Part I: Spinning Off Loyalty Programs
Have you ever stopped to think about the value of a standalone airline frequent flyer program? Did you ever consider that it might be worth more than the airline itself?
Loyalty programs are cash cows for airlines, and frequent flyer miles are crack cocaine for many travelers. But most of us never consider a program’s perceived worth as a separate entity from the airline. Now as the airlines fight for their lives, the discussion of a frequent flyer program ‘spin off’ has resurfaced…and it’s an interesting one.
An airline spin off essentially means that an airline sells off all or a portion of their frequent flyer program. The notion is that loyalty programs will receive a much higher valuation on the open market because they are no longer associated with the poor margins in the flying business, but rather, the more attractive margins in the miles business.
Quantas is thinking about it. As the largest airline in Australia, a partial spin off of 40% of their miles business is worth between $2 billion to $3.5 billion by various analysts. Qantas is currently in the midst of making this determination and will make the official announcement in August. If it happens, Quantas will enjoy a huge cash injection that will boost their earnings considerably.
This won’t be the first time an airline has spun off its loyalty program. In 2001, Air Canada spun off their Aeroplan frequent flyer rewards program to the tune of 287.5 million Canadian dollars (that gave Aeroplan an initial valuation of 2 billion Canadian dollars). Aeroplan, with 9 million members, has since then doubled its value and is now worth six times that of Air Canada.
Those numbers are not chump change. Apply that same math to American Airlines with 57 million members, and by some estimates American’s award program could be valued at $21 billion dollars – 18.5 times the airline’s current value.
You can be sure that American will be watching Quantas closely next month. In Part II of the series, we will explore how a spin off works in the open market and how it benefits the airline and the program members.
