Qantas to fix frequent-flyer grouses

QANTAS Loyalty boss Simon Hickey is well aware that the airline's 5 million frequent flyers are a vocal bunch when it comes to expressing their displeasure.

Simon Hickey who is in charge of revamping the Qantas frequent-flyer scheme. Picture: Bob Finlayson.

He has seen the complaints about not being able to redeem points, the lack of seats on key routes at popular times and the difficulty in getting upgrades.

And like that bank manager in the television advertisement, the issue invariably proves to be a barbecue stopper, which sees the Qantas executive showered with opinions.

"But, you know, that's a good thing," he says. "It shows how important it is, how engaged people are in it and how valuable they think it is."

Qantas on July 1 will unveil the biggest changes to its loyalty program since its inception, when it splits it into two tiers ahead of a partial float likely to take place later in the year.

In one tier, to be known as Anyseat, members will be able to use their points in the same way as cash to get any seat on any flight on Qantas or Jetstar.

This tier is aimed at addressing the complaints frequent flyers have about availability. But they will pay more for the option and will not know how much more until they book. Running underneath this will be a "Classic" tier, which will provide the same number of seats as the existing program under much the same conditions. This includes the provision for upgrades.

Anyseat redemptions will start at about the same points cost as a Classic seat and rise according to factors such as the availability of seats, demand and time of flying.

This means travellers will burn more points if they book closer to a flight and fewer if they buy their tickets ahead of time or during quiet periods.

They will find out exactly how much it will cost them when they enter their request into a separate Anyseat website that will mirror the cash site in look and functionality.

"So you'll be able to say: 'I really need that flight and that's what it's going to cost me in points'," Hickey says.

"Or you make other choices, including down to the price where it is today."

Hickey, who took over as head of the Loyalty segment last May, came to Qantas about four years ago from Lend Lease in the US, as the airline's head of strategy.

As a former Platinum frequent flyer, he has seen the problem from both sides and is sympathetic to the complaints that people are unable to burn their points. "We are changing that model," he says.

"There will never be another person who says to me: 'I don't need any more frequent flyer points.' I think there has been a natural cap, if you like, and I don't think that exists any more."

Other changes will include the ability to pay for taxes and charges using frequent flyer points, as well as to more easily use a mix of cash and points to pay for flights. Qantas estimates that taxes and charges on a Sydney-London return trip of roughly $700 will add about 70,000 points to the 128,000-point cost. The result, says Hickey, is a win for frequent flyers looking to convert what he calls their "invested value" in their points balance.

"You've got great utility and you've got great choice in how to use your points," he says. "Everything you've got today is still there and we're providing this fantastic choice model on top to allow people to really get the most out of the program and out of their points."

That model will include a significant expansion of the ways people will be able to earn and burn points.

Frequent flyers can already earn points on a range of transactions involving areas such as credit cards, hotels, box office tickets as well as renting - or even buying - a car.

Part of Hickey's brief is to expand those partnerships and to find new ways of redeeming points through merchandise and store vouchers.

This will include areas where people spend every day - supermarkets, department stores and telecommunications companies.

He wants to make Qantas Loyalty a one-stop shop where members can earn points quickly, manage them through a single account and use them for a vast array of rewards.

"We'll have very, very competitive and wide-ranging merchandise and vouchers," Hickey says.

"We've got an arrangement, for example, with Qantas Holidays for packaged holidays with all the land content in there.

"If you fly a lot and you earn a lot, you're away from the family a lot. You could take a week with the family in Fiji and your points could pay for the flight, the transfers, the hotel, the hotel, the scuba diving, the fishing ... it could all be done on frequent-flyer points."

Hickey admits he expects a rush of people eager to burn points as they realise the new options, particularly those who have built up a big pool because they were unable to use them previously. But he notes it also will be easier to earn points through the expanded group of partners and that, ultimately, the equation will rebalance.

The Qantas strategy is similar to that employed by North America's Aeroplan, which was spun out of Air Canada in 2002 and listed on the Toronto Stock Exchange in 2005 at a market capitalisation of $C2 billion.

Qantas is not planning to spin off its entire frequent-flyer program and is believed to be looking at an initial public offering of about 40 per cent of the business later this year. But work has been under way for some time on separating the business so it operates as an independent segment, with its own balance sheet.

Strategy planning began in May last year, after Qantas chief executive Geoff Dixon appointed Hickey at the helm of the new business. In October, it moved into its own headquarters in Sydney's CBD.

It employs about 70 people in administration, development and management and uses about 25 per cent of the Qantas call centres as well as its own facility in Melbourne, employing about 300.

Much of the work has also involved grappling with the massive technology change needed to extract for its own use accounting and other functions previously embedded in Qantas.

"It feels like we're drinking from a fire hydrant but we're working as fast and hard as we can to deliver benefit from it to the membership," Hickey says.

Initial indications are good for the fledgling business: Qantas for first time this year broke out the program's earnings to reveal a first-half profit before tax of $62 million on revenue of $399 million.

Analysts are also bullish. JPMorgan recently valued the program at up to $2 billion, based on an analysis of listed loyalty programs operated by Aeroplan in North America and David Jones in Australia. JPMorgan analysts Matthew Crowe and Russell Crichton-Browne say earnings from the program would help offset weaknesses in the Qantas and Jetstar domestic airline businesses.

"We expect Qantas's loyalty program to grow reported earnings by 75 per cent in FY09, offsetting some of the weakness in mainline earnings (down 17 per cent)," they said in a recent note.

Macquarie Research analysts Russell Shaw and Riaz Hyder believe revenue from the program will double from an estimated $704 million in fiscal 2008 to $1.44 billion in the 2011 financial year.

The Macquarie analysts estimate the Anyseat program will result in a significant increase in redemptions, after a build-up of points in recent years and a corresponding diminishing of the liability - estimated to be $2.2 billion at the end of last financial year - on the airline's balance sheet.

They believe the increased scale of the program and its fixed cost base will also provide strong operating leverage to boost EBIT margins going forward.

Hickey is also confident about the program's growth prospects, although he does not believe it will follow Aeroplan's lead and end up bigger than the airline.

He says Air Canada was under bankruptcy protection when that happened and notes that Qantas "is a very substantial and different beast". He adds: "I don't quite have those aspirations."

He is reluctant to go into details about the IPO, saying only that he is positioning the company so that a spin-off is an option, "depending on market conditions and enhancing shareholder value".

"From a corporate restructuring sense, that's my mandate from the board: to do everything that's necessary, with the option to look at that and make that call," he says.

"They have asked me to do everything I need to do so they can make that decision - whether they want to do that this time or any time in the future."

Regardless of when the float occurs, Hickey says Loyalty has already moved beyond being just an airline business.

"It's obviously, to use a horrible word, synergistic with the airline in that we both have areas where we work together and drive value for each other," he says. "But we don't actually carry the passengers, we don't have the planes."

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