The Wise Marketer continues its survey of the airline and travel industry with an interview with Evert de Boer, Managing Partner at On Point Loyalty, a Consulting and Advisory services firm focused on the global airline industry, the future of frequent flyer programs, and their attendant financial services partners, investors, and service providers.
Evert de Boer has researched and worked in airline loyalty strategy since 2000. He has collaborated with more than 35 airlines globally on airline loyalty programs in advisory roles and has published numerous articles and white papers on the subject.
In his current role at On Point Loyalty, he leads a global team of loyalty and finance experts supporting clients in designing and executing their airline loyalty strategies.
Evert is the author of ‘Strategy in Airline Loyalty: Frequent Flyer Programmes’ which was published by Palgrave Macmillan in 2018. I’ve read that book and it is as comprehensive a text as you can find on the topic.
He is based in Singapore and was kind enough to lose some sleep to answer our questions and share his candid thoughts on how the airline industry will evolve post pandemic. He also offers thoughts on the valuation of frequent flyer miles, programs, and whether the divestiture of FFP’s by their host airlines will continue.
Wise Marketer: You have pioneered much of the prevailing thought related to the valuation of frequent flyer programs and the feasibility of FFP spinoff. What is taking place in the market today?
Evert de Boer: In the last year we have seen major carriers in the US talk openly about the value of their loyalty segments for the first time. Generally speaking, the valuations shared by them align to our valuation predictions. But equally important — the record-breaking debt financings by Spirit, United, and Delta underscore the unique position of the loyalty program as a steady component of the airline that is not only very profitable but also very stable. If anything, the recent developments are proof points to the enormous value of the programs.
Wise Marketer: Can you share your current thinking on FFP divestiture? Is it viable for a FFP to operate as a separate business entity from its airline host?
Evert: The decision to spinoff the FFP is not black or white. There are many considerations. Operating a loyalty program is very different than running an airline. If you do it right it can be very profitable and contributes highly to the airline. The program benefits from higher degrees of autonomy that aren’t always available when it is subject to the corporate governance of the airline. Within the airline, attention will always be given first to things like operations, security, and maintenance.
Why do some airlines outsource maintenance and ground operations? Well, there’s often better results when working with specialists who can provide services at lower costs. So, the point is not just to sell the program, it is to raise capital for the airline by collateralizing future cash flows from the program. The best partners for a divested FFP bring more than capital. They offer knowledge, accountability, and transparency.
Investors have found that buying mileage backed bonds are an efficient and affordable investment vehicle, with interest rates lower than those on bonds issued directly by the airline.
When people criticize the spinoff idea as a path to ruining the loyalty program, they are perhaps missing the bigger picture. Qantas is a good example. Even though the FFP was separated from the airline itself, those responsible needed to continue to sell and leverage miles and develop a strong partnership group. To do this successfully, they need to keep the value proposition of the program strong and take care of the customers if they are to maintain the value of the currency.
At the end of the day, this is not just about financial engineering, it is about building more robust and attractive loyalty programs that have a strong value proposition.
Wise Marketer: What are the first questions you ask when considering a FFP spinoff?
Evert: I think we should consider the question through two lenses. The first question is to solve for the organizational structure that provides the right amount of agility and versatility to really unlock the true potential of the loyalty program. The answer to that question leans towards a more independent structure that can untap the full potential of the program without being weighed down by the operational, technological, and financial limitations that are typical for airlines.
The second question is related to corporate finance: what structure affords the best potential for financial value creation? I don’t think that an equity carve out is a means by itself — it is a means to an end and the end objective is optimizing the airline’s financial structure. If an airline can achieve a better financial structure through a partial carve-out (e.g. by enjoying a risk discount on a separately run program with partial external ownership) there is a lot be said for that.
Wise Marketer: We hear from many industry observers that “the FFP is more valuable than the airline”. This may be true on paper, but where does that observation lead us? What is the story here?
Evert: The story is quite straightforward. Investors believe that airlines and loyalty programs are different types of businesses, with different growth profiles, different risk factors, and different degrees of control over the levers of profitability. As a result, the loyalty business attracts different multiples and different types of investors.
Debating the “what if” circumstances if the airline goes bust is a myopic view of the industry. Clearly, when the airline goes bust, it will have an impact on the rest of its value chain as well. But a standalone program in control of its own liability, technology, and partners will have a better chance of survival. So, if we consider the going concern scenario, they can co-exist in separate structures successfully.
Wise Marketer: JP Morgan Chase announced an alliance with Affinity Capital Exchange (ACE) to create a tradeable asset based on FFP miles. What are your opinions about this? What is the logic here and does the frequent flyer program mile have a future as an asset class?
Evert: Historically, airlines have used bulk pre-purchases of frequent flyer program miles as a means to generate capital. This is a rather blunt instrument to raise capital, and often comes at the detriment of yield erosion when the miles leveraged are valued at a discount. Given the size of the underlying programs, and the enormous volume of capital represented by the purchase of miles by partners, there may be better avenues for airlines and their frequent flyer programs to unlock capital.
This could actually be a vehicle for investors to gain exposure to the industry and for the airlines to adopt a more fine-tuned tool to raise capital than to just sell miles or discount them. The airlines are exhibiting a willingness to essentially give up some control and in turn, investors can partake in this new asset class. Overall, it’s too early to know how this will exactly take shape.
Wise Marketer: Do you think this will lead to more fungibility with airline miles? Does higher utility result from this transformation into an asset class?
Evert: I think what JP Morgan is getting at relates to the fungibility of miles, but remember that today you can use, for example, Singapore Airline miles with any of the 27 Star Alliance partners. Would Singapore Airlines benefit from a greater integration with a longer list of partners? They could add 1,000 partners or more and add utility for the customer. But remember that customers want to redeem miles with Singapore Airlines for flights. Yes, you can redeem at any number of merchants — technologically that is absolutely possible — but the sweet spot of the program is still free flights.
Perceived value is still the most important aspect of reward redemption for the customer. Even today, if a customer were to swap miles for an iPhone, the airline would not get much of a price advantage purchasing that iPhone. That means the value exchange for the customer is going to look almost like cash-back. On the other hand, the value of a flight from New York to Singapore is determined by each passenger. You can see that even though miles can become more fungible, it won’t unseat free flights as a redemption option.
Wise Marketer: What did you learn about what the flying public wants from airlines during 2020? What changes made to the cabin experience and FFP’s in response to COVID will be sustainable?
Evert: My personal view is that the public wants to be able to trust the airlines and have clarity around requirements. People want clarity and consistency in the way the airlines communicate about the changes they are making. I completely understand the situation is evolving, but some organization from a governing body might help to give comfort to travelers about what to expect.
The best way forward is for the airlines to establish consistent and coherent guidelines. I don’t get why some airlines are touting HEPA filters, whereas others are advertising the fact that they are keeping the middle seat free. This type of conflicting messaging will not help the market’s perspective.
On the frequent flyer program side, we have seen quite a number of successful initiatives to maintain connection and engagement with members through different types of promotions. I think programs have done quite a good job actually, showing how valuable they are for the airlines while still being relevant for members.
Wise Marketer: Do you see bright spots in the future of air travel?
Evert: Yes. In an interesting way, the whole crisis has put a spotlight on loyalty. On the airline side we saw people continue to engage in the programs and I think the airlines did a pretty good job at maintaining momentum. Clearly in the consumer market, people still want to travel. The search data supports this, and we also see FFP members saving miles for that trip in the future. In the business travel segment, there’s a big group of people saying that while the video calls work, there is great value in meeting face to face or going to a conference and interacting with people.