Part II: Is a Spin Off a Good Idea For Anybody?
In Part I of this series, we talked about how Quantas is considering spinning off their frequent flyer program to improve their bottom line. In Part II, we will explore how this might work for an airline, why it may or may not be a good idea, and also whether or not it would be a value-add for frequent flyer program members.
When an airline spins off a loyalty program, the public company retains all of the assets and proceeds from mileage sales, as well as all of the liabilities. When a person accumulates miles from anything other than flying and then uses those miles to fly, the spin off pays the airline for the value of the travel. Likewise, when the member earns miles through travel and uses them to redeem something aside from airfare, then the airline owes the spin-off compensation for the miles. The spin off gets all the upside on the difference between what they charge partners to buy miles and how much they cost to redeem. On the flip side, an airline program on the public market is a risky proposition right now. This is because the program’s value is contingent upon the ability of the airline to survive, which is questionable at best.
For an airline, spinning of their loyalty program means losing the only profitable division of their business. Forever. This is a scary outcome and probably the overlying reason only a handful or airlines (Aeroplan, Quantas, etc.) have considered the move. It also seems counter-intuitive to spin off the very program you developed to increase customer ‘loyalty.’ However, there are a few reasons why an airline would consider such a deal. First and foremost, it would obviously bring about a huge cash injection that would help airlines brave the current conditions and also help build employee morale. Secondly, it would also increase the stock price of the airline and make it easier to raise more money. Of course, once it’s gone, it’s gone, so it might make sense for an airline to partially spin off (like Aeroplan) and retain some of the core value of their loyalty program.
For members of the said program, a spin off is actually in their best interests, particularly in a bad economy like today. In the event of an airline bankruptcy, the spin off would be able to quickly purchase free air travel from other airlines using their huge cash reserves. This would insulate the member from the risk associated with accumulating miles from a particular airline. A spin off also increases your options for redeeming points, as they will have a variety of loyalty programs.
Regardless of what happens, it shouldn’t be a big concern to frequent flyers. Things will likely stay the course, or you may find that your airline spins off and you just get more security and better options. Cool.
