now, a disruptive loyalty scheme environment as airlines reposition themselves in response to a changing world order.

Loyalty programmes are very valuable to airlines; sometimes they are even more profitable than the airline itself.

Qantas is an example of this. The Australian airline has built an astounding position in the market because its Qantas Frequent Flyer programme has established itself as a virtual currency for earning and exchange across a wide array of transactions.

Qantas reported that Frequent Flyer’s profit before tax jumped from A$226 million in 2008-09 to A$328 million for 2009-10. The latter was crucial in a year when Qantas overall reported a profit before tax of A$377 million.

In November, bucking the current trend, it returned another record as the Qantas Frequent Flyer division reported earnings before interest and taxes (EBIT) of A$342 million for 2010-11. All this from a division which accounts for just 82 of the airline’s 32,490 employees, according to its annual report.

This is why the Macquarie Equities analyst Russell Shaw recently valued the Frequent Flyer programme at more than A$2 billion – over half the airline’s market value.

Conversely, it is estimated that 14 trillion unused air miles are currently sitting in various airline programmes. So do loyalty rewards in the form of miles work as a retention driver in this sector?

Loyalty programmes are very valuable to airlines; sometimes they are even more profitable than the airline itself.

James Berry, product director for ancillary revenue experts Collinson Latitude, believes that by offering a wider range of rewards and leveraging  partner products and services rather than focusing solely on own inventories, airlines can dramatically increase the perceived value of their reward programmes, leading to greater levels of redemption by customers.

Endorsing the Qantas model, he says: “In a recent survey we conducted, 79 per cent of people who travel more than seven times per year want non-travel-related rewards.  Clearly if we have got over 14 trillion points unused out there, something is not working as well as it could and we think this type of approach could make all the difference.”

A report from ICLP concurs: “For many frequent flyer members the promise of ‘free’ flights has all but vanished with continual increases in taxes, fuel surcharges, security fees plus many ancillary services being charged as extras. This is not the case with hotel programmes where a ‘free night’ has largely remained a free night without additional charges.”

An added complication in the airline business is that most of the long-haul companies belong to one of the three airline alliances – oneworld, SkyTeam and Star Alliance.

How this changing skyscape will affect frequent travellers, who already have to spend considerable time and energy making sure they maximise their miles, is too early to tell, but it is certainly causing a great deal of discussion on the frequent flyer websites.