Air New Zealand’s Airpoints scheme a better earner than aviation business: Forsyth Barr

As Air New Zealand revamps its Airpoints scheme, the value of loyalty, now a star of the airline’s operation, has been outlined in an analysts’ report.

Forsyth Barr says the Airpoints scheme is scalable, lights on assets and generates relatively stable earnings.

”We believe it is a higher multiple business than Air [NZ’s] aviation business and contributes a material part of current share price,” say analysts Andy Bowley and Scott Anderson.

”This may sound fanciful, yet a number of recent US airlines have used their loyalty schemes as collateral in recent funding events.” The airline will raise capital in the first half of 2021.

Forsyth Barr has upgraded its rating of the airline to neutral, after applying the value of Airpoints as part of its revised net asset value approach.

Chief executive Greg Foran has said loyalty will be a ”second growth engine” and the scheme is now under review. Among other changes, the airline may introduce a new upper tier of Airpoints

Besides the Elite Plus tier, the survey suggests there could be the opportunity to earn lifetime status at lower tiers.

A survey sent to Airpoints members indicated that a target range between 2800 and 3200 status points a year would be required to pocket an Airpoints Elite Plus membership, compared to 1500 points to reach the Airpoints Elite tier now, and 900 for Airpoints Gold.

Australia-based Executive Traveller said benefits of Elite Plus status gleaned from the survey included the possibility of free same-day flight changes for domestic, transtasman and Pacific flights, free parking at the member’s “home airport” and complimentary Elite status for the nominated partner of an Elite Plus member.

Forsyth Barr analysts say key sources of external loyalty revenue include bank partners, through aligned credit card schemes, and a number of retailers.

In normal operating conditions, loyalty represents just another earnings stream for an airline and can be valued as part of the overall profit base of the company, within an earnings multiple or cash flow-based valuation.

”However, when the aviation business is generating significant losses, the loyalty income stream which is typically defensive can easily be lost, particularly if it’s not split out,” says the analysis. “Book value approaches to airline valuations ignore the asset light nature of loyalty schemes that generate income from third parties (credit card companies and retailers) irrespective of whether aircraft are flying.”

The Air NZ scheme has about 3.5 million members – up from 1.2million eight years ago.
The airline doesn’tprovide any financial detail on its Airpoints scheme, beyond the balance sheet disclosure for “revenue in advance” related to loyalty.

This liability reflects the amount of Airpoints dollars outstanding among members.
Bowley and Anderson said the lack of disclosure, exacerbated by Covid-19, made it difficult to value Airpoints.

“However, based on an assessment of recent loyalty scheme transaction values, third party loyalty valuations and listed loyalty scheme providers we value Airpoints at $725m. While appearing significant in the context of the airline’s market capitalisation of $1.9 billion it is only about 15 per cent of its pre-Covidenterprise value.”

The analysts say their estimate of the scheme’s value has a ”reasonable margin for error”.

Air New Zealand could extract more direct economic value from its Airpoints loyalty scheme by generating incremental revenue through selling points/airmiles to third parties including credit card companies (many schemes issue a greater proportion of points to third parties than to their own airline).

The airline could grow its membership base; about 90 per cent ofmembers are New Zealanders so the scope to grow the membership base is limited by its historic success and the New Zealand population.

However, the airline could grow its proportion of active members and expand its scheme to include more partners.

”We expect Airpoints to expand the depth and breadth of its retailer/financial services relationships, to white label its own credit cards as other airlines have done successfully, and expand its Airpoints store for redemption options.”

How airline loyalty schemes work

Forsyth Barr analysts explain that loyalty schemes are typically encompassed within the broader airline business (as Airpoints is within Air NZ). However, some schemes are treated at arm’s length due to ownership requirements, funding arrangements, or reporting frameworks.

Regardless of whether a scheme is internalised or externalised, they share common traits:

Sales of points: Schemes sell (issue) points to the airline and third parties (scheme partners).
Points issued to members: The airline and scheme partners issue points/airmiles to scheme members as an incentive to purchase flights, products and other services.
Members redeem points/airmiles: Members are able to redeem points earned by booking flights or via third party redemption partners.
Flights typically account for the majority of redemptions. According to Air NZ, more than 90 per cent of redeemed Airpoints dollars are spent on flights. At Qantas it is around 80 per cent. At United it is 97 per cent, of which 20 per cent are redeemed on partner airlines.

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