Frequent flyer schemes revamped to drive profits in tough times for airlines
By Victoria Bryan
BERLIN (Reuters) - Beset by low air fares and relentless competition, airlines around the world are waking up to the value of their frequent flyer programs and realizing they can boost profits as well as brand profile.
A multitude of global carriers - preserved by complex cross-border ownership rules that curb dealmaking - means that simply selling tickets is no longer lucrative. Industry body IATA predicts a 3.5 percent drop in fares this year and for airlines' net profit margins to reach just 2.4 percent.
As airlines dig around for new ways to make money, many of them are finding it buried deep in their marketing departments.
Dating back to American Airlines' launch of AAdvantage in 1981, FFPs were originally used to encourage a customer to spend their money with just one carrier by offering free flights as rewards once enough miles had been collected.
Nowadays, however, the programs, with their rich customer data, have become a currency of their own as airlines realize their value to companies such as credit card providers, hire car companies and hotels. An example: Delta (DAL.N: Quote) commanded $675 million from American Express (AXP.N: Quote) for its Skymiles in 2011-2013, according to Euromonitor analyst Nadejda Popova.
Those are not the only kind of deals to which airlines have turned, increasingly inventive as profits nosedive. In 2012 Germany's ailing Air Berlin AB1.DE sold a 70 percent stake in its Topbonus program to Etihad for 185 million euros ($247.72 million), more than the market value of the German company as a whole at the time. In 2013 an IPO of Smiles SMLE3.SA helped Brazil's Gol (GOLL4.SA: Quote) bring down net debt. [ID:nL2N0GE0JF]
Now industry watchers expect more such deals, spin-offs and stock market listings as airlines try to unlock more value from these businesses - and in turn drive more new revenues.
Brazil's Valor Economico newspaper reported recently that the country's third-largest airline Azul Linhas Aereas could follow in the steps of rivals TAM and GOL by floating its TudoAzul frequent flyer program as a way of raising funds in the capital market, citing the program's director. Continued...