The countdown is on and the marketing activity has reached fever pitch as airline loyalty schemes spruik generous offerings to capture market share in the face of a massive watering down in the generosity of points earned from credit cards from July 1.
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Qantas discovers that loyalty pays off
Qantas' frequent-flyer business, earmarked for sale at least twice, has delivered consistent growth since the airline's historic loss in 2012.
Historically, banks have been one of the biggest purchasers of airline points from Qantas' Frequent Flyer scheme and Virgin's Velocity – which they then pass on to credit card customers as part of their own rewards schemes.
But the credit card fees that banks were able to charge, and which funded their own rewards schemes, will fall from July.
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Given many credit card holders redeem their awards as airline points, the demand for airline points will fall.
The airline loyalty schemes will see their revenue come under pressure, with one industry estimate that it will cut up to $200 million from Qantas Frequent Flyer's revenue.
"The value of airline frequent flyer points purchased by credit card issuers could decline by as much as $250 million a year," according to industry expert Lance Blockley from payments consultancy, The Initiatives Group.
While it will also hit Virgin's Velocity, the impact will be smaller given the scheme itself is smaller and it has not had a deep relationship with the banks.
Virgin also argues Qantas Frequent Flyer has a different model to Velocity Frequent Flyer.
Virgin says that as a result of Qantas' "Time to change" campaign in 2009, Qantas moved the majority of its credit card relationships to direct-earn models. This meant people would directly earn Qantas Frequent Flyer points from their credit cards, rather than bank credit card points, which could then be transferred.
Qantas itself has said that 35 per cent of all spend on credit cards in Australia earns Qantas points, thus it appears more vulnerable.
By contrast, Velocity's credit card strategy is largely based on "indirect-earn" relationships – which means consumers can choose to transfer their credit card points to Velocity.
They will need to spend more to earn the same number of points.
Lance Blockley, The Initiatives Group.
Blockley agrees, but notes that "after July 1 no matter whether it's Virgin, Qantas or the bank proprietary card schemes, they [members] will need to spend more to earn the same number of points".
In another sense, the stakes are additionally high for Virgin as market sources say it is looking at selling the remainder of its Velocity scheme – which is 35 per cent owned by private equity player Affinity.
Such a deal would probably value Velocity at more than $1 billion.
Biggest change
The credit cards most affected in July will be the American Express companion cards, which were previously the most generous and therefore most effective when it came to amassing points. In anticipation of the July changes, ANZ has announced it will ditch this card and the others banks are expected to follow suit eventually.
For example, the Commonwealth Bank has just informed its American Express Diamond Award credit card customers that from July 1 the three points they currently earn for every dollar spent will fall to 0.5 points on all purchases other than in supermarkets, department stores and overseas.
The response from the airlines has been to mitigate the impact of the looming hole in their bank credit card revenue by boosting their relationships with other points-earning partners – like health insurance providers, retailers and utilities.
Qantas has gone one step further and announced the creation of its own credit card in conjunction with Citibank, which it says will offer a more munificent earn rate for frequent flyer points.
It will be a deeper relationship in that it shares in the card economics such as the interest paid and annual fees.
Already Qantas has a relationship with health insurer NIB through the venture, Qantas Assure, in which the airline takes a share in the overall profitability rather than simply selling points.
The deal with Citi will in effect put Qantas in competition with banks and could sour the relationship.
"One can imagine that banks offering Qantas Frequent Flyer points on their credit cards today would not be overjoyed to see Qantas launch its own card, particularly if the rewards offer is more than the banks themselves can afford," Blockley says.
While Qantas is not denying that its loyalty revenue could be put under pressure, it remains bullish about Frequent Flyer's earnings.
Qantas chief executive Alan Joyce addressed the issue at a recent investor day.
In reply to questions about the impact of the credit card rewards changes, he said: ''Just to be clear, we are saying that the loyalty program and the EBIT from the [Loyalty] division will continue to grow next year.
"It's this component of credit card and financial services with the transition that's going to – it's going to have a hit with this transition. It is because – and again this is not hugely significant, but it is that transition, particularly from the companion cards, that now has been extended for a period of time but can't continue because of the change of interchange fees."
Joyce told the same gathering this division was expected to earn between $500 million and $600 million in five years compared with the $346 million it made in 2016.
His comments only serve to underline the importance of these airline loyalty divisions as less cyclical and more reliable and growing contributors to group earnings.
The wave of promotional offers from both over the past month is a clear sign of the attempts to gain further loyalty market share in this highly contested space – particularly given the fact that for the average person it makes sense to load into one scheme or another rather than splitting points in two camps.
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