As Air New Zealand changed its Airpoints scheme, the value of the loyalty, now the star of the airline’s operations, was outlined in an analyst report.
Forsyth Barr says the Airpoints schematic is scalable, light
on assets and generate relatively stable income.
“ We believe this is a double business that is higher than Air [NZ’s] the aviation business and make a material contribution to the current share price, ” said analysts Andy Bowley and Scott Anderson.
“ This may sound strange, but a number of US airlines have recently used their loyalty schemes as collateral in recent funding events. “ This airline will increase capital in the first half of 2021.
Forsyth Barr has upgraded the airline’s rating to neutral, having implemented the Airpoints value as part of a revised net asset value approach.
Chief executive Greg Foran said loyalty would be the “second engine of growth” and the scheme was now under review. Among other changes, the airline may introduce new top tier Airpoints.
In addition to the Elite Plus tier, surveys indicate that there may be a chance of obtaining lifetime status at a lower tier.
A survey sent to Airpoints members indicated that a target range of between 2800 and 3200 status points a year would be required to pocket Airpoints Elite Plus membership, compared to 1500 points to reach the current Airpoints Elite tier, and 900 for Airpoints Gold.
The Australian-based Executive Traveler said that the benefits of Elite Plus status derived from the survey included the possibility of free same-day flight changes for domestic, transtasman and Pacific flights, free parking at members’ “home airports” and free Elite status for the nominated partner. from Elite Plus members.
Analyst Forsyth Barr said the main sources of external loyalty revenue include bank partners, via credit card aligned schemes, and a number of retailers.
Under normal operating conditions, loyalty represents just another revenue stream for an airline and can be valued as part of the company’s overall profit base, in cash flow-based valuations or some revenue.
“However, when the airline business generates significant losses, the normally defensive flow of loyalty revenue can easily be lost, especially if it is not shared,” said the analysis. ” The book value approach to airline valuation ignores the light asset nature of loyalty schemes that generate revenue from third parties (credit card companies and retailers) regardless of whether the aircraft is flying. ”
The Air NZ scheme has about 3.5 million members – up from 1.2 million eight years ago.
The airline does not provide any financial details about its Airpoints scheme, beyond disclosing balance sheets for loyalty-related “upfront earnings”.
This liability reflects the dollar amount of Airpoints owed between the members.
Bowley and Anderson said the lack of disclosure, exacerbated by Covid-19, made it difficult to assess Airpoints.
“However, based on recent loyalty scheme transaction value assessments, third party loyalty assessments and registered loyalty scheme providers, we rate Airpoints at $ 725 million. While it appears significant in the context of the airline’s $ 1.9 billion market capitalization, it is only about 15 per percent of the company’s pre-Covid value. “
Analysts said their estimates of the scheme’s value had a “reasonable margin of error”.
Air New Zealand can get more direct economic value from the Airpoints loyalty scheme by generating additional revenue through sales points / air miles to third parties including credit card companies (many schemes issue a larger proportion of points to third parties than to their own airlines) .
The airline can expand its membership base: about 90 percent of its members are New Zealanders so the scope for growing its membership base is limited by its historic success and New Zealand’s population.
However, the airline can increase the proportion of its active members and expand its plans to include more partners.
“ We expect Airpoints to expand the depth and breadth of its retailer / financial services relationship, to white label its own credit cards as other airlines have successfully done, and to expand Airpoints’ store for redemption options. ”
How the airline loyalty scheme works
Analyst Forsyth Barr explains that loyalty schemes usually cover the broader business of the airline (because Airpoints are located within Air NZ). However, some schemes are treated inappropriately because of tenure requirements, funding arrangements, or reporting frameworks.
Regardless of whether a schema is internalized or externalized, they share common features:
• Selling points: The scheme sells (issue) points to airlines and third parties (scheme partners).
• Points awarded to members: Airlines and scheme partners issue points / air miles to scheme members as an incentive to purchase other flights, products and services.
• Members exchange points / air miles: Members can redeem the points earned by booking flights or through third party redemption partners.
• Flights usually make up the majority of exchanges. According to Air NZ, more than 90 percent of Airpoint dollars redeemed is spent on flights. At Qantas, this is about 80 percent. At United, 97 percent, of which 20 percent are exchanged with partner airlines.