Velocity business model

[deepblerg]

Since we are all armchair CEOs here I'm thinking there must be a few people in this forum who know the economics of how Velocity works, specifically with partners.

So Velocity sell billions (trillions?) of points to all the credit card companies and other partners, VA included. This is their primary revenue source.

When a Velocity member redeems those points for a partner flight (for example: redeems 139K points for 1 way Qsuites to EU), how much does this cost Velocity in dollar terms? You can directly buy 150K points from Velocity for the full retail cost of $3,510 (2.3c per point) so one would have to assume the cost of these points when sold to AMEX is a fraction of this - perhaps 0.5c per point? Maybe even lower?? In this instance, back of napkin maths based on average gross margin of 50% - Velocity pays Qatar around $350 for this redemption. The passenger kicks in another $350 taxes/carrier charge. Qatar are therefore selling this seat to a Velocity redemption for $700, where the retail cost is more like $6K. Is this about right?

 

[Saab34]

They are generally empty seats they allocate to rewards are they not? Which enables them to keep cash seat sales at a premium.

 

[ChrisFlyer]

So Velocity sell billions (trillions?) of points to all the credit card companies and other partners, VA included. This is their primary revenue source.

Billions. Last financial year, QFF issued 175 billion new points, and members redeemed 155 billion points. Velocity is a smaller program and its parent carrier (VA) has roughly half the market share of Qantas, so it'd be reasonable to assume that the volume of points sold would be half of QFF or less. Perhaps a little less beyond that, given Qantas is very strong with direct-earn credit card partnerships and has a broad QBR program, whereas Velocity for the most part relies on the transfer of points, and the opaque earn and conversion rates with most of the banks mean that the value of credit card sign-up offers can be less generous than the plethora of QFF direct earn cards overall (thus, fewer Velocity Points earned per customer).

When a Velocity member redeems those points for a partner flight (for example: redeems 139K points for 1 way Qsuites to EU), how much does this cost Velocity in dollar terms?

Those sorts of figures aren't usually disclosed, but Nick Rohrlach did say at an event this week that Velocity really can't go lower than 6,200 points for one-way domestic flights (the new Tier 1, Zone 1 rate) unless Virgin Australia lowered the amount that Velocity is charged per seat. (Remembering too that Velocity also needs a little bit of margin in there to account for the broader costs of running the program and servicing memberships, etc.) On top of that, some partnership agreements use a price per seat that depends upon availability levels on that partner - so sometimes, a frequent flyer program may have the option of paying more to get access to better availability (which in turn, makes their points more valuable at negotiation time with entities like banks, because they're more useful for a customer to earn, etc). For instance, have you ever noticed how only some of Singapore Airlines' partners have decent access to reward seats in business, and some other partners mainly just get the dregs in economy?

One would have to assume the cost of these points when sold to AMEX is a fraction of this - perhaps 0.5c per point? Maybe even lower??

Knowing people who work in this space, all I can say is that you're way off.

 

[deepblerg]

Knowing people who work in this space, all I can say is that you're way off.

Higher or lower?

 

[oz_mark]

Higher or lower?

I think you can assume that north of 1 cent a point would be closer to the amount that it costs them ( at least for standard offer points )