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 A multitude of global carriers - preserved by complex cross-border
ownership rules that curb dealmaking - means that simply selling
tickets is no longer lucrative. Industry body IATA predicts a 3.5
percent drop in fares this year and for airlines' net profit margins
to reach just 2.4 percent.
As airlines dig around for new ways to make money, many of them are
finding it buried deep in their marketing departments.
Dating back to American Airlines' launch of AAdvantage in 1981, FFPs
were originally used to encourage a customer to spend their money
with just one carrier by offering free flights as rewards once
enough miles had been collected.
Nowadays, however, the programs, with their rich customer data, have
become a currency of their own as airlines realize their value to
companies such as credit card providers, hire car companies and
hotels. An example: Delta <DAL.N> commanded $675 million from
American Express <AXP.N> for its Skymiles in 2011-2013, according to
Euromonitor analyst Nadejda Popova.
Those are not the only kind of deals to which airlines have turned,
increasingly inventive as profits nosedive. In 2012 Germany's ailing
Air Berlin <AB1.DE> sold a 70 percent stake in its Topbonus program
to Etihad for 185 million euros ($247.72 million), more than the
market value of the German company as a whole at the time. In 2013
an IPO of Smiles <SMLE3.SA> helped Brazil's Gol <GOLL4.SA> bring
down net debt. [ID:nL2N0GE0JF]
Now industry watchers expect more such deals, spin-offs and stock
market listings as airlines try to unlock more value from these
businesses - and in turn drive more new revenues.
Brazil's Valor Economico newspaper reported recently that the
country's third-largest airline Azul Linhas Aereas could follow in
the steps of rivals TAM and GOL by floating its TudoAzul frequent
flyer program as a way of raising funds in the capital market,
citing the program's director.
"The visibility you get from establishing it as a separate unit and
the additional focus that it then has in terms of becoming
profitable in its own right pushes it to generate revenue from
sources other than the core FFP," Jonathan Wober, chief financial
analyst at CAPA - Centre for Aviation, an independent aviation
market analysis group.
VALUATION
Given that airlines often don't report separate figures, it's hard
to say precisely what FFPs are worth. But the figures that are
available show how richly valued they are.
When Air Canada <ACb.TO> spun off 12.5 percent of its frequent flyer
program in 2005 it was valued at C$2 billion ($1.82 billion), or
around 20 times its then annual profit of C$99 million. More
recently, analysts have put a value of up to $2.5 billion on the
loyalty division of Quantas <QAN.VX> - almost 10 times the unit's
annual profit - as Qantas prepares to float or sell part of it under
a restructuring.
There are benefits for those airlines that do make money too.
Deutsche Lufthansa's <LHAG.DE> new chief executive Carsten Spohr
said last month that giving its frequent flyer program Miles & More
an independent profile would lift the entire group's profitability
and provide money needed for new planes.
Analysts at KPMG say it's worth an airline putting a program into a
separate unit first before attempting a stock market flotation.
"For IPOs there are a lot of requirements when it comes to
transparency. I would recommend letting the program report results
for one or two years first so the market has access to numbers,"
Magnus Schenk, a transactions director at KPMG in Frankfurt, told
Reuters.
RICH DATA
It's no surprise that investors are interested in FFPs for their
data. What makes FFPs particularly sexy is the detail in that data:
Not just a rich seam of customers, but a rich seam of rich
customers.
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"It's extremely powerful data, especially as it tends to be slanted
towards the premium segment," said Marc Allsop, Senior Vice
President and Head of Global Business Development at Aimia <AIM.TO>,
which has stakes in a number of FFPs and runs other loyalty schemes
including the Nectar supermarket plan in the UK and Italy.
Allsop told Reuters that in the UK, 41 percent of those who are a
member of an airline loyalty scheme have an annual income of above
90,000 pounds ($151,164).
Still, he added, airlines face a tougher task than retailers when it
comes to leveraging their data, because people fly far less often
than they shop.
A way around this would be to keep tracking their customers once
they leave the airport.
"Airlines sell tickets, tell people when they can check in, lead
them on board and to their destination city. Then the next time
passengers hear from them is when it's time to check in again,"
Stefan Auerbach, head of airline solutions at Lufthansa Systems,
told an aviation conference in Frankfurt.
Instead, they could be using smartphone technology to track their
customers as they travel onwards, gathering more information on
their spending to tailor offers to their preferences, and increase
the possibility that customers take them up, thus bringing in more
revenue.
COSTING NEW FLYERS
Aimia's research showed that while 73 percent of consumers were part
of supermarket loyalty schemes, just 12 percent were members of
airline schemes.
Carriers such as Lufthansa and Emirates hope to attract more flyers,
and make infrequent customers more regular, by offering the option
to buy miles - to reach reward thresholds - or by offering smaller
items like songs via iTunes to persuade them to cash in their
points.
More customers, more profits? Maybe. Amid the scramble to boost
their FFPs, airlines also have to remember to manage the trillions
of unused award miles out there to make sure they don't suddenly get
swamped with requests that could burden their yields, or how much
profit they get per seat.
For despite airlines offering customers the chance to buy anything
from language classes to cases of wine with their points, most
people still just want to use their points for a free flight or an
upgrade.
"I would rather spend 160,000 miles for a Lufthansa business class
ticket than to take the same miles for five nights at a middle range
hotel somewhere," said Dennis Glosik, an airline blogger and
frequent flyer with Lufthansa.
($1 = 0.7468 Euro)
($1 = 1.0964 Canadian dollar)
($1 = 0.5954 British pound)
(Additional reporting by Peter Maushagen; Editing by Sophie Walker)
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