Hi Lifehacker, Reading the doom and gloom financial results from Qantas this week, I notice that its frequent flyer program is a star performer showing a profit of $286 million. How can a frequent flyer program be profitable? I would have thought it would be a liability on an airline's balance sheet as it is points or flights that are owed to a program member. What gives? Thanks, Infrequent Flyer
Qantas' frequent flyer program (operated by a separate division called Qantas Loyalty) was indeed one of the few bright spots in Qantas' results. Qantas Loyalty has actually been doing so well -- it has seen double-digit growth for five years straight -- that there has long been speculation that Qantas might spin it off as a separate company. In the devious world of corporate finance, such a move might score it a better share price, since that price would (in theory) only reflect how well the frequent flyer scheme was doing, unencumbered by the broader challenges facing Qantas (and indeed most other global airlines). That plan has now been officially shelved, and Qantas says that Qantas Loyalty "continues to offer major profitable growth opportunities". So how can giving away flights be profitable?
The main key to how Qantas Loyalty makes money is actually very simple. Whenever you earn frequent flyer points from anything other than flights -- through spending on your credit card, booking a hotel, renting a car or whatever else -- those points have been purchased from Qantas Loyalty by the business concerned. Companies will pay to acquire those points because they calculate customers will favour the points-earning option when choosing between products or services. If you have a choice of companies to rent a car from, you may well choose the one where you earn points.
So that's where the majority of Qantas Loyalty's income comes from: other businesses paying it so they can offer points to their customers. There are more than 10 million Qantas Frequent Flyer members, so it's not surprising that other businesses see that as a resource worth tapping into. In the last year, Qantas added 14 new "partners" to the scheme, which is 14 more sources of income. It also makes money from other activities -- such as the Qantas Cash currency conversion card -- but selling points to other businesses remains the backbone of the business by all accounts. It also doesn't hurt that actually earning points from Qantas flights is a slower process than it used to be.
So Qantas Loyalty has a business value even before you consider the less tangible benefits it offers Qantas collectively: a way of filling seats that might otherwise go unsold, and a way of persuading customers to stick with one airline rather than swapping around to find the cheapest price. It might seem counter-intuitive that you can make money from a scheme that offers free flights, but those flights are only a very small part of the equation.
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