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Published:
July 1 2008 09:30 | Last updated: July 1 2008 19:44
Flying might have lost its glamour in the past few years but the
business of marketing loyalty schemes has remained as alluring as the designer
handbags on offer in duty-free. Now, however, the International Accounting
Standards Board’s new rules on such programmes threaten to wipe hundreds
of millions of dollars off airline balance sheets.
Qantas’s
review of whether to spin off its frequent flyer division – which has 5m
members – and sell up to 40 per cent to outside shareholders could be the
first in a series of restructurings and sales to result from the IASB’s
new rules, which came into force on Tuesday.
Traditionally,
the liability of unused flyer miles was recorded on the airlines’ balance
sheet at the (relatively low) marginal cost of a delighted regular customer
putting their bum on an otherwise empty seat: a meal, some baggage-handling and
a few extra gallons of kerosene.
But the
IASB, seeking a more rigorous analysis of the opportunity cost of frequent
flyer rewards, now wants the liability to be valued at “the amount for
which the award credits could be sold separately”. At its most
conservative, that means basing the value on the cost of a full price ticket.
The new
regulations have their logic, no doubt. But their timing is awful, given that
airlines are struggling for survival amid surging oil prices. When Qantas
voluntarily adopted the new standards this year, it took a hit of A$508.4m to
its retained earnings.
Spinning
off its loyalty programme could raise between A$2bn and A$3.5bn. Keeping
control would make strategic sense as the Qantas brand is at stake. And acting
quickly might produce a better price than waiting for other airlines to crowd
the market and depress demand.
Run well,
these can be embarrassingly successful standalone businesses. One danger is
that the semi-independent reward programme outshines the parent airline. Air Canada spun off
its rewards programme, Aeroplan, in 2002. It is now worth four times more than
the airline itself.
- - - -
Qantas
looks at loyalty spin-off
By Elizabeth
Fry in Sydney, Raphael Minder in Bangkok and,Justin Baer in New York
Published:
July 2 2008 03:00 | Last updated: July 2 2008 03:00
Qantas is considering the partial float of its frequent flyer business
later this year, in a move that could raise between A$2bn (US$1.9bn) and
A$3.5bn for Australia's
biggest airline.
The
Qantas announcement comes as some Asian flagship carriers are also studying
whether to spin off their passenger loyalty programmes - including Korean Air
and Japan Airlines - at a time when their main airline business is facing
soaring fuel costs and stiffer competition from low-cost carriers, according to
people close to the airlines.
While the
carriers would not comment, such a move could allow them to generate additional
funding, as well as highlight the value of a business that is less reliant on
aviation as it generates sales by selling air miles to credit card companies,
hotels and retailers.
Geoff
Dixon, chief executive, said Qantas would decide by August whether to sell a 40
per cent stake in the business, with a partial float among the options. Qantas,
one of the world's most profitable airlines, is overhauling its loyalty
programme into one where points can be redeemed for any seat, at any time.
Qantas
shares rose as much as 9 per cent yesterday, before closing up 6.6 per cent at
A$3.24. UBS, Citi and Macquarie have been
appointed as joint lead managers to manage the potential IPO. Morgan Stanley
will continue to provide financial advice ahead of a possible offering.
US
airlines that face a potential cash crunch later this year are starting to sell
pools of frequent flyer miles to their credit card partners. The downturn has
made many conventional capital-raising options more costly or dilutive, leaving
carriers to explore alternatives that leverage assets that will retain value
even as market conditions continue to deteriorate.
Airlines'
ties to the credit card industry have come under greater scrutiny from
investors this year as mounting losses cast doubt on carriers' ability to avoid
seeking protection from creditors.
Continental
Airlines, one of the six legacy US
carriers, raised $413m on June 10 from affinity card partner JPMorgan Chase by
selling miles and posting some of its routes and airport slots as a security
interest. The figure comprised about 12 per cent of Continental's total cash at
the end of the quarter.
In a bid
to persuade investors that they will stave off bankruptcy, carriers such as
American Airlines and United Airlines have noted that they have billions of dollars
in miles and other unencumbered assets that could be exploited to raise cash in
the coming months.
Additional reporting by Jonathan Soble in Tokyo
Copyright
The Financial Times Limited 2008
- - -
US
airlines sell off frequent flyer miles
By Justin
Baer in New York
Published:
July 2 2008 03:00 | Last updated: July 2 2008 03:00
US airlines that face a po-tential cash crunch later this year are
starting to sell pools of frequent flyer miles to their credit card partners.
The
brutal industry downturn has made many con-ventional capital-raising options
more costly or dilutive, leaving carriers to explore alternatives that leverage
assets, including frequent flyer miles, that will retain value even as market
conditions continue to deteriorate.
Airlines'
ties to the credit card industry - both the issuers that co-brand cards and the
electronic payments companies that process ticket purchases - have come under
greater scrutiny from investors this year as mounting losses cast doubt on
carriers' ability to avoid seeking protection from creditors.
Credit
card issuers use airline miles to reward account holders for making purchases.
Continental
Airlines, one of the six legacy US
carriers, raised $413m on June 10 from affinity card partner JPMorgan Chase by
selling miles and posting some of its routes and airport slots as a security
interest.
The
figure comprised about 12 per cent of Continental's total cash at the end of
the quarter.
Others
may follow. In a bid to persuade investors that they will stave off bankruptcy,
carriers such as American Airlines and United Airlines have noted that they
have billions of dollars in miles and other unencumbered assets that could be
exploited to raise cash in the coming months.
"The
wheels are already in motion," JPMorgan analysts Jamie Baker and Mark
Streeter wrote in a research note last week.
"Can
a similar deal between American and Citibank [its affinity card partner] be
that far off? Not in our opinion."
Because carriers
often sell miles to card issuers at a discount to persuade them to acquire
large blocks in advance, the transactions can be costly.
Nevertheless,
airlines can make a persuasive case. Large issuers such as JPMorgan Chase, Citi
and American Express value their marketing agreements.
Frequent
flyers tend to earn and spend more money, and exhibit more loyalty toward their
co-branded airline card than the typical account holder.
"Issuers
are always trying to find a way for cards to not be commodities," said
Richard Vague, a former credit card executive who ran stand-alone card issuers
that are now part JPMorgan and Barclays.
"Airline
programmes have always been one of the most successful in terms of having
additional value."
Copyright
The Financial Times Limited 2008
- - - -
Card
companies hold a strong hand
By Justin
Baer in New York
Published:
July 2 2008 03:00 | Last updated: July 2 2008 03:00
Last autumn, Frontier Airlines selected First Data over its peers as
the low-cost carrier's credit card processor. But by April, Frontier held the
electronic payments company responsible for its descent into bankruptcy.
Frontier's
Chapter 11 filing underscores the crucial role the credit card industry plays
in determining which airlines survive the downturn unscathed.
While
credit card issuers can be a source of capital for airlines struggling with
record fuel costs and slumping demand, card processors like First Data and US
Bancorp can have the opposite effect on a carrier's financial flexibility by
holding on to some or all of the proceeds from advanced ticket sales.
Processors
have the right to "hold back" cash under certain circumstances
because they take on the risk that airlines may go out of business before they
meet all of their future obligations to passengers.
In short,
if a consumer uses his credit card to buy a seat on an August flight to Los Angeles, and the
airline fails in July, it is the processor who is left to reimburse the
would-be passenger.
"It's
really just like an extension of credit, in the sense that you're collecting
the cash upon tendering the receipt but not delivering the service until some
point in the future," said Ben Hirst, Northwest Airlines' general counsel.
"That's typically a credit-based decision and so it varies by carrier,
depending upon the relationship of the airline and the processor and the
strength of the company."
In some
cases, an airline's processor is part of the same financial services
conglomerate that owns the company that co-brands credit cards with the same
carrier.
Still,
the threat of potential processors' hold-backs "may pose an even greater
liquidity risk than fuel over the next several months as cash balances come
under increasing pressure", JPMorgan analysts Jamie Baker and Mark
Streeter wrote in a research note.
"Any
material change in hold-back could exact a heavy toll on liquidity."
Concerned
that Frontier's financial conditions had wilted materially, First Data put in
place a timetable that would have quickly held back 100 per cent of the
airline's advanced sales.
In filing
for Chapter 11, Frontier was granted a stay on the holdback policy.
"Unfortunately,
our principal credit card processor, very recently and unexpectedly informed us
that, beginning on April 11, it intended to start withholding significant
proceeds received from the sale of Frontier tickets," Sean Menke, the
airline's chief executive, said in a statement.
"This
change in established practices would have represented a material change in our
cash forecasts and business plan."
Brian
Mooney, president of First Data's Merchant Services unit, said his company was
surprised, too.
"Even
they would admit that the high price of oil had caught them in a tough
bind," Mr Mooney said. "We had ongoing dialogue with them in the
months leading up to the filing. They had not mentioned they were considering
bankruptcy."
Under
protection from creditors, Frontier reached a processing agreement with First
Data that increases the extent of the hold-back more gradually. While troubled
by the severity of First Data's actions with Frontier, many US airlines
executives see the Denver-based airline's filing as an extreme case. Larger
carriers will have more leverage and additional sources of liquidity, they
argue.
Copyright
The Financial Times Limited 2008
- - - -
Australian
carrier soars on idea to float customer scheme
By
Raphael Minder in Bangkok
Published:
July 2 2008 03:00 | Last updated: July 2 2008 03:00
Investors yesterday sent Qantas shares to rally to their biggest
one-day gain in a year, after the Australian carrierannounced it could list its
loyalty passenger programme.
But
beyond investors' euphoria, which resulted in the Qantas share price rising 6.6
per cent to A$3.24, lies a long-debated idea that continues to divide the
airline industry.
The
benchmark was set in 2001, when Air Canada spun off its Aeroplan
frequent-flyer scheme as a separate entity. Aeroplan now trades on a multiple
of 18 times 2008 earnings and has a market capitalisation that is four times
that of Air Canada.
However,
the Canadian success story has not been sufficient to convince European
airlines such as Air France
to follow suit, while some Asian airlines, including Korean Air, are now
showing interest but refuse to disclose their plans.
In fact,
even Geoff Dixon, Qantas chief executive, did his best yesterday to damp shareholders'
enthusiasm by insisting a partial flotation was only one of the options being
considered.
"Under
active consideration for the future of the programme is a partial initial
public offering, potentially for completion in 2008," he said.
That caution
underlines the dilemma faced by airlines that seek to boost the value of their
assets without losing control over them. Proponents of the spin-off idea point
to Aeroplan as an exemplar of how airlines can extract greater value from a
programme by turning it into an independent profit centre, capable of
ultimately forging new partnerships with other airlines.
Peter
Harbison, executive chairman of the Centre for Asia Pacific Aviation, a
Sydney-based consultancy, says that, given Aeroplan's track record, it makes
sense that "all airlines who have a well-established frequent-flyer
programme are looking at the concept", which amounts to a recognition that
the sum of the parts can be worth more than the whole.
"The
bad apple is often the airline itself, which tends to contaminate the
others," he adds. The worst scenario, however, is an immediate loss of a
favourable and secretive contractual arrangement between an airline and its
loyalty programme, which could also force the airline to raise its assessment
of the liabilities generated by its redemption plan.
In the
longer term, there is also the potential for reverse contamination as an
independent programme branches out.
"Should
the divested unit enter risky ventures and ultimately go bankrupt, the damage
to the loyalty that Qantas has built up would be immense," noted Morgan
Stanley in a report earlier this year, which forecast that Qantas would
therefore settle for a partial sale.
Still,
analysts believe that Qantas is among those airlines that have most to gain
from floating its programme because, as a flagship carrier, it has built up a
long-standing domestic clientele of more than 5m cardholders, a significant
attraction for Australian banks and other local partners. That applies even
more to Japan Airlines and Korean Air, two carriers that have also been
studying a spin-off and which have, respectively, about 20m and 15m programme
members.
On the
other hand, Cathay Pacific and Singapore Airlines, two of Asia's
most profitable air carriers, have successful loyalty programmes but with a
relatively small domestic base, which makes an IPO a less attractive option,
according to observers.
That they
are still determined to extract more value from their programme was, however,
demonstrated recently by Cathay, which
launched a new venture with American Express after ending a long-standing card
deal with Citibank. Listing a loyalty programme also creates additional costs,
estimated at A$10m (US$9.5m) a year in the case of Qantas by Morgan Stanley,
because of the breakdown in the existing contract between the airline and its
programme and the need to hire more staff to set up a fully fledged business
operation.
But
Qantas, like many other airlines in the region that have committed to an
extensive fleet expansion, has already earmarked A$13bn of capital expenditure
over five years.
That in
itself could be the compelling reason for Qantas and others to seek to raise
additional cash from an existing business.
Additional reporting by Elizabeth Fry
Copyright
The Financial Times Limited 2008
Rather,
Mr Kent inherits a group that has recovered well but now faces
headwinds largely beyond his control. In the US, structural decline in
sales of carbonated soft drinks has been reinforced by an economic
slowdown forcing Americans to trade down to cheaper brands and eat out
less often. Meanwhile, investors are nervous about the impact of rising
prices on consumers in faster-growing emerging markets, their concerns
heightened by gloomy outlooks from some of Coke’s bottling partners.
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