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Should Airlines Spin Off their FFPs?

Should Airlines Spin Off their FFPs?

Old Jun 28, 05, 7:23 pm
  #1  
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Should Airlines Spin Off their FFPs?

The cover story of the July 2005 Inside Flyer argues yes.

According to a press release from the magazine,
* Though Air Canada is only selling an 18-percent share in Aeroplan, the deal will earn the airline $200 million.

* Several financial analysts have predicted that those who invest in the Aeroplan stock offering can expect returns of close to 8.75 percent.

* In 2002, United Airlines (UAL) effectively "sold" all of its stock in
Mileage Plus, Inc. and Mileage Plus Holdings, Inc. to its wholly owned
subsidiary, UAL Loyalty Services, Inc. (ULS) for a total of $1.4
billion. In 2003, ULS accounted for five percent of UAL's total
revenues.

* American AAdvantage reports annual revenue in excess of $1 billion
related to the third-party sales of miles.
And as to whether the spinoff would be a negative for program members, Randy thinks not
"We don't believe that members of frequent flyer programs will be harmed if the industry follows through with public spin-offs," says Randy Petersen, publisher and editor of InsideFlyer magazine.
What do you think?
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Old Jun 28, 05, 11:02 pm
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Originally Posted by gleff
What do you think?
I think AC's Aeroplan ceased being a true FFP sometime ago and has morphed into a loyalty program. Spinning them off is just the next step in this process.
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Old Jun 29, 05, 8:42 am
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It's about how it works, not about who owns/operates it. Lots of outfits I do business with have spun off one aspect of their operations or another. If the partners manage things so the ownership is transparent, no problem. If AA (for example) starts to forget that AAdvantage is its program, not some independent operation, they can start to forget about me too.
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Old Jun 29, 05, 9:05 am
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If the programs are spun-off, one thing is certain: budget allocations for frequent flyer program consultants will come by easier (and more often).

I don't think the downside of a spin-off exceeds the upside; however, requests for "yield management" to free up seats may end up being a more haggled and harried process. As Efrem said above, it's about how it works and not necessarily about ownership of the equity.
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Old Jun 29, 05, 9:56 am
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Old Jul 2, 05, 7:21 am
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Randy says that a spinoff would be good for members, because their miles would be safer -- if an airline went under, the program could simply contract with another airline or airlines for tickets, which they could get cheap because of their buying power (a couple hundred million tickets/year for the largest programs).

I'm wondering if there's another real world example of this besides LatinPass/GlobalPass, which doesn't provide alot of hope that things would work out well for members. Perhaps better than an airline going under and stranding members altogether, but not a scenario of no downside to members whatsoever.
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Old Jul 2, 05, 7:32 am
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I'd cautiously welcome a spinoff into a publicly-traded entity if for only one reason: more transparency.
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Old Jul 2, 05, 9:22 am
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As tcook052 points out, Aeroplan ceased being a FF program three years ago and ventured into the consumer points game. More of its miles are earned through credit cards, and retail transactions than flying AC or STAR carriers. During this drift, the FF aspects of Aeroplan declined and AC itself is only now starting to realize it must rebuild its own relationship with its AC fliers, and particularly its elites.

Also, the corporate situation of AC and Canada is very different that it would be in the US. Aeroplan's only domestic competition is Air Miles, a retail based program. Were this phenomenon to be copied by US programs there would be a half dozen such companies, all scrambling for their own market share, which would also lead them astray into the retail sector, and less focused on airline customers. This competition would severely reduce the yield on the investment, and thus reduce the share price making it an unattractive investment. In Canada, Aeroplan is an Income Trust, predicated on stable cash flow from those buying miles from it, versus moderate demand from those redeeming miles. Furthermore, ACE only sold off 20% of Aeroplan, so still gets the mainshare of those profits.

Sorry, but I cannot agree with Randy's analysis as there are very different sets of circumstances in play.

And another caveat that has not been mentioned:

As a separate company, Aeroplan now buys its seats from AC and the other STAR airlines. What this means is there is now an actual dollar transaction taking place between two entities that are not divisionally related. Thus Aeroplan cannot do book transfers to cover the "cost" of these seats, balanced by the miles it sells the various partner airlines. It must pay cash for seats, and once cash changes hands, the full array of fees and taxes come into play.

Before this occured, we could get an Aeroplan award ticket for "free" and pay only airport fees when these were included in normal ticket prices. Or the FCC segment fees when flying within the US. Now we get hit for every tax and fee that is applied to a revenue ticket [albeit sales taxes are a bit lower based on the price Aeroplan pays versus what we'd pay for a similar revenue ticket]. But we now pay C$60 or more for a simple short haul or transcon domestic/transborder award ticket. Plus Aeroplan charges $25 (plus tax) if the booking is made with an agent.

No, stay away from the Aeroplan model. It is thoroughly only of benefit to shareholders and AC's parent company ACE. It has destroyed Aeroplan as a frequent flyer program, and increased the base of members who seldom or never fly, but who earn huge account balances, and thus increased the competition for award seats.

Sorry to say, but this dog won't hunt.
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Old Jul 2, 05, 9:30 am
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Originally Posted by GUWonder
I'd cautiously welcome a spinoff into a publicly-traded entity if for only one reason: more transparency.

Given US securities laws are more stringent than ours, this may well be the case. I know I was disappointed by the lack of detail about the FF program's relationship with AC. All the stuff we'd like to know was covered by general sentences like "operated for Air Canada under contract" with bulk numbers provided that said nothing. As prospectuses go, the only revealing numbers were finally knowing how much Aeroplan made from selling miles to various parties [AC, STAR, banks/credit card issuers, retailers] and the "breakage" rate representing miles likely to never be used [17%].

There is a link in the main AC thread to the draft prospectus [which only changed from the final one by virtue of specifying the price and number of units on offer].

BTW the Aeroplan float was not shares of stock, but units of an income trust. 80% of the prospectus described how unit trusts operate, 20% about Aeroplan itself, and half of that about its previous history and relationship with Air Canada! For those who don't know, unit trusts pay out their "dividends" as a percentage of net income, before taxes. The tax liability is passed on to the unit owner, the investor. These are big things up here, which is also another unique reason why the US situation is not likely to replicate the success of Aeroplan [in the financial marketplace].
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Old Jul 2, 05, 9:57 am
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Shareholder, with a certain deference to Randy I suspect that the financial structure and competition issues are built into his valuation of Mileage Plus in the $2.5 billion range rather than $15 billion (which is what you'd get extrapolating value-per-member of Aeroplan onto United's membership numbers).
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Old Jul 2, 05, 12:14 pm
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Valuation is a game I would not dare get into at this point for there is always a banker who will sell you anything, including their mother or the moon, at whatever price sounds nice.

I definitely appreciate everyone's input above and especially Shareholder's insight about the potential risks for loyalty program consumers. The last thing I want to see is reduced elite benefits because of the distancing factor; otherwise, we will be nothing more than our fare and a partial rebate of transactional fees in a less than fully liquid currency.
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Old Jul 2, 05, 2:55 pm
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While the prospect of such $s would certainly suggest a struggling carrier could last a few more years, it would also add to the risk of the offering. The new AC emerged from its bankruptcy protection in a considerably better situation all around: union contracts, fleet leases, unecumbered assets, cash in the bank, a several profitable divisions [maintenance and Aeroplan, as well as its regional carrier JAZZ]. It's share offering soared, and in a duopoly, fare stability was assured aside from gas prices.

This is certainly not the situation any of the American carriers would find themselves in. And a FF program, particularly as these are limited among US carriers to servicing the carriers needs and not being national consumer points programs [as Aeroplan was moved towards], these companies [were they to be spun off] would need to assure investors that those airlines would be around for the long haul. None of the legacy carriers can provide this guarantee in the way AC has been able to in the Canadian market. So if UA were to spin off MP, would investors feel confident that UA will be around in five years to provide the revenue base for MP? Or DL or CO or AA or NW or US? As long as there is competition rampant in the US market, none of these carriers' futures are assured, and thus the income stream that bouys the FF program cannot be assured in the way Aeroplan's can be.

And while I know the US investment community is a much more risk-taking place, how many pension funds would be willing to buy units or shares of a company that relies on a crippled company in a lame business sector for its surity? So I am not really questioning the valuation numbers per se, but just the assumption that the risk factor is the same as it was for Aeroplan.

That's another reason I cannot really see this working down there.

Last edited by Shareholder; Jul 2, 05 at 2:59 pm
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Old Jul 3, 05, 3:47 am
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I guess my gut says the K.I.S.S. principle has to apply as far as it being anything good for flyers. I think it'd be something done To us, rather than For us (though certainly it won't be pitched as such). Seems the best you could hope for would be no degradation of the status quo. But you're creating three parties (airlines, programs, customers) where there used to be two, and in other triangle situations (think TicketMaster, concert venues, fans) you wind up with two parties both trying to satisfy their interests at the expense of the third.

I think the different structures also would give the IRS more chances to ruin things. If Congress can start a mileage tax on miles bought by those other than airlines, they can certainly put new taxes on third parties.

I have a feeling the transparency is the deal-breaker from the airlines' point of view, though. But we could get other types of "restructuring" in coming years that make things far worse for people with miles. I've been saying for some time that the unredeemed-miles thing will hit the fan with the baby-boom retirements (2008 and after for 62, 2011 and after for 65). Fuel costs could make it worse or be used as a reason to hike award levels. Or we could see something really cute such as Rule-Busters losing seat availability on many routes and seats getting allocated to FC or an E+ for 3-4 times minimum rather than 2x minimum. At the same time the LCCs are reducing the perceived value on many domestic-redemptions, leaving the long hauls as the ones everyone seems to be fighting for. Rather than burn 25K to see Aunt Selma in Baltimore more people will want to fly that one on a paid LCC ticket and build the 25 up to 35 in heightened hopes of going to Hawaii. FTers already tend to do that, but I think the thinking will become more widespread.
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Old Jul 3, 05, 4:18 am
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When I think of "spin off", I think of outsourcing, and then I think of Singapore Airlines' Kris Flyer program where no one really know what they are doing.
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Old Jul 3, 05, 8:03 am
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No - anything that disconnects the relationship between the frequent flier and the airline cannot be good. What happens if the 'Loyalty Programme" goes bust or has financial problems. GlobalPass is a case in point. It was once owned by a conglomerate of airlines - most bailed out due to various reasons. In the end, the programme had many members, many miles but no where to redeem - this is a real example. The programme was spun off a seperate entity with no obligations to anyone other then itself.

We need the connection. We need good staff who understands the airline, preferably someone who has worked the frontlines and understands FFers.

No - airlines should not spin off their FFPs. What's next - check in agents, pension plans, then the actual aircraft - wait - a virtual airline with no obligations to anyone. Hang on - aren't we almost there?
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