by Rod Douglas 

Airlines through a frequent flyer peephole: the great Qantas Frequent Flyer Swindle.

We’ve all been bombarded by the advertising and press blitz around Qantas’ decision to close transfer of bank frequent flyer points into their frequent flyer programmeme. The deadline of March 31st has expired but, not surprisingly, Qantas has extended the deadline to allow its remarkably effective fear based campaign overhang to be cleared.

What amazes me most about all of this is that Qantas has managed to pull off a cash heist without equal, in the midst of the most challenging economic times in living history. They’ve co-opted into the swindle our most ‘trusted and respected of banks’ (sic), and then completely hoodwinked the poor punters that own the points…and simply got away with it.

 In fact I’m wondering why Graeme Samuel from the ACCC hasn’t taken an interest in this breathtaking change in the rules that Qantas has imposed upon its poor frequent flyer punters. After all, many people committed to credit cards because they had Qantas Frequent Flyer points attached. Summary withdrawal is unfair and immoral.

To understand the size of this swindle you need to understand how frequent flyer programmemes work and how they’ve morphed from being a loyalty programme designed to stick the airlines most valuable customers to the brand, into an incredible working capital generating machine. These programmemes are valued by the market, in Qantas case, at close to a billion dollars.

Now some people’s view, (the shareholders), would be ‘go to it boys’. That, of course, belies a longer term view of what happens when you treat your punters unfairly which can cause an enormous amount of damage to your brand.

So let’s have a look at the economics of a frequent flyer programme and the rationality of anyone allowing a frequent flyer programme to motivate their behavior. Firstly, let’s understand what you get for a frequent flyer mile. A quick comparison of the Qantas programme with the Virgin Velocity programme suggests that they are broadly comparable when directly compared based on redemptions. Basically every mile you generate will deliver you about 0.7 c in the Qantas programme and between 0.7 & 0.8 c per mile depending on the reward in the Velocity programme.

Naturally there are lots of benefits that distort these numbers. While Qantas has been rushing with a deadline, Virgin has been offering a 25% bonus on point’s transfers. Sounds good doesn’t it. Until you realise that when you transfer from bank programme you only get 50% of the points transferred across. So transfer the near million points I had in my Westpac programme and I  received 625,000 Velocity points for doing so. So let’s translate that into the economics for you. For every dollar you spend on your credit card generally actually earning back around 0.0035% of your spend. So spend a million dollars on your co-branded credit card and receive back an economic benefit of $3,500. Some are better than others, and bonuses confuse the whole question, but you get the idea.

On the other hand the bank earns about $15,000 from your million dollars in spending just in transaction fees. If it’s American Express or Diners club add another $5 to $10k on to the total. And who knows just how much they’re earning from you on the average of $8,500 of credit card debt that Australian’s hold but with the average frequent flyer connected card currently at 19.5% that would be $1,700 in interest every year. Except that when you do the analysis you discover that high use credit cards also have far higher average balances. The banks win every which way.

Now before the great Qantas swindle, the banks were holding the points and had a contingent liability on their balance sheet for the reward points. Of course, it was only a contingent liability because if you didn’t use the points then the bank had no liability.

Then someone at Qantas figured out that if they forced you to transfer your points, then the banks would be forced to pay out the contingent liability to, wait for it, Qantas. So Qantas has in one fell swoop crystallized a contingent liability for the banks and turned it into tens if not hundreds of millions of dollars in working capital.

Why is that you say? Well Qantas doesn’t just sell seats. They also sell frequent flyer points. You can buy Qantas frequent flyer points for about $654 per 100,000 points. I understand that this is about a 20% premium to the price paid by the banks. Other frequent flyer partners are reputed to have to pay up to $1,500 per 100,000 points or 1.5% of the face value for the privilege of having access to the Qantas Frequent Flyer brand.

Every time a point lands on your statement somebody has paid for it. So when you choose a Qantas partner you can be absolutely assured that you are paying a premium for the service or product you’ve selected because they are paying a premium, which is often equivalent to the credit card transaction cost on top of what they pay the banks. Does that sound like good business?

On top of that Qantas, and all other frequent flyer programmes that allow you to shop for products, are, naturally enough, in the retailing business. Good business too. Uncontested premium retailing. Once you understand how to price products using points and you model some of the prices you discover that with the slightest effort you could expect to get a 30% better price, which means that Qantas is probably making a margin of about 65% on the products sold.

So let’s wrap this up. Frequent flyer programmes make no economic sense. That they dramatically impact upon the buying behaviours of anybody is remarkable. Think about it. Could you save better than $3,500 per million dollars spent with some basic cost management? Of course you could. Probably more like $50,000 (or 5%) with only a little attention paid. So why would you become a committed traveller and pay whatever price is asked just because you want the frequent flyer points?

At the very pointy end, regular business flyers, whose businesses are paying for their travel, are being manipulated through private reward to pay premium prices to maintain their status and to generate private flights and holidays that under any other circumstance would be taxable… and probably should be taxable. Those particular executives are, without question, destroying shareholder value within the businesses that they serve and generating significant shareholder value for Qantas.

Qantas has done it again. Under Geoff Dixon the airline used high levels of fear to drive down the wages and conditions of its workers, even as profits increased and then manipulated the unions to allow the setting up of a competitor that it owned to support it to become the most profitable airline in the world. That profit came from the workers pockets. Now, under Alan Joyce, the travelling punter is being screwed out of the promises made in the frequent flyer programme to provide more working capital to the airline for free. I can’t wait to see what the next financial engineering trick is. Used to be that a great airline, with exceptional safety standards, superb service and delivering a frequent schedule on the right routes was the way to build profitable airline. Now it’s all about getting your unfair share and getting away with it.

Virgin have been playing a ‘keep the air fare’ rear guard action in all of this, using their advertising budget to do what by rights the ACCC should have been doing and advising all who would listen that the Qantas ‘transfer the points or lose the opportunity’ was bunkum. Virgin’s Velocity programme, while desperately short of members, is a simpler programme that operates much more fairly. It’s doesn’t have the marketing clout of the Qantas programme but probably does deserve to win a whole lot more market share.

And on the point of status, Qantas is the master of giving it and taking it away. Unless you have reached the privileged status of being a member of the Chairman’s Lounge, then even paying for the privilege of the Qantas Club gives you no more than sheep race-like crowding and a bit of free food and grog if you’re willing to stand in the queue for long enough.

Of course, access to the Chairman’s Lounge is limited to a few thousand of the elite of the elite, politicians, captains of industry, ASX 100 company directors and the like. (I guess I’m ensuring I’ll never be on that list). Doesn’t matter how much you fly, you’ll only make it in there if you have influence and then it doesn’t really matter how much you fly… Just that you remember Qantas’ largess when a policy decision is being made, either politically or when the company travel policy makes it into the board room.

On the other hand, over in the other terminal at the much more egalitarian ‘the lounge’, anyone who makes gold frequent flyer status is in the door without a question (and for free). When you land in ‘the lounge’ the people are friendly, the food is abundant and substantial, (the risotto has been a huge hit), and there is tons of space.

Virgin 1 vs Qantas 0.

With the GEC biting, Virgin have mothballed five of their 737’s. It’s meant that I’ve been getting to fly on the Embraer 190’s a whole lot more often. What a great passenger experience. While the decision to add the Embraers to the lineup has dragged Virgin away from its one fleet roots, I suggest that they should be celebrating right now.

For passengers, the big oval cabin with two abreast seating is superb. From my regular crew chats they seem to love them and the pilots who fly them, rave about them. The only negatives I’ve heard have come from within the aviation management fraternity (outside of Virgin) where there seems to be a question as to whether they are built heavy enough to stand up to the years of beating that both the 737 and A320  family have founded their reputation upon. I suspect that it’s a question of the new kid on the block challenging the establishment, rather than there being lots of evidence.

What is really nice for Virgin is the operating economics. With breakeven at a 61% passenger load Virgin needs only put about 63 passengers on board to begin making a profit. When times are tough mothballing a handful of the 737’s with their 144 – 178 passenger capacity makes good sense when you can simply work the Embraer’s harder and give your ‘guests’ a better flight experience.

I have to say that having been through the wringer with Virgin over the past couple of months and having built such a good relationship with Matt Dixon, I can’t help but start to play games with the Virgin staff to catch them out. I think it’s extraordinary when a frequent flyer can, by simple deduction, figure out what the policies of the airline are when the staff clearly don’t know. The other day was a classic. I persist in supporting the profitability of Virgin by buying blue zone seats. An extra $30 and you’re assured of an aisle with the extra leg room. I inevitably work when I’m travelling so the $30 is a good investment in assuring that I’ll be able to pull at least an hour’s work out of a Melbourne leg.

What’s interesting, of course, is that if my PA’s forgotten to pay the extra I almost inevitably get the exit row anyway. What’s also interesting is that Virgin hasn’t figured out that they should block the exit row for those who don’t pay the difference. If I have one criticism it is that they sell the exits as a premium, then fill any that aren’t filled with the biggest people they can find.

Anyway, on this particular flight I booked in at the front counter at Brisbane and was given a middle seat in the exit row. I was late and the other seats had been filled. I asked if the aisles were filled with blue zone guests. The answer provided was ‘yes’. What about the window I asked. No they weren’t blue zone guests. Can you move one then please? No. You have an exit row. That’s what you paid for.

Give me a break. I’d say that ground crew have moved people 100 times who weren’t blue zone guest for me. I smiled sweetly and wandered up to ‘the lounge’ where the very helpful girl proved her counterpart to be a liar by confirming that one of the aisle was not occupied by a blue zone guest and moving them to give me my beloved aisle.

They really should run a morals module during induction. ‘Thou shalt not lie unless you are smarter than everyone else… and you’re not’. Sorry Matt. Caught out again.

Choice, the magazine of the Australian Consumers Association has once again run its biannual Domestic Airline Satisfaction Survey. I like choice because they are vehemently independent in their views and are not swayed by any of the usual commercial incentives.

To say that this year’s outcomes were shocking is an understatement. 37 out of 100 passengers are generally unsatisfied with the experience they have of their airline of choice. What a shocker.

That just goes to show that, while airlines have decided that economic rationalism is their only path to profitability, they are trashing their brands and leaving more than a third of their passengers completely underwhelmed.

Every airline in the survey went backward in customer satisfaction.  Regional Express led the backward charge with a 13% reversal to score 66% but then today’s whipping boy Qantas only needed to fall 5% to crash to an all time low of 61%. That’s right, our only full service airline managed to beat its low cost sister by 1% point. They did beat Tiger, the pretend airline, with absolutely no service, a weird 45 minute before flight check in policy and terminals that have you doubting their seriousness, by 6 points. You have to give credit where credit is due.

No wonder Brett Godfrey thinks that they are doing alright at Virgin Blue. Topping the survey this year with a worst ever score of 68%, (he can’t honestly be proud of that can he?), the Australian underdog managed to beat his much larger competitor in every category. While winning all five categories, the stark reality is that Virgin took reversals on all of them since the last survey. Clearly life, service and satisfaction is slumping across all the teams and the whole of the Australian airline industry is suffering as a result. One can only assume that this is in fact a great opportunity for Virgin Blue to lift its game and its market share because the whole Qantas group is on the mat.

Interestingly, Qantas was chosen by an astonishing 54% of respondents because of its frequent flyer programme. This was a 2% degradation over the past two years and compares with Virgin’s improvement of 4% to 13%. One wonders what would happen to the Qantas business if the truth was revealed about the real value to all of those loyal flyers of the programme.

Virgin 7 vs Qantas 0

Those who immediately raced out and bought Virgin Blue shares after last month’s article pointed out how desperately oversold they were will be sitting on a pretty profit this month. At 15c when I wrote the last article, today’s price is 32c. Now while I would advise absolutely nobody to follow my stock picking prowess, I will happily accept lunch invitations to suitably swanky venues to help you celebrate the doubling of your money from that simple stock assessment. Virgin Blue is still very cheap. Worst part of all… I haven’t got around to calling my broker yet. Qantas was up 40c to $1.96. Is the market taking a view of the future?

Virgin Blue was the big winner in today’s contest. Final score Virgin Blue 8 vs Qantas 0.

Share your insights on the airlines, funny anecdotes of your trips or drop me a line with your bitches from that ever so important but impersonal world of the airlines at rod@aviatormag.com.au