Airlines find hidden value in miles

Airlines find hidden value in miles

HONG KONG - Airlines are finding hidden value in air miles. Frequent flyer programmes can provide a stable income stream for carriers in what is otherwise a cyclical and turbulent industry. Carriers can also sell stakes to outside investors in times of financial strain to raise cash. But the opportunity isn't equal for all.

Though earn-and-burn schemes started as a way for airlines to reward loyal customers, some have morphed into fully-fledged marketing businesses. Airlines are selling miles in bulk to hotels, credit card companies, and retailers, which use the credits to lure customers and mine valuable data on their spending habits. Members then use the miles to buy anything from business class upgrades to vouchers for iTunes.

Successful programmes make airlines more profitable by filling seats. Yet loyalty schemes can also generate good returns in their own right. Their main source of income comes from selling miles to commercial partners at a premium to their redemption value. Buyers pay for them upfront, while the airline only has to bear the cost when the miles are redeemed - if ever. That's good for working capital.

Most airlines still reveal little about the finances of their loyalty schemes. The extent to which carriers can expand into more lucrative areas appears to depend on the size of their domestic market. That makes loyalty schemes one of the few areas in which long-haul carriers in Europe and Asia may have an advantage over their deep-pocketed rivals from the tiny Gulf countries.

As investors wake up to the value of frequent-flyer programmes, airlines are responding. Germany's Lufthansa is giving its scheme a more independent profile. Virgin Australia last week sold a minority stake in its loyalty business to a private equity firm at a valuation which implies it is worth more than a third the airline's total enterprise value.

But giving up control is something that most airlines only consider when they are in deep distress. The programme operated by Qantas has twice as many members as Virgin Australia and is the airline's only profitable and growing business. No wonder that the Flying Kangaroo has decided to keep full ownership of the money-spinner for itself.

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