India-based Airlines - JetPrivilege to be spun off from JetAirways as a subsidiary

I was going over the annual report of Jet, and turns out this year they are going to go the AAdvantage/MileagePlus way, by making a separate company for marketing the loyalty program. A special resolution has been voted upon by the shareholders, and a co. with a capital of 50L to be established.

More details here:

http://boardingarea.com/blogs/livefromalounge/2012/08/03/jet-privilege-to-be-spun-off-from-jet-airways/

And one more interesting thing out there, last year (2011-12), jet provisioned for 32% of the amount in 2010-11 miles, indicating that the travel must have been really hit bad. Also redemptions went up 4 folds, and expiry of miles as well. Have a look at this extract below:

http://boardingarea.com/blogs/livefromalounge/files/2012/08/image_thumb1.png

Interesting data, somehow doesnt make sense with what we have seen on seat availability on Jet. So in that sense the large chunk of redemption increase has to have been on partners. I think it is also a fair assumption that the partners reddeming on Jet would in all probability be lower so Jet must have had to pay the partners in some form for the partner redemptions that have happened.

Anyone here has an idea on how airlines settle partner travel liability and what financial impact could that have had on JetPrivilege?

I was going over the annual report of Jet, and turns out this year they are going to go the AAdvantage/MileagePlus way, by making a separate company for marketing the loyalty program. A special resolution has been voted upon by the shareholders, and a co. with a capital of 50L to be established.

very interesting....i hope this change is for the better....

Any input on how they think this is going to help them? Financially, or in their ability to service their customers better.

By the way, Jet also plan to set up an academy to train cabin crew (http://www.business-standard.com/india/news/jet-airways-charts-new-route/482219/).

All I can say is HAHAHAHAAAHHHH! AHAHAHAHAHAHAHHHH! AHAHAHAHAHAHAH ! AHAHHHAHAHAAAAHAHAHAAHAH !

That's like Jayalalithaa(aaah!) opening up a slimming centre.

The phrase "physician heal thyself" springs to mind.

Any input on how they think this is going to help them? Financially, or in their ability to service their customers better.


miles are usually provisioned on the b/sheet of the airline co. so i am trying to find out if this move makes the miles go to this subsidiary or keeps it with the parent only. either ways, the intention is clear, to sell as many miles as possible .... that will help financially.

customer service... well, more depression on the way [I cannot redeem my miles :P]

So, effectively, the chances of this new subsidiary having any positive impact on the customer are about the same as AI turning a profit? :)

IFRIC 13 requires you to accrue for customer loyalty programs, most airlines have it spelled out deep in the annual reports. Aeroplan is the first completely independent FFP spin off. Actual cash flows between them and AC for the points earned/burned. Supposedly a great success and a way to earn some cash for the airline to show on balance sheets and annual reports and give a unusual one time revenue jump.

Outsourcing or separating training facilities to eventually sell/spin it off is not unusual either. SAS for example sold its flight training ops to Oxford and can make use of their facilities worldwide at reduced rates.

I was going over the annual report of Jet, and turns out this year they are going to go the AAdvantage/MileagePlus way, by making a separate company for marketing the loyalty program. A special resolution has been voted upon by the shareholders, and a co. with a capital of 50L to be established.

More details here:

http://boardingarea.com/blogs/livefromalounge/2012/08/03/jet-privilege-to-be-spun-off-from-jet-airways/

And one more interesting thing out there, last year (2011-12), jet provisioned for 32% of the amount in 2010-11 miles, indicating that the travel must have been really hit bad. Also redemptions went up 4 folds, and expiry of miles as well. Have a look at this extract below:

http://boardingarea.com/blogs/livefromalounge/files/2012/08/image_thumb1.png

Thank you A2A. I read your blog too. It's interesting that you point pointed out what my lay mind, or shall we say, astute mind, concluded that JP members have too many non-BIS miles.
It's one thing to make your loyalty programme more attractive by allowing JP members to earn miles in ways other than flying, but quite another, risky behaviour, to turn it into an ATM.
It already has the most number of partners who award miles for non-flying transactions.

Thanks for the table also.

The table gives absolutely no indication of what 31st refers to. I presume, it's March 31st.
It appears the numbers represent financial liability of accrued JP miles. It's clear that the number of JP miles redeemed more than quadrupled,which also confirms my feeling about the insatiable appetite ( (entitlement) JP members have. This must mean a major expense for Jet.

How are miles redeemed by other members of Jet's partners accounted. Or is this just an accounting of JP miles?

Every JP mile is future, though limited by expiry date, liability. Every mile JP members earn through other partners, whether flying or non-flying is revenue. Members of partners' FF programme redeeming their miles on Jet, also represent revenue. How is this revenue accounted on the books?

If loyalty programme is in check, it's not necessary to make it a separate entity. When you intend to milk it the way Jet has, it becomes unfunded liability that must be taken off the books. Hence the spin off.

I suspect, Jet thought expiry will take care of JP miles becoming a big unfunded liability. But it did not count on JP members watching their miles like a hawk. I can't see anything but devaluation of JP miles ahead as Jet continues with its addiction to revenue by selling miles to partners.

For those, who asked "What will it do for me?", a reasonable question, though it betrays the simplicity of their mind, my answer is, "At best, nothing! It means more frustration with JP miles. "

I do hope that people realise that a JP mile, is not currency backed by assets despite Jet's claims to the contrary. It's not even a fiat currency as it has no monetary face value beyond Jet's books. In the real world, JP miles, and vouchers have no monetary value. I know it;s frustrating to not be able to use your miles, but it's naive to think that they will be able to redeem them easily.

IFRIC 13 requires you to accrue for customer loyalty programs, most airlines have it spelled out deep in the annual reports. Aeroplan is the first completely independent FFP spin off. Actual cash flows between them and AC for the points earned/burned. Supposedly a great success and a way to earn some cash for the airline to show on balance sheets and annual reports and give a unusual one time revenue jump.

Outsourcing or separating training facilities to eventually sell/spin it off is not unusual either. SAS for example sold its flight training ops to Oxford and can make use of their facilities worldwide at reduced rates.

I couldn't quote you accounting rules, but it should be quite obvious to any one that accrued miles have to be funded, just like pensions and health care plans have to be funded. There is no free lunch--neither for airlines, nor for loyal members. This is something that seems to have been forgotten by airlines, as well as frequent flyers.
I know pension and healthcare plans are also governed by law. Even them corporations fail to fund them adequately.

I couldn't quote you accounting rules, but it should be quite obvious to any one that accrued miles have to be funded, just like pensions and health care plans have to be funded.

Well... until IFRIC 13 came along it was pretty vague on how much was required to be accrued for, AA for example initially said that awards would be seats that would go empty anyway, so the absolute minimum was accrued.

very interesting....i hope this change is for the better....

Better for whom? The purpose to "disappear" liability represented by miles. After spinoff, they become the other company's liability. How it affects JP members will depend on how well the spun off company plays the game of hedging and arbitrage.

Well... until IFRIC 13 came along it was pretty vague on how much was required to be accrued for, AA for example initially said that awards would be seats that would go empty anyway, so the absolute minimum was accrued.
So you make money selling something to your customers that could use in future, that you assumed would not cost you anything.
And now with load factors high, that assumption no longer holds true, not unlike the returns assumed by many state and city govt pension plans.
You sell too well or too much, you put yourself in a jam.
With easy sell miles, Jet is sitting on a log with its tail between two halves (JP miles and JP members) of the log, and the JP members are ready to pull the wedge out. :D

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Think of the spun off company as a reserve bank that can create miles that Jet doesn't have to back by "Gold".

Better for whom? The purpose to "disappear" liability represented by miles. After spinoff, they become the other company's liability. How it affects JP members will depend on how well the spun off company plays the game of hedging and arbitrage.

better for the jp members of course....at this point jet can't really get any worse....so any change raises hopes for better things to come....i guess time will tell....

Better for whom? The purpose to "disappear" liability represented by miles. After spinoff, they become the other company's liability. How it affects JP members will depend on how well the spun off company plays the game of hedging and arbitrage.

at this point, not. the new co. will be a subsidiary of jet airways so in the consolidated balancesheet, it wil still show the liability. however, under the new guidelines for domestic transfer pricing notified under the current budget, i suspect the arm's length valuation will only take the liability upwards.

better for the jp members of course....at this point jet can't really get any worse....so any change raises hopes for better things to come....i guess time will tell....

I knew what you meant. I was asking rhetorically.
It can't get better when you have unfunded liability with no signs of abatement. The best loyalty programme, best for both, passengers and airlines would be more or less revenue neutral, with cost of administering the programme coming out of the programme.
It's OK for airlines to tweak it a little bit to extract some revenue out of it. You can't see miles to everyone, give every one status through a credit card and not expect to hear complaints when people can't redeem.

at this point, not. the new co. will be a subsidiary of jet airways so in the consolidated balancesheet, it wil still show the liability. however, under the new guidelines for domestic transfer pricing notified under the current budget, i suspect the arm's length valuation will only take the liability upwards.

It makes the balance sheet look nice and clean. Jet does intend to spin off completely. Spinning off is not a bad idea for accounting purposes alone. The change is not just cosmetic. The new company will bring in new rules for redemption too. Consolidated balance sheet, is an artifact. It does not make Jet liable for it's subsidiary's liabilities. Does it? Subsidiary iis a separate cost center. It contributes to parent company without keeping the parent completely liable. This is what I understand by a subsidiary. If it means something else, let me know.

The new company will bring in new rules for redemption too.

did they say that or are you saying that?

did they say that or are you saying that?

I am. And it's not a guess.

I am. And it's not a guess.

so maybe you should educate us...

so maybe you should educate us...

I did. But you got yourself tangled in consolidated balance sheets. ;)
This business is a strange one. It's not like a normal business in which you procure a product at a cost and sell it at market price to make profit.
If you think about it, it's elementary.
Redemption has quadrupled year on year.
Answer the following questions
Why is jet setting up a different company?
What will that company do?
What will its product be?
How will it procure that product?
What will sources of revenue be?
Does the product it sell have future costs?
How does that cost relate to revenue it raises?
The company will have to balance its books or Jet will have to pump money into it.
Now please, answer these questions instead of arguing about the questions themselves. I know you are smart enough to educate yourself.
If you still don't get it, please don't hesitate to ask.

I did. But you got yourself tangled in consolidated balance sheets. ;)
This business is a strange one. It's not like a normal business in which you procure a product at a cost and sell it at market price to make profit.
If you think about it, it's elementary.
Redemption has quadrupled year on year.
Answer the following questions
Why is jet setting up a different company?
What will that company do?
What will its product be?
How will it procure that product?
What will sources of revenue be?
Does the product it sell have future costs?
How does that cost relate to revenue it raises?
The company will have to balance its books or Jet will have to pump money into it.
Now please, answer these questions instead of arguing about the questions themselves. I know you are smart enough to educate yourself.
If you still don't get it, please don't hesitate to ask.

oh, I am not hesitating to ask. I'd like to seriously have an answer to "why do you think Jet is establishing this company" in detail rather than 20 other questions hurled back at me.

I was going over the annual report of Jet, and turns out this year they are going to go the AAdvantage/MileagePlus way, by making a separate company for marketing the loyalty program. A special resolution has been voted upon by the shareholders, and a co. with a capital of 50L to be established.

More details here:

http://boardingarea.com/blogs/livefromalounge/2012/08/03/jet-privilege-to-be-spun-off-from-jet-airways/

And one more interesting thing out there, last year (2011-12), jet provisioned for 32% of the amount in 2010-11 miles, indicating that the travel must have been really hit bad. Also redemptions went up 4 folds, and expiry of miles as well. Have a look at this extract below:

http://boardingarea.com/blogs/livefromalounge/files/2012/08/image_thumb1.png

Am a little confused here, Jet Airways has revenues of ~17,000 Cr and the redemptions as per this table was 7 odd crores. The overall miles liability we are talking about is 45 Cr on a total liability base of 12,000 Cr. While everyone on flyertalk is fixated with earning and redeeming miles, from a business perspetive is this cost material enough for Jet to bring in so much focus on driving revenues by selling more miles?

Interesting thread. Thanks OP.

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I don't see how you got 7 cr (700 lakhs). The mileage liability is 4,500 lakhs or 45 crores in 2012, down from 50 crores in 2011.
The
amount privisioned for 2012 was 7 crores, down from 21 crores in 2011.
My conclusion is Jetlet will try to reduce outstanding mileage liability.
The comany will need cash to satisy some of that liabilty when JP memebers redeem those miles for awards. The only way for it to raise cash is to sell miles, which increases the liability.
It's like selling the product that miles would me redeemed for short. CASM, or price of of a seat isn't likely to go down. I can't thing of another option except devaluing miles, or offering other priducts, such as consumer goods, electronics, iPhones, hotels, car rentals or other services.

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I don't see how you got 7 cr (700 lakhs). The mileage liability is 4,500 lakhs or 45 crores in 2012, down from 50 crores in 2011.
The
amount privisioned for 2012 was 7 crores, down from 21 crores in 2011.


The bold is mine, do you see where i got the (approx) 7 Cr from.

As per my original statement we are still talking about a 45 Cr liability on a total base of 12000 Cr (as per the FY 12 Balance Sheet) and the overall provisions for FY 12 was approx 7 Cr on an overall Cost base of approx 17,000 Cr. So overall Jet attributed a cost of approx 7.45 Cr to mileage redemptions in FY 12 as compared to Rs 1.77 Cr in FY 11. Assuming that redemptions remain at these levels we are effectively talking about a cost base of 7-10 Cr that the Jetprivilege subsidiary will work on, where even if they devalue miles by 100% (highly unlikely) they will only save 3-5 Cr which appears to me to be peanuts in the overall context of a loss making company with revenue of 17,000 Cr.

I agree that they will try and sell more miles but looking at their partners added this last few months i dont see too much scope in a significant bump-up there.

The bold is mine, do you see where i got the (approx) 7 Cr from. [
Never mind. My fault. For some reason, I thought you were talking about liability. Don't ask me why! :eek:
7 crores that I was talking about was the amount provisioned. Redemption was 8 crores approximately.

As per my original statement we are still talking about a 45 Cr liability on a total base of 12000 Cr (as per the FY 12 Balance Sheet) and the overall provisions for FY 12 was approx 7 Cr on an overall Cost base of approx 17,000 Cr. So overall Jet attributed a cost of approx 7.45 Cr to mileage redemptions in FY 12 as compared to Rs 1.77 Cr in FY 11. Assuming that redemptions remain at these levels we are effectively talking about a cost base of 7-10 Cr that the Jetprivilege subsidiary will work on, where even if they devalue miles by 100% (highly unlikely) they will only save 3-5 Cr which appears to me to be peanuts in the overall context of a loss making company with revenue of 17,000 Cr.
I don't know how jet puts a value on miles. Each mile can represent different value to the redeemer depending on how it is redeemed. For example an economy class ticket used to cost 90,000 miles and a business class ticket 120000. It can vary from 1 to 7 cents a mile.
The liability represented by miles is different from other liabilities. When that liability is paid, it deprives the airline of revenue.
The spinning off has more to do with parent's books look cleaner and transfering the liabilities, even if not large compared to other liabilities that are essential to operations of the primary business.

I agree that they will try and sell more miles but looking at their partners added this last few months i dont see too much scope in a significant bump-up there.
I have nothing to say about that at the moment.