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FOCUS FREQUENT FLYER PROGRAMMES REPORT RAVINDRA BHAGWANANI IN TOULOUSE AND KERRY EZARD IN LONDON SPIN-OFF LOYALTY It appears increasingly likely that some carriers will follow Air Canada’s lead and spin off their frequent flyer programmes. But is this the right option? ir Canada became the first investment capital for such projects appears airline to spin off its frequent within reach of most major airlines. Richard flyer programme when it sold a Schifter, managing partner at TPG Capital, A 12.5% stake in 2005. By March which has an impressive track record of active 2007, the carrier’s parent com- investments in the airline industry but has not pany ACE Holdings had sold the remainder of itself invested in a FFP, confirms that FFPs are its shares in the Aeroplan programme. The interesting investment targets “because of spin-off was deemed a success, with ACE their growth potential and free cash flow char- netting an impressive one-off benefit and acteristics”. Schifter believes that as FFPs Aeroplan’s value more than doubling since evolve they will become even more attractive 2005. But should airlines rush to make a quick to investors. In fact, a Morgan Stanley report buck by spinning off their FFPs? Or should cites FFPs as being more sustainable and less they take a more cautious approach geared risky than direct airline investments. towards longer-term gains? Qantas chief executive Geoff Dixon identi- The spin-off strategy of ACE, which also fied a far more basic advantage of considering sold other units during the same period, most “Growth potential and a spin-off: it allows a market value to be notably its regional feeder operation Jazz, has free cash flow make attached to the FFP operation. Dixon has shown that the sum of the value of independ- frequent flyer quietly admitted to the current lack of trans- ent units is larger than the former total value parency reigning in FFPs – a problem that is of the airline. This new school of thinking has programmes interesting not only limited to Qantas. Many carriers, caught the attention of airlines worldwide. investment targets” including the majors, still do not properly For the US majors in particular, the value of RICHARD SCHIFTER account for accumulated miles and redeemed the FFP unit alone might come close to the Managing partner, TPG Capital awards on their own airline. This leads to a total value of the airline. However, only a false picture of the value of the FFP operation. handful of carriers, including American Air- While the new IFRIC13 accounting standard, lines, Qantas and United Airlines, have pub- with an annual turnover of $800 million, is which determines how liabilities of loyalty licly said that they are considering a possible estimated at around $7.5 billion. This balance programmes need to be handled, won’t spin-off of their FFPs. The majority of Asian, sheet approach is neither an airline industry address the financial relationship between the European and Middle Eastern carriers do not innovation nor limited to FFPs as balance parent airline and its FFP as such, it might envisage such a move at this point, with their sheet improvements are always expected help to steer some airlines in the right finances healthy enough not to warrant it. when companies sell selected units. Over the direction in the sense of more transparency, The motivation for an airline to consider a past decades, airlines have explored such The financial performance changes for the spin-off is generally to improve its balance opportunities by selling affiliated hotel com- new owner, concentrating now on developing sheet. For instance, the market value of panies and maintenance or catering units. the value of the programme, which has cut United’s Mileage Plus programme, a business Spin-offs are even more tempting now, as ties with its former parent airline and is likely 70 | Airline Business | May 2008 ightglobal.com/ab FOCUS FREQUENT FLYER PROGRAMMES to benefit from a better investment climate as Aeroplan vice-president corporate strategy to be. We don’t negotiate deals on a bilateral a result. TPG Capital’s Schifter makes no se- and business development Marc Trudeau says basis, it’s trilateral. The price we charge is of cret of the fact that the ability of the FFP to sell the biggest change in the relationship between great relevance to us so, like it or not, we will points to third parties and the financial basics Air Canada and Aeroplan since the spin-off is be involved in the negotiations. But it’s not between the FFP and the parent airline are the that there is “a lot more clarity between the true to say that Aeroplan negotiates on behalf key drivers of value from an investor’s per- two parties on the true costs and revenues” of Air Canada with other carriers.” spective. This is almost the opposite focus of generated by the FFP. He adds that Air Canada When Aeroplan was spun off, the Air Cana- an airline-controlled FFP, which still primari- has kept an element of control over the pro- da name was removed from its branding, ly aims to create loyalty and build relation- gramme: “Air Canada’s influence is very sig- which Trudeau says was important to allow ships with clients. Control over the pro- nificant. They haven’t lost control and the the loyalty company to enter sectors outside gramme is assumed by a party with a seats we buy from them are essentially con- the airline industry. “The reason we branded completely different strategy. An independent trolled by Air Canada. Their access to mem- differently from Air Canada was to make sure operator such as this might even touch on ba- bers, data and communication channels has Aeroplan would be recognised,” he explains. sics such as accrual and redemption rules on remained unchanged; the difference is they “We had to create some distance with the air- the former parent airline. For this reason, pay for the services. line because we’re entering sectors where Air when spinning off FFPs it is important for air- “We didn’t separate from Air Canada to Canada is not relevant. We’re a marketing lines to “maintain some control over the pro- gain an independence that would damage the company and we offer services aimed at gramme”, says Stuart Evans, European general brand or the partner itself. We decided it increasing the loyalty of customers. The right manager of loyalty marketing agency ICLP. would be better to be separate from the airline, way to do this is to reposition the brand.” It is telling that Air Canada accounted for a but that didn’t mean our intentions were to do Robert Milton, chairman of ACE Aviation mere 25% of all miles accrued in the Aerop- anything in the interests of Aeroplan that was and the architect of the break-up of Air Cana- lan programme between March and Septem- against Air Canada.” Trudeau says that “for da, describes Aeroplan as a “great, stable, ber 2007, placing it well behind financial the most part, nothing has changed”. cash-flow business”, and says that “the mar- service companies in terms of miles accrued. ket likes these”. He adds: “Airlines are great Comparable parent airlines with in-house ut will Air Canada’s Star Alliance incubators for businesses, but if you don’t get FFPs usually account for about twice this partners be happy about having them out of the airline they won’t do anything share in their programmes. This change of to deal with a third party loyalty other than be sucked alive.” focus is also shown by Aeroplan’s purchase of Bcompany? Trudeau believes this However, airlines would be well advised the UK’s Loyalty Management Group last De- is just something they will have not to limit their views to a potential one-time cember. The company operates, among oth- to accept. “If other Star Alliance carriers are financial gain. While spin-offs in other sectors ers, the Nectar programme, a UK consumer complaining, I would argue that it may be be- are usually justified by the “non-core busi- loyalty programme built around the Sains- cause we have a lot more resources than an ness” argument, this hardly applies to FFPs, bury’s supermarket chain. Although FFPs are average FFP,” he explains. “We’re more savvy which are crucial to every airline and their already highly profitable, even more money than we were five years ago and it’s not as marketing strategy. These soft factors are, can be made by expanding into other sectors. straightforward on a bilateral basis as it used however, beyond a pure investor’s 72 | Airline Business | May 2008 ightglobal.com/ab FOCUS FREQUENT FLYER PROGRAMMES the programme. American has said this is one option its board is considering, but FL Group, POTENTIAL OUTCOME frustrated at the lack of progress in moving OF LOYALTY SPIN-OFF this forward, sold most of its 9.1% stake in the carrier late last year. ACE’s Milton believes A possible outcome of spinning off a frequent AAdvantage is “the most valuable FFP on the yer programme can be shown using a planet” and is worth $15 billion, but has been simpli!ed calculation model for a !ctitious “compressed into American Airlines”. airline ( see table ). Aeroplan’s Trudeau advocates FFP spin- Model B is characterised by full offs, but adds a note of caution on market con- transparency due to the proper inclusion of ditions. “It’s a good idea for airlines to spin off the parent airline in the FFP !nances.

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