When a decade ago Air Canada blazed a trail in spinning off and selling its Aeroplan frequent flyer programme, it would be fair to see this did not start of flood of others following suit.
Even now you can count on one hand the number of airline loyalty programme that have been spun out into separate programmes and strategic investors found.
Yet whether driven by short-term financial needs or interest in the growth opportunity in the stand-alone model, there appears to have been a recent uptake of interest in airlines looking to separate out their frequent flyer programme into a stand-alone units.
In the last few months Air Berlin has sold its TopBonus frequent flyer programme to strategic investor Etihad Airways; Brazilian carrier GOL selected banks and has been authorised to launch an IPO of its Smiles frequent flyer programme; and Italian carrier Alitalia in January approved a plan to set up its MilleMiglia frequent flyer programme as a stand-alone company.
They join the likes of Jet Airways and Virgin Australia among those to have announced plans to spin out their frequent flyer programmes over the last 12 months.
Iain Webster, senior loyalty consultant at ICLP, sees airline loyalty schemes broadly following four strategies; those designed to sell more core product, those maximising mileage sales to third parties; those driving ancillary sales; and those seeking to build an asset with value.
"If you've built a business that has a value, I think a lot of CEOs have looked at Air Canada's Aeroplan and decided they should look at a similar opportunity," says Webster. "More and more airlines are knocking on our door asking us to look at the issue and to help scope a commercial review."
Scot Hornick partner at management consultants Oliver Wyman says "I do think airlines and management teams are beginning to think about it. In the beginning it was just Air Canada and Aeroplan. It took a while for other carriers to the wisdom of it and you still find a number of carriers that are reluctant to give away that value.
"I think from our perspective, it does make a lot of sense for airlines to spin off their loyalty programmes," he says, but only if there is time to get the value exchange right. "When you rush through this," he says, "you don't get the value exchange right. Then the strategic investor gets more value than they should. You [then] run the risk of trying to renegotiates the programme at a time when you no longer control that discussion. So that is the risk of jumping too soon."
Webster says: "One of the biggest issue is what are you going to do with your existing liabilities or deferred revenues. Most airlines have millions, if not billions of unredeemed miles. So it's not just the cost of the operation, but what will you do with these miles," he notes. Webster also points to the difficulties of valuing breakage correctly - forecasting the amount of miles which are not redeemed is not an exact science.
"So its do you give up equity in it? And if so, how much? And to who? And how do you shift the value of historic liabilities?" he says. "But there are investors who are beginning to wake up to what the potential might be."
The motives for spinning off loyalty programmes may differ across airlines. Air Canada envisaged a possible IPO for Aeroplan from the outset. When Qantas spun out its frequent flyer programme it had planned to sell a minority stake in 2008 through an IPO. It has still to do so though and has since seen its coalition-based model grow the scheme strongly, to 8.6 million members generating and EBIT of A$231 million ($237 million in it last financial year.
Its rival Virgin Australia in April announced plans to create a separate division for its Velocity frequent flyer programme, recruiting former Qantas loyalty specialist Neil Thompson to run the unit. But it has made no mention of selling equity, and says its focus is to grow the scheme "to capitalise on the significant earnings growth potential through third-party partnerships and improved participation of our frequent flyers."
Indian carrier Jet Airways does appear to have selling some equity in its programme on its agenda. It outlined plans to "leverage" the evolution of the loyalty industry by spinning out a marketing service company to manage its JetPrivilege programme last year. "Initially, the marketing services company will be a 100% subsidiary company. As and when negotiations with the potential knowledge partners crystallize into a concrete decision, it is proposed that some percentage of the company's stake be offered to the knowledge partners," the carrier explained in 2011/12 annual report. It says the process will see it transform its JetPrivilege programme into "a larger retail-based coalition loyalty programme and through its operations unlock greater commercial value."
Restructuring German carrier Air Berlin meanwhile moved quickly in carving out its frequent flyer programme and selling a 70% stake to strategic partner Etihad Airways. In November it confirmed plans to sell the stake and closed a deal netting it €184 million by the end of the year, contributing to its recovery efforts 2012.
"It's a long and difficult process to separate out the programme from the airline that requires the airline shareholders and executives to be committed," says Evert de Boer, general manager, global business development - travel of loyalty management specialists Aimia - which itself was established out of Aeroplan. "Of course there is a pay-off in the end, including the transparency that a separation enables.
"To a great extent, what we see today is that programmes are being separated out from the airline, but the ownership still resides with the holding company or parent company. I think we'll see more and more of this. Whether there's going to be a full spin off? It really depends on the market conditions and the shareholder strategies," he says.
Sandra Diem, vice-president of Aimia's global business development - travel, says: "It is a benefit if the airline still remains a shareholder, it does not need to remain a major shareholder. But it needs to have enough skin in the game."
Diem highlights the wider benefits of separating out loyalty programmes as standalone businesses. "One of the big advantages of spinning off a programme is that it's run as a separate business. Therefore it has the ability to make the decisions that are required to build a business. The capabilities that are required to run a programme are quite a lot different from the capabilities needed to run an airline.
"It enables the CEO to invest in the right infrastructure, capabilities and skills, like marketing, loyalty and data analysis," she adds.
Webster adds: "It's about the cultural change. You don't just relocate the same 50 people into a separate office. It needs to have direct marketing, data insight and partnership relationship skills, but still have the umbilical cord to the airline."
"British Airways retains its own team in charge of its Executive Club and the recognition elements of the programme and a different operation in Crawley in charge of monetising the currency through Avios," he says, adding. "The fact Avios is owned by BA tells you something about the value they see in it."
Source: Air Transport Intelligence news
