Why airline loyalty programs are so valuable

Airlines may be struggling to make a profit but their loyalty programs are going from strength to strength.

Amid the $2.8 billion in losses and writedowns announced in the airlines’ 2014 results, one division shone brightly.

Qantas Loyalty, the operator of the Qantas Frequent Flyer program, posted an underlying earnings before interest and tax of $268 million. 

Unencumbered by costly aircraft and terminal leases or a highly-unionised workforce, Qantas Loyalty has pointed the way forward for airlines around the world. It is run by a team of just 200 people -- most of them data analysts and digital marketers.

Whereas an airline runs on jet fuel, Qantas Loyalty runs on the data generated by its 10.1 million members. And that data is enabling it to take off in new and unusual directions.

According to Qantas Loyalty’s chief marketing officer Stephanie Tully, the model beneath Qantas Loyalty is simple. Program members such as Qantas, Woolworths, Optus or the major banks purchase frequent flyer points from Qantas Loyalty and offer them to their customers in exchange for specified behaviour. Qantas Loyalty then purchases rewards, such as seating capacity on flights, which are offered to consumers in exchange for their points.

“It’s basically the cost of the difference between the cost of the points that the partners pay, versus the rewards that we pay, that contributes to the EBIT,” Tully says. “We spend a lot of time making sure that value equation makes sense from a partner and member perspective, but also for us as a business that contributes to the Qantas group.”

Qantas Loyalty began life 27 years ago as the airline’s direct marketing arm, to provide value for frequent flyers. A strategic review in 2005 explored the potential for generating greater value, and in 2007 it began operating as a standalone business. 

The launch of Woolworths’ Everyday Rewards program in 2005 delivered more than 2 million new members, and since then a raft of members have joined. New variants have also been launched, including the Acquire sub-program for small businesses, which signed 40,000 member in its first six months. Qantas Loyalty also makes money from foreign exchange trading via its Qantas Cash card. More than 300,000 of these have been issued in its first year.

“Our assets here are really people and data,” Tully says. “We have a number of highly entrepreneurial and highly intelligent people working in this business, which is really exciting to be around.

“We’ve got a constant focus on innovation. We are very conscious that we can’t just rest on our core business.”

Two years ago Qantas Loyalty purchased the loyalty program specialist Accumulate. That group now runs the Qantas stores where members redeem points, and develops loyalty programs for other brands, including the bookseller and stationer Dymocks.

That company’s managing director Steve Cox says that while Dymocks already had a loyalty program, it lacked sophistication in how it analysed the data generated.

“There was so much more that we could do with that data in terms of engaging with that group of customers,” Cox says. “Like many retailers we just didn’t have the computing capacity and the staff available in-house with the experience to really leverage this great asset.”

The two organisations began working together six months ago, with Qantas bringing statistical rigour and analysis to Dymocks’ loyalty data.

“It’s called big data for a reason, and Qantas has people who can sift through it and get the answers, which helps us make better decisions,” Cox says. “We are building up a profile of our customers that is far deeper and far richer than ever before. We have transformed the results that we get through that program, and it is now the number one driver of increased sales in our business.

“Data is one of the key places that retailers need to be working towards and really leveraging. And certainly we’ve seen the results.”’

Qantas Loyalty is not the only company have realised the value of data collected through loyalty programs. According to the co-founder of the data analysis specialists C3, Conrad Bates, the challenge is in creating and operationalising a program that generates the right data – known as signals.

“The competitive advantage comes in how you use that data to effect changes in outcomes,” Bates says. “Loyalty is not about loyalty any more – loyalty is about better signal engineering, to affect a behavioural change,”

Qantas Loyalty is using its data skills to take it into a broadening series of markets. In August it launched Red Planet, which uses anonymised data to provide media and analytics research to other brands, helping them better reach target consumers online.

“It’s leveraging the knowhow that we’ve got here, and the ability that we’ve got to target people in a sophisticated way, which we have done for many years for our direct marketing channels,” Tully says. “Understanding consumers and being able to target marketing at them effectively is one of our strengths and assets.”

Those strengths have served to create an asset for Qantas now valued at $2.5 billion, prompting speculation that Qantas chief executive Alan Joyce might consider selling the business, although this notion was quashed by Joyce at the 2014 results announcement.

However, rival Virgin Australia has taken steps to unlock value in its Velocity loyalty program selling 35 per cent to Affinity Equity Partners for $335 million.

The Velocity program has signed 4.6 million members since its launch in 2005, and its chief executive Neil Thompson has aspirations to grow that to 7 million by 2017.

“As we grow, we become more and more attractive to third parties who see the value of being able to promote their own products and services to our growing database of relevant customers,” Thompson says.

Thompson says the key to that growth has been close analysis of the data that members provide, which has uncovered insights leading to innovations such as allowing families to pool their status credits or earn points when their pets fly. It also enables Virgin to recognise customers at an individual level as the backbone of its customer relationship management program.

“The insights are all about understanding what is going to be of value to the member,” Thompson says. “And that is the core proposition – whether it is driving loyalty to the airline or driving transactions and consumer behaviour with the other partners in the program. It’s about understanding through a combination of data and through conversations what’s important to them.”

As the competition for loyalty heats up, Tully says Qantas Loyalty will continue adding new categories and benefits to the program.

“Our aim is to keep growing and keep delivering for the Qantas Group,” Tully says. “I don’t think we’re going to be let off now that we have had five years of 10 per cent growth.

“It is about continuing to be thought leaders in the loyalty space. So attracting the right people to work here, keeping on the forefront of members’ needs and partners’ needs, and making sure we are delivering value all around.”

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