Changes to ODU's?

[Platy]

Qantas refer to this as breakage, and last I saw it was less than 10%. Some of the Qantas accounting basics can be found starting from Page 45 of the following document: http://www.asx.com.au/asxpdf/20080221/pdf/317kqrh3frdhpf.pdf

Basically when you get a point the Billing for that point is treated as deferred revenue. When the point is redeemed the deferred revenue makes its way to the P&L

Thank you very much for the info, oz_mark.

That's in accounting terms. In real terms, Qantas has the real cash in the bank from the sale of points and/or sale of seats driven by loyalty. There is thus cash flow benefit up front, whatever the accounting methodology (trickery depending on yourn point of view), BEFORE any liability is realised.

 

[AnonymousCoward]

We have already seen than this whole charade depends on accounting trickery.

There is no accounting trickery here. QANTAS accounts for all this stuff in the same way that say, your newspaper accounts for your subscription when you prepay.

So the stupidity is the figues used by the airline have driven it to a situation where it is more cost effective to leave a seat empty than let a loyal frequent flyer sit in that empty seat, use their points, feel great and lower the liability ledger

If people felt that they could alway get upgrades, then people would always buy economy fares. QANTAS knows this, so they keep things a lottery to force people who really want to sit in J to pay J prices.

 

[simongr]

Dear god - I think I am about to agree with AnnonymousCoward...

OK let's get past accounting trickery and other excitable phrases. How QF accounts for this is on some levels separated from how they deliver on points for upgrades.

Let's go back to accounting 0.1 - the underlying concept is to match the revenue (that is the reported earnings) to the expense (that is the cost of bum on seat). Now if you spend 100K on Amex and QF receive cash of $1000 from Amex they cant spend that money on Exec bonuses or Liesel Jones as they have the potential liability of giving someone 100K worth of flights - that could cost them very little (if points die in a hole in the ground) or a lot (if someone gets a J flight to LAX from SYD). So it is appropriate to tell their shareholders and investors that the $1000 sat in the bank is not free to invest in spas but needs to be set aside for the future liability/cost that they have "committed to incurring.

If you were a QF investor you feel gypped if your shares were worth $4 this year and $3 next year because they had had to fork out heaps in FF redemptions that noone knew were out there.

The issue for QF is that they can get that revenue in their books if they give away seats but the revenue is small and compared to the cash someone might pay for the same seat potentially. This is where the ral black arts starts - revenue management.

Please dont blame the accountants - its the lawyers that sue us because some dimwitted shareholder made a decision based on what they read rather than what they hould have gotten someone to explain.

Ahhh, thank you, thank you, thank you! Some logic, raw brain power and honest genuine enquiry!!! Good on ya, Medhead!!!

The point is that the real benefit to the frequent flyer is only a few real % gain in redeemed awards. Now in marketing terms, this is a very low amount to pay for customer loyalty by the supplier (airline) and a stupendous achievement to lock in customer loyalty for such a paltry cost (which is fudged in accounts anyway). This this whole blog (brilliant as it is) is largely driven by folk aiming to increase this pay back, BUT in reality it remains small and we'd all be better off taking a great discount (if we can find it) rather than letting our egos be pandered by the odd upgrade etc.

Now to the all important question (bold, italics in the quote above). We have already seen than this whole charade depends on accounting trickery. So the stupidity is the figues used by the airline have driven it to a situation where it is more cost effective to leave a seat empty than let a loyal frequent flyer sit in that empty seat, use their points, feel great and lower the liability ledger (as happened to Chooms last night onm the CNS-BNE). The point is the airline sets the figures and their own accountancy practices to their advantage and our disadvantage as customers.

Many argue empty seats depend on catering - thus cost of meal (a few measley dollars) in the yield management/FF calculation system is allowed to outweigh any value on customer loyalty.

That is NUTS !!!

Go figure.

Bring on more competition!!!

 

[Ric]

Interestingly, I came back on QF128 last night (Sep 3) Hkg - Syd on discount whY. Put in a points upgrade request on August 30 knowing that it was zero chance of getting one. Well, 99% nil anyway. Rang Qantas a couple of days later and was told that business class was "chokers" and "highly unlikely" that I would get an upgrade. I know I wasn't going to get one as seatcounter showed business class was all full and that they change the aircraft from the 400 to the 300 series.

After checked in last evening, went to the Wing instead of QP. Was at the gate a bit early so decided to ask the service desk there whether business class was full. Nope! What about the requested points upgrade? Quota for points upgrade was used up/full. But there are empty seats in Business? Yep! Ok then...no point persisting....nothing she can do anyway. Went back to read my book.

As I was boarding, the lady asked me if I have change flights or something like that for me to miss out on the upgrade. No changes. Put in the requested as soon as I was able to confirm my trip. Then with a smile she said, "You are not going to miss much. There's no skybeds as they have changed the aircraft, so better to use your points next time on the sky beds". Boy, did I feel a lot better after!!

There were at least 4 empty business class seats available downstairs and would have assume at least a couple empty upstairs.

So definitely QF will have the seats empty rather than letting someone points upgrade to them. whY, oh whY QF, whY??

Is seatcounter that reliable? It was showing business class all full even 24 hrs before flight.

Just my 2 cents worth.

Ric

 

[Platy]

Dear god - I think I am about to agree with AnnonymousCoward...

OK let's get past accounting trickery and other excitable phrases. How QF accounts for this is on some levels separated from how they deliver on points for upgrades.

Let's go back to accounting 0.1 - the underlying concept is to match the revenue (that is the reported earnings) to the expense (that is the cost of bum on seat). Now if you spend 100K on Amex and QF receive cash of $1000 from Amex they cant spend that money on Exec bonuses or Liesel Jones as they have the potential liability of giving someone 100K worth of flights - that could cost them very little (if points die in a hole in the ground) or a lot (if someone gets a J flight to LAX from SYD). So it is appropriate to tell their shareholders and investors that the $1000 sat in the bank is not free to invest in spas but needs to be set aside for the future liability/cost that they have "committed to incurring.

If you were a QF investor you feel gypped if your shares were worth $4 this year and $3 next year because they had had to fork out heaps in FF redemptions that noone knew were out there.

The issue for QF is that they can get that revenue in their books if they give away seats but the revenue is small and compared to the cash someone might pay for the same seat potentially. This is where the ral black arts starts - revenue management.

Please dont blame the accountants - its the lawyers that sue us because some dimwitted shareholder made a decision based on what they read rather than what they hould have gotten someone to explain.

Thanks, Simongr, for the further clarification (excellent) and let me stress (as indeed I said in an earlier post on this thread) I'm not out to disrespect accountants. Nor am I a Qantas shareholder, dimwitted (open to differences of opinion no doubt) or otherwise, but I accept your point about the books/processes needing to be overt to investors and decisions answerable to shareholder scrutiny. AND I respect the opportunity to learn by asking questions and proposing points of view.

That said, I am yet to hear any cogent argument to refute the concept that firstly the system is set up in a way which is clearly to the advantage of Qantas AND secondly the system is engineered to deliver benefits to the frequent flyer to the minimum extent required (or tending to that). Look, certain parameters are open to be defined by the airline (eg. cost of empty seat in J, cost of meal, etc) in its own interests.

I respectfully question the phrase, which I have put in bold italics in your quote. In the real world, I do not think that the revenue is small compared to that if the seat is sold IF you accept a given a couple of caveats, which are required in real world situation (context) (otherwise, yes you are right).

First caveat. The earn/burn ratios are always in the airlines favour and represent a few percent of turnover and are ever increasing. It takes a lot of loyalty (flights and partner business) to earn points and a lot of points to redeem a benefit for the customer. Our loyalty is being bought for a low percentage. Thus you need to introduce an algothorim for marketing budget into your cost/benefit analysis.

Second caveat. The basic concept of any frequent flyer scheme is to make available seats, which would otherwise be empty and thus not primarily revenue raising through direct sales( your "black arts&quot. Some airlines take that simply (AA) and fill seats and others (QF) do not and apparently engineer their revenue/expenditure model to tinker with a meal or two either way such that they would rather fly with empty seats than honour upgrades and risk the cost of one or two extra meals.

Now, whether or not the up front revenue can or cannot be spent (as you argue since such revenue must be quarantined to offset liability) on Leisel Jones, bonuses or whatever the fact remains that the cash is in the bank. This is a benefit. If only in interest offset terms, surely? That must be worth something (8% odd?).

Furthermore, whether or not QF ELECT (you suggest compelled) to offset that revenue with a 100% liability, the eventual realised revenue is always greater than the realised liability (true cost) of "giving away' a seat (with or without a meal worth a few bucks) that would not otherwise be sold. AND Qantas can tinker with the key parameter, number of seats made available for redemption/upgrade (old system) OR number of points required (AnySeat) to keep well ahead of the game. Thus the FF business is of value (and indeed the golden cow lined up for first sale) both 'cos of very positive benefit/cost ratio and realised/unrealised marketing opportunity (4 million plus members) potential.

 

[Platy]

If people felt that they could alway get upgrades, then people would always buy economy fares. QANTAS knows this, so they keep things a lottery to force people who really want to sit in J to pay J prices.

OK, I accept that BUT that also presumes people have the points to burn in the first place. People must first EARN the points by BUYING flights or partner company products. People are loyal and make such purchases with expectation of being able to redeem.

 

[Platy]

Interestingly, I came back on QF128 last night (Sep 3) Hkg - Syd on discount whY. Put in a points upgrade request on August 30 knowing that it was zero chance of getting one. Well, 99% nil anyway. Rang Qantas a couple of days later and was told that business class was "chokers" and "highly unlikely" that I would get an upgrade. I know I wasn't going to get one as seatcounter showed business class was all full and that they change the aircraft from the 400 to the 300 series.

After checked in last evening, went to the Wing instead of QP. Was at the gate a bit early so decided to ask the service desk there whether business class was full. Nope! What about the requested points upgrade? Quota for points upgrade was used up/full. But there are empty seats in Business? Yep! Ok then...no point persisting....nothing she can do anyway. Went back to read my book.

As I was boarding, the lady asked me if I have change flights or something like that for me to miss out on the upgrade. No changes. Put in the requested as soon as I was able to confirm my trip. Then with a smile she said, "You are not going to miss much. There's no skybeds as they have changed the aircraft, so better to use your points next time on the sky beds". Boy, did I feel a lot better after!!

There were at least 4 empty business class seats available downstairs and would have assume at least a couple empty upstairs.

So definitely QF will have the seats empty rather than letting someone points upgrade to them. whY, oh whY QF, whY??

Is seatcounter that reliable? It was showing business class all full even 24 hrs before flight.

Just my 2 cents worth.

Ric

Ric thanks for the story. Some would argue seats kept aside in case of last minute sales. Other would argue that catering set to a certain limit and once that limit reached no upgrades will be processed (or processed with "catering not assured" caveat on boarding pass).

Others argue that QF limits upgrades to avoid perception of low availability so people are encouraged to pay for J rather than upgrade.

The new check in system (domestic) limits upgrades to class (eg U class) with local personnel unable to over-ride even when seats and catering available. This system due to go international (I understand but someone correct me if wrong).

Some argue it comes down to QF yield management being so amazingly good that we shouldn't question it and simply marvel at the huge profit line.

Yet others think that upgrades and premium cabin should be kept exclusive as possible (and don't like the AA system which tends to fill the first cabin).

Opinions differ. Perceptions differ.

Personally, I'd like to see the airline honour the spirit of the FF scheme and attempt to facilitate upgrade opportunities where reasonably possible. But this opinion is not universally shared on this forum. Although I am personally surprised FF folk don't all want to have maximum chance for upgrades, that's fine. That's part of the learning process of being in a blogshere with others and exploring divergent experiences, opinions etc.

 

[simongr]

< snip >

Totally agree - I think perhaps my message was more about the accounting than the operational principles.

I totally agree that the system is set up in the way to best return value to shareholders (which is a key measure in Exec bonuses). Qf could make the liability virtually nil if they wanted to by further restricting availability of seats.

I think ODUs are a strange beast - I just upgraded a MEL flight but couldnt up the outbound - 2 days later I was able to up SYD-MEL.

 

[Platy]

Totally agree - I think perhaps my message was more about the accounting than the operational principles.

I totally agree that the system is set up in the way to best return value to shareholders (which is a key measure in Exec bonuses). Qf could make the liability virtually nil if they wanted to by further restricting availability of seats.

I think ODUs are a strange beast - I just upgraded a MEL flight but couldnt up the outbound - 2 days later I was able to up SYD-MEL.

Thanks once again, Simongr, for your accounting insights and for sharing you point of view.

 

[medhead]

Usually I'd be happy to stick it to the accountants. BUt I'm not sure this is the case here. QF Loyalty seems to be a separate cost center to QF airline. Certainly they should be if they are reporting a separate profit. I think this situation gives rise to the things that you've mentioned.

In reality the Loyalty program is just another customer of QF. And customer loyalty is probably the job of the Loyalty Program not QF. SO there is a no connection between customer loyalty and setting the cost of loyalty seats. Sure the loyalty program can choose to sell at a loss to satisfy loyal customer, but the QF board will still expect a profit from them.

While I still puzzled and I don't really understand all the fine detail, I'm more inclined to point a finger at management rather than the accountants. In particular the type of management that danced with the hedge funds. Unfortunately, even with the passing of the junk yard dog, I don't see this improving.

Ahhh, thank you, thank you, thank you! Some logic, raw brain power and honest genuine enquiry!!! Good on ya, Medhead!!!

The point is that the real benefit to the frequent flyer is only a few real % gain in redeemed awards. Now in marketing terms, this is a very low amount to pay for customer loyalty by the supplier (airline) and a stupendous achievement to lock in customer loyalty for such a paltry cost (which is fudged in accounts anyway). This this whole blog (brilliant as it is) is largely driven by folk aiming to increase this pay back, BUT in reality it remains small and we'd all be better off taking a great discount (if we can find it) rather than letting our egos be pandered by the odd upgrade etc.

Now to the all important question (bold, italics in the quote above). We have already seen than this whole charade depends on accounting trickery. So the stupidity is the figues used by the airline have driven it to a situation where it is more cost effective to leave a seat empty than let a loyal frequent flyer sit in that empty seat, use their points, feel great and lower the liability ledger (as happened to Chooms last night onm the CNS-BNE). The point is the airline sets the figures and their own accountancy practices to their advantage and our disadvantage as customers.

Many argue empty seats depend on catering - thus cost of meal (a few measley dollars) in the yield management/FF calculation system is allowed to outweigh any value on customer loyalty.

That is NUTS !!!

Go figure.

Bring on more competition!!!

 

[medhead]

First caveat. The earn/burn ratios are always in the airlines favour and represent a few percent of turnover and are ever increasing. It takes a lot of loyalty (flights and partner business) to earn points and a lot of points to redeem a benefit for the customer. Our loyalty is being bought for a low percentage. Thus you need to introduce an algothorim for marketing budget into your cost/benefit analysis.

If you look at the profit information in the link from Oz_mark. The Profit (BT) was about $60m and revenue was about $400m. Does this broadly indicate that the earn/burn rate is about 15% towards the airline? And $60m in less than 10% of a almost $1000m profit for the group.

 

[Platy]

Usually I'd be happy to stick it to the accountants. BUt I'm not sure this is the case here. QF Loyalty seems to be a separate cost center to QF airline. Certainly they should be if they are reporting a separate profit. I think this situation gives rise to the things that you've mentioned.

In reality the Loyalty program is just another customer of QF. And customer loyalty is probably the job of the Loyalty Program not QF. SO there is a no connection between customer loyalty and setting the cost of loyalty seats. Sure the loyalty program can choose to sell at a loss to satisfy loyal customer, but the QF board will still expect a profit from them.

While I still puzzled and I don't really understand all the fine detail, I'm more inclined to point a finger at management rather than the accountants. In particular the type of management that danced with the hedge funds. Unfortunately, even with the passing of the junk yard dog, I don't see this improving.

Some interesting ideas and observations, Medhead!

I assume you are right that the FF program is defined financially as a separate cost centre - indeed my understanding is that definition of separate such cost centres and attendant accountability has been part of the legacy of the outgoing CEO ("junkyard dog"?! ) and applied across the business.

Looking at the part of your quote in bold/italics, I would note that however these things are defined it would surely be questionable business practice for QF (the airline) not to champion "customer loyalty" as an integral part of its strategy. The FF scheme is just one part of the loyalty game.

Now in part it may come back to QF Group having an each way bet with the way it has set up its activities across two airlines, various cost centres, etc, etc. Thus Jetstar is part of QF when it suits (eg. selling full priced codeshare tickets on JQ metal) and not when it doesn't (eg. paying staff less, not honouring points/SCs even with a QF flight number on JQ metal).

With the FF scheme set up as a different cost centre (whatever you want to to call it) one may presume that QF airline will try to maximise its revenue from the scheme when its seats are redeemed via the FF scheme. This may artificially inflate the cost of a redeemed seat on the books. QF airline will also want to "purchase" points at the least cost to encourage customer loyalty.

Now the double whammy is that the customer is likely to lose out on both counts since QF wants cost of giving away points to be minimum and revenue from a redeemed seat to be maximum. Thus customer will tend to earn least points and have least access to redemption opportunities (or have to part with huge amounts of points).

The stupid thing is that it's all still part of QF - the management and accountancy gurus have freely chosen to set the system up this way. BUT in the course of it all, the baby can get thrown out with the bathwater because the VALUE put on a redeemed seat no longer relates simply to yield management, but also to however the values are set for the game of defining costs/revenues and liabilities between the airlines and the FF scheme. Somewhere in the middle, the loyalty customer is being squeezed in the balancing act. The simplistic concept of the FF scheme as a loyalty driver using unsold seats become overtaken ages ago...

 

[medhead]

Looking at the part of your quote in bold/italics, I would note that however these things are defined it would surely be questionable business practice for QF (the airline) not to champion "customer loyalty" as an integral part of its strategy. The FF scheme is just one part of the loyalty game.

I almost totally agree with you observations and conclusions about how things are operating. My one uncertainty is about who is the customer loyalty champion. Ideally, it should be an integral part of QF group strategy. However, I'm not confident they see it that way. I'm inclined to think they have put responsibility onto the loyalty program, which goes someway to explain what is happening as you outlined. IMO.

 

[Platy]

I almost totally agree with you observations and conclusions about how things are operating. My one uncertainty is about who is the customer loyalty champion. Ideally, it should be an integral part of QF group strategy. However, I'm not confident they see it that way. I'm inclined to think they have put responsibility onto the loyalty program, which goes someway to explain what is happening as you outlined. IMO.

You may have hit the bullseye with that summation, Medhead!

As a customer I personally find some situations hard to fathom (like Chooms being left in Y when there where empty J seats available just before the flight) and get the feeling that QF senior management has lost touch with its customers in some regards. The customer experience is at the mercy of a mish mash of cost centres, processes and systems, which sometimes deliver, but also sometimes don't. One feels that they need to take a step back, take a good look at the whole picture and get back to some basics. A customer loyalty champion would be great for that (if they don't have one) (as would a brand champion, as brand/products are blurring, but that's another story).

I suspect that in an effort to be "smart" some obvious stuff is falling through the (ever widening) cracks.

In the meantime, I, like many others, attempt to understand the system's strengths and weaknesses sufficiently well to adopt strategise for own personal benefit.