crazydave98
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- Oct 25, 2005
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from today's AFR:
Loyalty program may be worth $2bn
JAMES HALL
14 December 2006
FREQUENT FLYERS QANTAS ON THE BLOCK
The Macquarie Bank-led consortium planning a private equity buy-out of Qantas will review ownership of the airline's Frequent Flyer scheme before a potential sale, valuing the loyalty program at as much as $2 billion.
The plan - modelled on Air Canada's separately listed Aeroplan scheme - could result in Frequent Flyer becoming a stand-alone financial services business responsible for managing hundreds of millions of dollars a year in revenue.
The Frequent Flyer program is the most lucrative sell-off option available, and it's understood the buying group will complete a review of the business within 18 months if it succeeds. Other likely asset sales include Qantas's catering and holiday units.
A stand-alone Frequent Flyer business would have a mandate to expand by selling broader loyalty and financial services products and other marketing products, drawing on its database of more than 4.6 million members.
However, Deutsche Bank analyst Jason Bloom said that while separating the Frequent Flyer business made sense in theory, it could prove extremely complex in practice.
"It's incredibly complicated," Mr Bloom said.
"On the one hand, you have a huge and loyal customer base that you can access, but on the other there is this huge potential liability of points."
At present, Qantas generates revenue by selling Frequent Flyer points to more than 140 program partners such as credit card issuers and hotels that offer them as incentives to their own customers.
Since the introduction of the Australian equivalent of international financial reporting standards (AIFRS) in 2005-06, the only revenue Qantas recognises immediately relates to the share of these points it considers holders will never redeem.
The rest it defers, booking it as revenue only when passengers "spend" the points and recognising it as a liability that, according to Qantas annual report for 2005-06, was just short of $1 billion when it switched to AIFRS.
As long as Qantas owns Frequent Flyer and the plan keeps growing, this liability never crystallises. But if Qantas were to spin off Frequent Flyer, it would have to recognise the liability against its bottom line.
JPMorgan analyst Matt Crowe said while this would not go down well with shareholders focused on short-term returns, it wouldn't matter to private equity owners.
"It's just a big accounting hit," Mr Crowe said, while private equity firms care only about cash generation - which Frequent Flyer could do better outside Qantas.
"The real potential value is that the Frequent Flyer program can also use the points to sell other products. And provided they can create a spread between what they pay Qantas for them and what they sell them for, they should do OK," Mr Crowe said.
"And the thing is, an airline might not be the best business to do that."
An analyst with Canadian investment group Wellington West who covers Aeroplan, Wui-Seng Kon, said that cash was certainly king when the separation of a loyalty scheme took place.
"The main advantage is you can see the cash," Mr Kon said. "Right now it's under the airline: you can't see the cash and you can't see how profitable the entity is. I'm surprised it's taken [other airlines] so long to think of doing this, because Aeroplan has been listed for a year now.
"And when people started realising how much cash the business was generating over the past few months, the share price really started moving."
Indeed, after issue at $C10 ($11) a share in June 2005, stock in Aeroplan Income Fund is trading in record territory above $C17 a share.
He said Aeroplan - with more than 5 million members - was issuing more miles every year, as spending on air travel increased and the use of credit cards and other financial products through which customers earned points grew.
Aeroplan was beginning to generate new revenue by selling products derived from its enormous database of consumers.
Some observers consider ACE Aviation Holdings, the Toronto-listed parent of Air Canada and Aeroplan - each of which are also separately listed - to be the model on which Macquarie might build a new Qantas focused on global alliances.
While Air Canada is a pure airline business and Aeroplan a pure loyalty and marketing business, ACE Aviation is bulking up its services arm, last week agreeing to buy 80 per cent of El Salvadorean maintenance company Grupo TACA Holdings for $US44.7 million ($56.7 million).
Mr Kon believes Aeroplan might even consider Frequent Flyer an attractive investment, while Qantas chief executive Geoff Dixon has made no secret of his desire to form closer links with other airlines.
ACE still owns a 6 per cent stake in US Airways - which itself emerged from bankruptcy protection in 2005, thanks in part to a $US200 million investment by Texas Pacific Group.
Another member of Macquarie's consortium, Onex, also has links to Air Canada, having attempted and failed in 1999 to buy both it and Canadian Airlines, then merge them.
However Air Canada bought Canadian Airlines anyway, in 2001. Butler Caroye principal consultant Tony O'Connor, whose company consults on corporate travel, said this kind of global consolidation was likely to be at the heart of the grand plan for Qantas - whether the Macquarie consortium bought it or not.
But turning Frequent Flyer into a separate company could be problematic.
"The minute there's some sort of glass wall between the Frequent Flyer business and the airline you have diverging interests, because all the airline wants to do is minimise the number of Frequent Flyer seats it gives away so it can give them to paying passengers instead," he said.
"If I'm an airline, it's in my interest to choke off supply."
Loyalty program may be worth $2bn
JAMES HALL
14 December 2006
FREQUENT FLYERS QANTAS ON THE BLOCK
The Macquarie Bank-led consortium planning a private equity buy-out of Qantas will review ownership of the airline's Frequent Flyer scheme before a potential sale, valuing the loyalty program at as much as $2 billion.
The plan - modelled on Air Canada's separately listed Aeroplan scheme - could result in Frequent Flyer becoming a stand-alone financial services business responsible for managing hundreds of millions of dollars a year in revenue.
The Frequent Flyer program is the most lucrative sell-off option available, and it's understood the buying group will complete a review of the business within 18 months if it succeeds. Other likely asset sales include Qantas's catering and holiday units.
A stand-alone Frequent Flyer business would have a mandate to expand by selling broader loyalty and financial services products and other marketing products, drawing on its database of more than 4.6 million members.
However, Deutsche Bank analyst Jason Bloom said that while separating the Frequent Flyer business made sense in theory, it could prove extremely complex in practice.
"It's incredibly complicated," Mr Bloom said.
"On the one hand, you have a huge and loyal customer base that you can access, but on the other there is this huge potential liability of points."
At present, Qantas generates revenue by selling Frequent Flyer points to more than 140 program partners such as credit card issuers and hotels that offer them as incentives to their own customers.
Since the introduction of the Australian equivalent of international financial reporting standards (AIFRS) in 2005-06, the only revenue Qantas recognises immediately relates to the share of these points it considers holders will never redeem.
The rest it defers, booking it as revenue only when passengers "spend" the points and recognising it as a liability that, according to Qantas annual report for 2005-06, was just short of $1 billion when it switched to AIFRS.
As long as Qantas owns Frequent Flyer and the plan keeps growing, this liability never crystallises. But if Qantas were to spin off Frequent Flyer, it would have to recognise the liability against its bottom line.
JPMorgan analyst Matt Crowe said while this would not go down well with shareholders focused on short-term returns, it wouldn't matter to private equity owners.
"It's just a big accounting hit," Mr Crowe said, while private equity firms care only about cash generation - which Frequent Flyer could do better outside Qantas.
"The real potential value is that the Frequent Flyer program can also use the points to sell other products. And provided they can create a spread between what they pay Qantas for them and what they sell them for, they should do OK," Mr Crowe said.
"And the thing is, an airline might not be the best business to do that."
An analyst with Canadian investment group Wellington West who covers Aeroplan, Wui-Seng Kon, said that cash was certainly king when the separation of a loyalty scheme took place.
"The main advantage is you can see the cash," Mr Kon said. "Right now it's under the airline: you can't see the cash and you can't see how profitable the entity is. I'm surprised it's taken [other airlines] so long to think of doing this, because Aeroplan has been listed for a year now.
"And when people started realising how much cash the business was generating over the past few months, the share price really started moving."
Indeed, after issue at $C10 ($11) a share in June 2005, stock in Aeroplan Income Fund is trading in record territory above $C17 a share.
He said Aeroplan - with more than 5 million members - was issuing more miles every year, as spending on air travel increased and the use of credit cards and other financial products through which customers earned points grew.
Aeroplan was beginning to generate new revenue by selling products derived from its enormous database of consumers.
Some observers consider ACE Aviation Holdings, the Toronto-listed parent of Air Canada and Aeroplan - each of which are also separately listed - to be the model on which Macquarie might build a new Qantas focused on global alliances.
While Air Canada is a pure airline business and Aeroplan a pure loyalty and marketing business, ACE Aviation is bulking up its services arm, last week agreeing to buy 80 per cent of El Salvadorean maintenance company Grupo TACA Holdings for $US44.7 million ($56.7 million).
Mr Kon believes Aeroplan might even consider Frequent Flyer an attractive investment, while Qantas chief executive Geoff Dixon has made no secret of his desire to form closer links with other airlines.
ACE still owns a 6 per cent stake in US Airways - which itself emerged from bankruptcy protection in 2005, thanks in part to a $US200 million investment by Texas Pacific Group.
Another member of Macquarie's consortium, Onex, also has links to Air Canada, having attempted and failed in 1999 to buy both it and Canadian Airlines, then merge them.
However Air Canada bought Canadian Airlines anyway, in 2001. Butler Caroye principal consultant Tony O'Connor, whose company consults on corporate travel, said this kind of global consolidation was likely to be at the heart of the grand plan for Qantas - whether the Macquarie consortium bought it or not.
But turning Frequent Flyer into a separate company could be problematic.
"The minute there's some sort of glass wall between the Frequent Flyer business and the airline you have diverging interests, because all the airline wants to do is minimise the number of Frequent Flyer seats it gives away so it can give them to paying passengers instead," he said.
"If I'm an airline, it's in my interest to choke off supply."
