Ask LH: How Can Qantas Frequent Flyer Be Profitable?

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

Dear IF,

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.

Cheers Lifehacker

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Comments

    It would be very interesting to see what the points are sold to third party companies for, and what price they account for as the true cost of a frequent flyer reward flight...

      ABC's The Checkout looked into this issue. It was a fascinating story and pretty much answers all your questions.
      https://www.youtube.com/watch?v=OEcZih6qUT0

    And don't forget the big data! All that detailed data about their 14 million customers spending habits via their partners and credit cards. Companies love paying for that.

    Depending on how you use the points, for a consumer each point is worth between 1-2.5 cents.

    They also earn a pretty penny, when your points expire because they changed it from the 3 year limit that you signed up with to 18 months and then include a small note in the emails they regularly send you that they expire in a month and call that adequate, just when you were going to use them too.

    Look at that i'm still bitter 6 months after finding out, they should at least convert it to a gift card and cash you out if you don't use it.

    See it this way - a loyalty program 'prints money' since the points have no 'real value'. Lot's of points expire and will never be used. Many of the partner flights that you can book as an award come almost free for the loyalty program. So it's pretty hard NOT to make money :) Torsten @ http://www.mightytravels.com

    Hi,
    I agree so much with your story.

    Certainly the QFF program is so profitable because it gives out so little!

    I was foolish enough, some years ago, to start saving for an overseas holiday with my mother and travel Qantas Business Class . I accumulated over 300,000 points ( credit cards, Woolies,banking) but now the truth has finally dawned. No chance mate!

    Just try and get 2 seats in business to the USA or Canada - I have given up. The frequent flier phone staff were helpful and apologetic .They could get us on separate flights thru Hong Kong as long as we didn't mind travelling on separate days !!

    No problem for intra australian flights but not Perth to the east coast! ( we live in Perth)

    You just cannot get 2 business class seats as a reward overseas and believe me, have been trying for a year ahead.
    Maybe I am the only so disillusioned but I don’t think so.

    I can certainly see wy QFF is so profitable

    Beryl

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