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Qantas establishes new frequent flyer programme to generate cash and equity valuation

2-Jul-2008
  • Qantas announces new FFP redemption conditions;
  • Still to decide next month on (likely) float and partial sell-down;
  • Meanwhile shares rose 7% in a negative market;
  • Valuable fuel hedges ended on 30-Jun-08;
  • Having a cash reserve – from potential sell-down - will be most valuable in the coming economic environment.

Qantas yesterday announced formally the establishment of a new FFP, first flagged when private equity group TPG and partners bid to buy the airline a little over a year ago. This offers the airline a range of potential upsides. But Qantas is yet to formally decide to split out the unit into a new skin. Although Air Canada introduced a corporate concept in its Aeroplan, a listed company that is now worth many times more than Air Canada itself, few others have yet followed suit. The Aeroplan concept is not for everyone. But it should work for Qantas.

The Qantas board will decide next month whether to establish a separate corporate entity for its five million-member frequent flyer programme. But this looks to be a foregone conclusion, as CEO Geoff Dixon yesterday announced that a potential IPO would not allow Qantas’ holding to fall below 60% - or alternatively, that the airline was considering selling up to 40% of a listed entity. The simple announcement yesterday prompted Qantas shares to rise nearly 7%, in a market which otherwise trended steeply downwards.

Qantas daily open share price: Aug-07 to Jul-08

Source: Centre for Asia Pacific Aviation & Yahoo Finance

The new programme delivers a more accessible range of access options for frequent flyers, placing FF redemptions on the same basis as full revenue sales, so making available any seat either for more points or for a combination of points and cash. Surveys around the world have found that 50% and more of airline FF members are dissatisfied with their current programmes – hardly a happy situation for programmes which are designed to stimulate brand loyalty.

But the bottom line value to Qantas may be far more interesting. Making redemptions easier in this way has almost a virtuous spiral of benefits; it also generates additional cash for the airline, as more members use their previously un-redeemed points; it enhances brand loyalty, especially among smaller points holders, who constitute the bulk of members; and, by allowing a separate entity to act more commercially, it inflates the value of that entity itself.

1 July was the first day of Australia’s new financial year and, after probably the best year in its history, Qantas is going to need all the help it can get in the coming 12 months. The closing of the old year also marked the end of most of its better priced fuel hedges and its home market is quickly slowing as the impact of high oil prices and the credit crunch flow through to always price-sensitive potential travellers.

The potential to float off a portion of the programme in this 12 month period offers a very timely opportunity to cash up to the tune of another 1-3 billion dollars, theoretically without actually reducing the market capitalisation of the Qantas Group. This could be a tidy return for shareholders who have watched sadly as the share price has fallen back to pre-privatisation bid levels.

Although there are differences, Qantas has a number of similarities with Air Canada, which has benefited greatly from Aeroplan – for example, Qantas' frequent flyer points represent the second largest currency traded in Australia. By splitting out the value of this programme from the extremely complex range of activities that the airline group carries on, the concept seeks to increase shareholder value across the board.

The timing for this could probably not be better, even if the headline prices it will generate are not as high as they would have been a year ago. With economic winter approaching, having a few frequent flyer nuts stored up will be much more welcome now.


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