Strained Loyalty

Qantas has sought to spin the changes as aimed at a “simpler, fairer” frequent flyer program, where earn and spend are more closely aligned. But as many travellers on social media have pointed out, the changes hardly seem to simplify anything – instead adding three new tickets classes and requiring a page full of strikingly vague explanatory charts. Whether the changes are fairer is, of course, a matter of perspective, but Alan Joyce’s claim that they are not financially motivated has been widely dismissed. And then there is the timing, which commentators have described in terms ranging from “truly appalling” to, in the words of former Qantas chief economist Tony Webber, simply “poor. ” In the short term, the uproar will probably pass, but the sense these days is that every step Qantas takes comes within an unnerving proximity to some sort of tipping point, an accumulation of errors and cutbacks that finally drives loyal Qantas customers to begin abandoning ship en masse? To be sure, Qantas must tread especiallycarefully when it comes to its treasured frequent flyer program.

The loyalty cash cow

That’s because, far more than simply a way to reward (and encourage) customer loyalty, frequent flyer programs have become a major source of profit in their own right.

Often described as Australia’s second currency, Qantas essentially prints its own money – creating frequent flyer points out of thin air. In addition to giving them to passengers, Qantas also sells them to a range of other companies, from grocery stores to banks, who in turn use the points to entice consumers into their own loyalty programs, credit cards and the like. Most of the points are eventually redeemed for flights or other rewards – it’s estimated that at any given time Qantas is carrying $2 billion in liabilities from outstanding points – but those points are exchanged at rates entirely controlled by the airline. Indeed, as the recent changes make clear, the frequent flyer program is effectively a closed economy controlled by Qantas – and a very profitable one at that. During the last financial year, it earned $1. 2billion, hauling in a pre-tax profit of $260 million.

The profitability of Qantas Loyalty, as the frequent flyer division of the airline is known, has led to much speculation in recent years that Qantas could seek to sell all or part of the program as a quick fix for its financial woes. Estimates have tabbed the value of the division at between $1. 5 and $2. 5 billion, though not all analysts believe the business would be as valuable to an outside buyer as it is to Qantas.

Since the value of the program ultimately depends on the supply of seats, a buyer would face the risk of Qantas increasing the ‘price’ it charges for those seats, or even cutting off the supply altogether.

While a partial sale might be more attractive to an investor looking for a steady cash flow, it would leave the buyer shut out of the all-important decisions on the supply side.

For its part, Qantas has plenty of reasons beyond immediate profit to maintain control. For one, the frequent flyer program gives it arguably Australia’s most comprehensive database of consumer information and a relatively receptive advertising audience. Qantas already uses such data for targeted marketing, but as companies search for new and innovative ways to reach 21st century consumers, much untapped potential lies in Qantas’s vast stores of information on the travel and spending habits and consumer preferences of a market that amounts to more than a third of the Australian population. On top of that, the frequent flyer program still plays a role in encouraging customer loyalty, even in the age of low fares and budget carriers.

Changes explained

Quantifying just how loyal a frequent flyer is likely to be is a difficult business, but Qantas’s own read

The frequent flyer program is effectively a closed economy controlled by Qantas – and a very profitable one at that.

on that question can be easily read between the lines of the recently unveiled changes.

For the vast majority of passengers who fly in the cheap seats, the impact on their frequent flyer balance sheets will be significant.

Rather than calculate points based on miles travelled, as it currently does, under the new system Qantas will assign points based on travel sectors. For discount economy and economy tickets, the minimum earn for short-haul flights will fall from 1,000 to 800 points, but the drop becomes proportionally more severe as distances increase.

Coast-to-coast flights in Australia will earn 1,450 points as opposed, for example, to the 1,946 points currently offered for travel from Melbourne to Darwin or the 2,041 points earned between Sydney and Perth. For travel from east coast Australia to northeast or southeast Asia, passengers will earn 2,600 points one-way. That comparesto current total of 3,749 points from Melbourne to Singapore and 4,863 from Sydney to Tokyo, a drop of almost half in the latter case. Flights to the west coast of the United States and to Dubai will earn 4,500 points each way, compared to current totals of 7,923 from Melbourne to Los Angeles and 7,239 from Melbourne to Dubai.

For a hypothetical Sydney-based passenger taking two annual round trips to Melbourne as well as one cross-country trip, one trip to Tokyo and one trip to Los Angeles, the frequent flyer haul would drop from 32,790 points to 20,300 points under the new system, falling roughly 38 per cent.

For those paying more for their tickets, the points they earn will increase, though generally not as significantly as they will decrease for economy passengers. Those buying flexible economy fares or premium economy seats will see their minimum earn increase from 1,000 to 1,200 points, while those in business class and above will see a rise from 1,250 to 1,400 points.

A business ticket from Melbourne to Singapore will rise from 5,624 to 7,800 points while Sydney-Tokyo increases from 7,295 to 7,800 points.

The same hypothetical Sydney-based passenger from the last example, this time flying in business class, would earn 54,800 points under the new system as opposed to 48,188 under the current arrangement, an increase of about 14 per cent.

By increasing benefits for some while decreasing them for others, Qantas can argue – as it has – that it is only recalibrating its program in the interest of fairness. This sounds better than simply saying that it is decreasing benefits. It remains, however, that the increase in points for more expensive fares will in most cases be proportionally much smaller than the decrease in points for exponentially more numerouseconomy class passengers. The net effect on Qantas’s bottom line is not difficult to guess.

Still, the message is clear enough.

Qantas cares about its premium customers, but cares perhaps a bit less about those stuffed into the rest of the aircraft. In many cases, this is probably a reasonable calculation.

Among Qantas’s 10 million frequent flyers are a presumably substantial majority who wield only the lowliest Bronze status and a modest pile of points. For them, ticket price and other factors are likely to be bigger considerations than airline loyalty. The danger point, for Qantas, lies in alienating economy class passengers at higher frequent flyer status tiers, especially those with Gold status, for whom lounge access amounts to a compelling reason to choose Qantas over the competition for any given flight. Since Gold status is difficult to reach on discount economy fares through private travel alone, most such passengers are likely to be business travellers. As the corporate sector remains Qantas’s most important bullwark, it can ill afford to lose them.

Status update

The other major change in the frequent flyer overhaul relates to the number of status credits earned on flights with partner airlines and credited to a Qantas frequent flyer account. Here the changes are even more complex. Flights from the east coast of Australia to the west coast of the United States aboard American Airlines will continue to earn 45 Qantas status credits — the same as on a Qantas flight. But for many other routes, especially in Europe, the status earn will decrease. Flights I took last year on British Airways between Boston and London, Londan and Madrid, and London and Dubai earned 25, 15 and 25 status credits respectively, for a total of 65. Under

A “club for people who don’t fly very often, but still really like signing up for things. ”

the revised rules, it appears the same flights would earn 15, 5 and 15 credits, or a total of 35.

For heavy international travellers, those changes could sting, especially with cutbacks in Qantas’s own international offerings having left its frequent flyers increasingly reliant on partner carriers. For all the fanfare surrounding the Qantas-Emirates alliance, Qantas frequent flyers earn no status points on Emirates flights, and decreasing earns on other partners could make it difficult for heavy international travellers or members based overseas to maintain a status worth caring about. For some, it might make more sense to switch to another carrier’s frequent flyer program and credit their Qantas flights there.

A tipping point?

Despite its already vast market penetration, Qantas’s frequent flyer program has continued to grow at a steady pace, adding some 200,000 members this year. The program’s offerings have also continued to develop, with recent additions including a new frequent flyer card that doubles as a multi-currency prepaid debit card and the launch of thebusiness-focused Aquire program.

Needless to say, Qantas’s competitors are keen to make the most of the Red Roo’s stumbles. Budget airline Tigerair sought to capitalise on the social media backlash at the Qantas changes by launching a tongue-in-cheek ‘Infrequent Flyer Club’, which it described as a “club for people who don’t fly very often, but still really like signing up for things. ” Members receive few benefits but do get to print out a membership card in a colour of their choice.

More seriously, Virgin Australia let it be known that sign-ups for its own Velocity frequent flyer program spiked to 4,500 per day shortly after the Qantas changes were announced, up from a typical total of about 1,200 new members daily. Velocity now counts around four million members, having added one million over the past two years.

Few of those new members are likely to have come at Qantas’s expense. Unlike many affiliations, there’s no rule against having more than one frequent flyer membership.

And the truth is, even for passengers put off by Qantas’s recent changes, leaving could be easier said than done, especially for those who’ve made an investment in the program.

All those points, status benefits and shiny membership cards are hard to walk away from, and Qantas’s deep links across the Australian consumer landscape – especially with credit card companies and banks – means that, in many cases, frequent flyer membership is deeply enmeshed in individual spending habits.

Membership is as much a matter of inertia as anything else.

The recent changes to the program may be unpopular, but they’re unlikely to have a dramatic impact on such ingrained habits, at least in the short run. The danger for Qantas is that enough bad news finally drives customers to take another look at their options.