Qantas Holds Cards On Loyalty
Sydney Morning Herald
Wednesday June 5, 2002
When it comes to reward points, you've got to give credit to the Flying Kangaroo for its near-monopoly on frequent flyers.
It's a bit like a Masonic handshake: under no circumstances are those in the loop to tell the outsiders what's really going on. Welcome to frequent flyer points and reward programs.
Be it a bank, a card company or an airline, the deal is never to allow transparency. It feels a little like those interchange fees that the banks never isolated (for reporting purposes) but which the Reserve Bank and the Australian Competition and Consumer Commission unveiled and are now trying to remedy.
The fact that everyone is so secretive about these schemes makes them intriguing but leaves outsiders suspicious. National Australia Bank brought the whole issue of loyalty points to the surface a couple of weeks ago when it changed the redemption ratios from 1:1 to 1.5:1.
Thus the customer has to pay 50 per cent more (or spend 50 per cent more on his or her credit card) to get the same number of frequent flyer points.
At the time, it seemed a very strange move. But it's hard to tell just how strange a move because we don't know the financial impact of Qantas increasing the cost of its points or flights (it doesn't matter which currency it is) to NAB.
In fact it was never made clear when Qantas jacked up the prices nor by what amount. Sources suggest it was at least a month before NAB took action to change the rewards redemption rate.
Others suggest that when NAB announced the reduction in the value of the points to cardholders retrospectively, that it may have been working on getting a one-off financial gain (that is, having accumulated points at one value but distributed them at another).
But we do know that card issuers have had the cost of their points raised from Qantas over the past couple of months. There are suggestions this increase has been as much as 50 per cent.
This is a big increase and, if coupled with any change in interchange fees, would clearly do damage to the banks' credit card businesses.
It is believed the cost of points varies for each of the major banks.
The ANZ has the best deal because it has an arrangement with Qantas on a co-branded card. It also received a price slug, but the full cost is believed to have been partly offset by reducing the administrative costs of the ANZ scheme, which is now administered by Qantas. ANZ is thus the stickiest of the banks when it comes to using Qantas and its scheme.
NAB has broken away to some extent and its move will cost it credit card customers. The cost of its points is believed to have been about 130 basis points. For every $100 spent on a loyalty card, it put aside or paid $1.30 to Qantas to cover redemptions.
The remainder of the banks (other than ANZ whose deal is thought to have been sweeter) are thought to have been paying Qantas roughly the same.
This puts the cost of a loyalty seat about the same as a highly discounted airline seat. To compare, two years ago Ansett was charging the banks 80 basis points. There are suggestions that over time the banks will baulk at the increased cost of their schemes and the margin squeeze.
Westpac and ANZ have been happy enough to tell the public that their scheme remains unchanged. The Commonwealth Bank has not been as definitive.
ANZ figures and no doubt it is correct that those credit card customers annoyed with NAB will choose to join its own ranks. They may not be as profitable but some serious additional bulk will bring down the costs per customer.
Sure it costs the banks more, but the consumers want Qantas points. They are in demand because Qantas is the only viable aviation alternative. According to Ian Myles at Macquarie Equities, the sale of frequent flyer points and membership accounts for 10 to 15 per cent of revenue growth ($400 million) and over the past five years has grown to become 20 to 30 per cent of normalised earnings before interest and tax.
In the domestic market, Qantas has a near-monopoly on frequent flyer schemes. It can charge more because it operates in a market where its customers are oligopolists but don't act in a concerted way when it comes to loyalty schemes.
Until a Star Alliance member comes into the domestic marketplace and Air New Zealand is the most likely contender Qantas has the banks and the card companies over a barrel.
If these institutions rally against Qantas, there is a lot of downside for the airline. NAB and others offer rewards with other airlines but they are more expensive and only operate on overseas routes.
So if banks want to recoup some of the margin they will lose from interchange fees it looks like most will need to find a new hollow log.
For the time being at least, Qantas holds the cards in the loyalty market.
© 2002 Sydney Morning Herald
Share This