16 April 2008

Qantas looks at frequent flyer float

A report in The Australian this morning says that the Qantas board will today consider an overhaul of the carrier's frequent flyer program that will include a partial float on the stock market and the ability to redeem any seat on any flight.

The airline is believed to be considering an initial public offering later this year that would put 40 per cent of the program on the market.

It is also looking to introduce a two-tier system from July that would allow people to pay a premium to redeem any seat on any flight.

Separated out for the first time in this year's half-year results, the loyalty program reported a profit before tax of $62million.

The result included revenue of $399million from Qantas frequent flyer points for flights and other awards and total costs of $337million coming mainly from the purchase of airline seats.

The frequent flyer program has more than five million members and generates more than 60 per cent of its revenue outside Qantas, including from banks and credit companies that bought points from the airline.

The airline claims the program has strong growth prospects through expanded partnerships and the introduction of more ways to redeem points, such as merchandise and shopping vouchers.

JP Morgan has since valued the program at up to $2billion, based on analysis of listed loyalty programs operated by Aeroplan in North America and David Jones in Australia. JP Morgan analysts Matthew Crowe and Russell Crichton-Browne say earnings from the frequent flyer program would help offset weaknesses in Qantas and Jetstar domestic flying businesses.

This week, JP Morgan downgraded its price and earnings targets for Qantas in the wake of last week's profit warning from Virgin Blue and signs the domestic market was weakening.

JP Morgan cut this financial year's earnings estimates for Qantas by 5 per cent, noting that any slowing of domestic demand would be mostly offset by strong international business.

Fiscal earnings for 2009 would be down by 7 per cent due to weaker yields in Qantas's flying businesses, but this would be offset by strong frequent flyer growth, JP Morgan's analysts say.

"We expect Qantas's loyalty program to grow reported earnings by 75 per cent in FY09 offsetting some of the weakness in mainline earnings (down 17 per cent."

The frequent flyer spin-off is one of several strategies Qantas is pursuing to unlock value.

Today's Qantas board meeting will be asked to approve the leasing of six new wide-body Airbus aircraft, to allow Jetstar International to continue growing its long-haul operations, including services to southern Europe.

This follows last week's announcement of a further delay in the delivery of the Boeing 787 Dreamliner Jetsar was originally planning to use for the expansion.

A Report by The Mole from The Australian