Airlines spread their wings with omnipresent loyalty programs

While airlines struggle to mitigate costs of operation, frequent flyer programs have become lucrative businesses in their own right. AAP/Dan Peled

Frequent flyer programs have long since expanded out of their airlines, with points now being exchanged across supermarkets, banks and insurance companies.

Australia has two domestically owned frequent flyer programs, Qantas Frequent Flyer (QFF) and Virgin Australia’s Velocity program.

Of the two QFF is the dominant loyalty program, partly because of the dominance of Qantas in Australian air travel and partly because QFF points have become something of a “de facto” currency amongst its members.

Virgin’s Velocity program is more of a latecomer to the party, but both programs have recently received a bonus because of the alliances forged by their respective partner airlines, Qantas with Emirates and Virgin with Etihad. These alliances allow frequent flyers to both “earn and burn” points with their partners.

These loyalty programs are part of each airline’s business, but are also effectively a business within a business. The QFF program is the envy of airlines around the world for its positive financial contribution to Qantas. In the last financial year Qantas made a net loss of $244 million. However, as reported in the Australian Financial Review (AFR) (paywalled) of 23 October 2012, the QFF loyalty program nearly covered that with earnings of $231 million (before interest and tax) off $1.2 billion of points sold.

The QFF program had 8.6 million members at the end of 2012. Qantas extracts value from these members internal and external to its airline business.

First, it sells points to third-party organisations, such as Woolworths, the big banks and car hire companies, who issue them as part of their loyalty programs.

Secondly, Qantas gets to sell its seats to customers who have an incentive to re-book with the airline to maintain their points balance, their preferential status, and access to airport lounges, priority check-ins and upgrades. When QFF members redeem their points for a flight, Qantas can add charges above the points redeemed, fill otherwise unused capacity and also encourage redemption through their own online shopping service. On average there is a 30 month gap between a frequent flyer member earning and burning their points, a substantial income stream and a positive cash flow for the issuing airline. A shopper in Woolworths in April 2013 may earn QFF points as a result of their spending; these points are bought from Qantas by Woolworths when they are issued to their customers and yet they are on average not redeemed with Qantas until October 2015. Qantas reports that around 65% of its points are earned outside of Qantas, whereas around 85% of its points are redeemed on its flights.

Virgin’s Velocity program had 3.2 million members at the end of 2012 and it is keen to grow that to about 5 million by the end of 2015. Virgin has recruited frequent flyers from other airline’s programs (pay-wall) by a “status match” campaign, whereby a platinum, gold or silver frequent-flyer with, say, Qantas, was guaranteed the same membership tier with the Velocity program.

However, while loyalty and repeat business are the original “raison d’etre” of the frequent flyer programs, the underlying rationale is to build relationships with the airlines’ most valuable customers, to then build a database which can inform them of their customers’ preferences and hence to be able to better “serve” them, with as wide a range of goods and services as possible.

This point is best illustrated by another loyalty program, the Woolworths Everyday Rewards program, which uses QFF points as a central part of its reward incentive. With six million cardholders, Woolworths has been able to build a database of many of its most valuable customers: where they live, how often they shop, what they buy, how they pay, and how they redeem their points. This has enabled Woolworths to widen their customer proposition into services such as insurance. Having entered that market in August 2011, it has to date sold 40,000 general insurance policies to known Woolworths customers. The original products were pet and life insurance; the following year these were joined by motor and home insurance. Sold under the Woolworths Insurance brand, the parent company is using the data from its Everyday Rewards Program to “target customers who we think may benefit from Woolworths Insurance”.

Australia’s frequent flyer programs are very successful as a business in their own right. They earn customer loyalty in what is an increasingly promiscuous market. They are a key element in building a comprehensive customer database capable of guiding the expansion of goods and services. The future for such programs is based around the knowledge they provide to their owners about their customers. Not only who these customers are and where they live, but also where and when they travel, what they are interested in and what they redeem their points for. All this helps a frequent flyer program to begin to offer more products to more customers and hence capture a larger proportion of their share of purse/wallet spend.