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Reuters.com - No Spin. No Agenda. Just the Facts. As they happen.
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FEATURE-Airline reward plans become cash cows, spinoff eyed
Sun Jan 29, 2006 11:17 AM ET
By Christian Plumb
NEW YORK, Jan 29 (Reuters) - Airlines envisioned them as a simple marketing tool.
But frequent flyer programs, 25 years later, have become big cash generators for an industry struggling on other fronts, as airlines raise hundreds of millions of dollars by selling mileage credits to banks, hotels, car rentals and phone companies.
Now some analysts are wondering if top U.S. airlines will follow Air Canada in taking the next logical step to profit from the loyalty programs, spinning off all or part of them into separate units.
Air Canada's parent ACE Aviation Holdings Inc. (ACEb.TO: Quote, Profile, Research) raised C$250 million by selling a 12.5 percent stake in its Aeroplan loyalty points business last July.
"The frequent flyer programs could very well be a major source of financial liquidity for the key carriers that have significant programs," said Julius Maldutis, president of consulting firm Aviation Dynamics.
American Airlines' Aadvantage, which in 1981 became the first frequent flyer plan and is now the world's largest, could be worth $5 billion based on the valuation Air Canada got for its frequent flyer unit Aeroplan, he said.
American has no immediate plans for a spinoff.
AMR Corp. (AMR.N: Quote, Profile, Research) Chief Executive Gerard Arpey in a recent conference call warned about deals in which "while you bring some money in the door at the front end, over the long run you end up paying out, in the form of whatever kind of relationship you have created."
Still, Kurt Stache, president of Aadvantage Marketing Programs, told Reuters AMR did not rule it out in the future.
"We're always looking at potential opportunities for the program," he said. "The precedent has been set and it's certainly something that could be done."
LOYAL CLIENTS
United Airlines' parent UAL Corp. (UALAQ.OB: Quote, Profile, Research) which has another leading program, is "watching to see what kind of benefits are ultimately derived" from the spinoff by Air Canada, Ken Feldman, vice president of Loyalty and e-commerce, said in an interview.
Whatever the airlines' ultimate decision, they already make hundreds of millions off their frequent flyer programs by selling "miles" to partners from mortgage banks to restaurants who then distribute them to loyal clients.
American Express Co. (AXP.N: Quote, Profile, Research) in December 2004 threw a lifeline to Delta Air Lines Inc. (DALRQ.PK: Quote, Profile, Research) , agreeing to advance it $500 million, secured by miles American Express could then distribute to its SkyMiles cardholders.
The No. 3 U.S. carrier filed for bankruptcy in September but American Express is still one of its top lenders.
Airlines sold nearly $2 billion worth of miles to credit- card partners in 2004, according to Randy Petersen, editor of InsideFlyer Magazine. That means an increasing percentage of rewards are earned by credit card holders, and other partners' customers, rather than airline passengers.
"We're getting to a point where almost as many miles are earned through partnerships as through flying," AMR's Stache said. He declined to divulge American's revenues from selling miles to Citigroup Inc. (C.N: Quote, Profile, Research) , its main partner.
The multiplying channels for mileage has also led to increased liabilities for airlines, who are trying to relieve the pressure to set aside more seats by offering other ways to spend miles such as magazine subscriptions and car rentals.
'ROAD WARRIORS'
American estimated a liability from its Aadvantage program of $1.4 billion at the end of 2004, representing about a fifth of its total current liabilities, up from $1.2 billion, according to its most recent annual report filed with the Securities and Exchange Commission.
United Airlines in 2004 took a $47 million charge related to its Mileage Plus program, from which it estimated a liability of $840 million.
The programs still loom most importantly as a customer loyalty tool, though, with some "road warriors," taking circuitous year-end trips just to keep the elite status that entitles them to first- and business-class upgrades.
Miles are one of the few remaining weapons in the arsenals of airlines like American, UAL and Delta as low-cost rivals offer improved service and schedules and better prices.
United's program has helped stem defections to discounters Frontier Airlines (FRNT.O: Quote, Profile, Research) and Southwest Airlines Co. (LUV.N: Quote, Profile, Research) at its Denver International Airport hub, analysts say.
American is dangling the chance to earn up to 60,000 bonus Aadvantage miles as an incentive for travelers out of Dallas' Love Field, a longtime Southwest stronghold, to switch.
"The frequent flyer programs really were extremely successful because they generated for the first time brand loyalty which you never had before," Maldutis said. "It gives them the opportunity to charge a premium over the low-cost carriers."
advertisement
FEATURE-Airline reward plans become cash cows, spinoff eyed
Sun Jan 29, 2006 11:17 AM ET
By Christian Plumb
NEW YORK, Jan 29 (Reuters) - Airlines envisioned them as a simple marketing tool.
But frequent flyer programs, 25 years later, have become big cash generators for an industry struggling on other fronts, as airlines raise hundreds of millions of dollars by selling mileage credits to banks, hotels, car rentals and phone companies.
Now some analysts are wondering if top U.S. airlines will follow Air Canada in taking the next logical step to profit from the loyalty programs, spinning off all or part of them into separate units.
Air Canada's parent ACE Aviation Holdings Inc. (ACEb.TO: Quote, Profile, Research) raised C$250 million by selling a 12.5 percent stake in its Aeroplan loyalty points business last July.
"The frequent flyer programs could very well be a major source of financial liquidity for the key carriers that have significant programs," said Julius Maldutis, president of consulting firm Aviation Dynamics.
American Airlines' Aadvantage, which in 1981 became the first frequent flyer plan and is now the world's largest, could be worth $5 billion based on the valuation Air Canada got for its frequent flyer unit Aeroplan, he said.
American has no immediate plans for a spinoff.
AMR Corp. (AMR.N: Quote, Profile, Research) Chief Executive Gerard Arpey in a recent conference call warned about deals in which "while you bring some money in the door at the front end, over the long run you end up paying out, in the form of whatever kind of relationship you have created."
Still, Kurt Stache, president of Aadvantage Marketing Programs, told Reuters AMR did not rule it out in the future.
"We're always looking at potential opportunities for the program," he said. "The precedent has been set and it's certainly something that could be done."
LOYAL CLIENTS
United Airlines' parent UAL Corp. (UALAQ.OB: Quote, Profile, Research) which has another leading program, is "watching to see what kind of benefits are ultimately derived" from the spinoff by Air Canada, Ken Feldman, vice president of Loyalty and e-commerce, said in an interview.
Whatever the airlines' ultimate decision, they already make hundreds of millions off their frequent flyer programs by selling "miles" to partners from mortgage banks to restaurants who then distribute them to loyal clients.
American Express Co. (AXP.N: Quote, Profile, Research) in December 2004 threw a lifeline to Delta Air Lines Inc. (DALRQ.PK: Quote, Profile, Research) , agreeing to advance it $500 million, secured by miles American Express could then distribute to its SkyMiles cardholders.
The No. 3 U.S. carrier filed for bankruptcy in September but American Express is still one of its top lenders.
Airlines sold nearly $2 billion worth of miles to credit- card partners in 2004, according to Randy Petersen, editor of InsideFlyer Magazine. That means an increasing percentage of rewards are earned by credit card holders, and other partners' customers, rather than airline passengers.
"We're getting to a point where almost as many miles are earned through partnerships as through flying," AMR's Stache said. He declined to divulge American's revenues from selling miles to Citigroup Inc. (C.N: Quote, Profile, Research) , its main partner.
The multiplying channels for mileage has also led to increased liabilities for airlines, who are trying to relieve the pressure to set aside more seats by offering other ways to spend miles such as magazine subscriptions and car rentals.
'ROAD WARRIORS'
American estimated a liability from its Aadvantage program of $1.4 billion at the end of 2004, representing about a fifth of its total current liabilities, up from $1.2 billion, according to its most recent annual report filed with the Securities and Exchange Commission.
United Airlines in 2004 took a $47 million charge related to its Mileage Plus program, from which it estimated a liability of $840 million.
The programs still loom most importantly as a customer loyalty tool, though, with some "road warriors," taking circuitous year-end trips just to keep the elite status that entitles them to first- and business-class upgrades.
Miles are one of the few remaining weapons in the arsenals of airlines like American, UAL and Delta as low-cost rivals offer improved service and schedules and better prices.
United's program has helped stem defections to discounters Frontier Airlines (FRNT.O: Quote, Profile, Research) and Southwest Airlines Co. (LUV.N: Quote, Profile, Research) at its Denver International Airport hub, analysts say.
American is dangling the chance to earn up to 60,000 bonus Aadvantage miles as an incentive for travelers out of Dallas' Love Field, a longtime Southwest stronghold, to switch.
"The frequent flyer programs really were extremely successful because they generated for the first time brand loyalty which you never had before," Maldutis said. "It gives them the opportunity to charge a premium over the low-cost carriers."
