The Airlines industry, with its curious allure

The Airlines industry, with its curious allure

LEGENDARY investor Warren Buffett once used the defence of temporary insanity to explain a failed investment in a US Airlines in the late 1980s.

Now whenever he gripped by the temptation to invest in an Airlines stock, the sage of Omaha says he dials a toll-free number so a counsellor at the other end of the line can talk me down.

The Airlines industry, with its curious allure, has confounded the world’s most astute investors, who have repeatedly tripped up on its huge fixed costs, strong and sometimes militant unions, and wild gyrations in commodity prices, particularly for aviation fuel.

Buffett, though might be tempted to take a second a look at frequent flyer schemes.

Many of these loyalty programs churn out massive profits, even as the Airlines businesses that host them are awash in red ink.

Announcing a 2014 underlying loss of $212 million last week Virgin Australia chief executive John Borghetti said the Airlines would sell a 35 per cent stake in its Velocity rewards program to the private equity firm Affinity.

The deal valued Velocity at $960m, which is equivalent to two-thirds of the Airlines’s $1.45 billion market value, despite the scheme’s relative immaturity  by the end of 2017, the partners want to grow its membership from 4.5 million to 7 million.

Qantas, after a nine-month review, has decided to maintain full ownership of its program.

Based on a membership of 10.1 million and last year’s $286m in earnings before interest and tax, the scheme is estimated to be worth $3bn — an extraordinary 88 per cent of the market capitalisation of its parent, which reported operating loss last year of $646m.

Frequent flyer programs can effectively become licences to print money, with reward points conjured from nothing and onsold to partners like credit card companies and supermarkets.

The partners, in turn, use the points to attract and reward customers, who swap them for free flights and seat upgrades, or go shopping in frequent flyer stores.

Buffett’s concerns about fleet costs, expensive wages and unpredictable fuel prices tend to fly out the window with loyalty schemes, where the main task is collection of a lazy profit margin from issuing points at a higher price than their subsequent redemption.

It’s money for jam. The collection of data is also valuable for the Airlines and its partners, as they ­tailor product and service offers to individual customers.

Last month, Qantas launched the Qantas Golf Club — an online community where points can be earned for playing golf, with members able to book tee times and access travel packages to visit some of the world’s best courses.

As the only two domestic carriers to offer points, both Qantas and Virgin tend to get a bit dewy-eyed about the loyalty of their customers, pumping out a lot of fluffy and feel-good marketing material.

The customer perspective is somewhat different, if Clifford Reichlin from the online forum The Australian Frequent Flyer is any guide.

Reichlin, a former Ansett employee and industry consultant, says frequent flyer points are a “promotional and marketing currency” designed to get customers to fly more. “What they really want to do is to convert the occasional traveller into a frequent traveller,” Reichlin says.

“It’s not a loyalty program and has nothing to do with loyalty. The Airliness aren’t rewarding you for flying with them; they’re trying to get you to buy more Airlines tickets, preferably the pricier ones.

“If it were a straight-up loyalty program, your points wouldn’t expire and the programs wouldn’t be so difficult to figure out.”

Because of the complexity of the schemes and the wide range of variables, it’s difficult to put a value on the points themselves.

Reichlin told the consumer group Choice in March that the Airliness had continually reduced the value of their frequent flyer points over the last decade or so, but not in ways that were obvious to consumers.

That might be so, but it’s impossible to displace the conviction held by most consumers that loyalty points means they’ll get something for free. Points become a second currency, which the Airliness retain the right to print.

    









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