AFR - QAN ASX: Why Qantas had to give frequent flyers more spending options (afr.com)

There is a simple reason why Qantas is making it easier to use frequent flyer points – all those points are burning a hole in customers’ pockets.

Frequent flyers are racking up about 200 billion points a year. They love the program – the points, the chance to get free flights or upgrades, the status credits – all of it, it is an undisputed winner. Macquarie’s analysts went as far as to call it possibly the leading frequent flyer program globally.

Qantas CEO Vanessa Hudson announced the changes on Monday.  Oscar Colman

That points issuance is growing like a weed – it was up 13 per cent in the six months to December and 48 per cent last financial year (admittedly a bit of a post-pandemic rebound year), and Qantas makes money selling these points to third-party buyers such as the banks.

The problem is frequent flyers cannot spend the points quickly enough, or do not want to spend them on what’s on offer. And if there is no spending, what is a point really worth?

We can see from Qantas’ filings that it issues more points than frequent flyers redeem every year.

At its peak, frequent flyers were earning about 40 per cent more points than they would redeem in any one year. The gap was 17 per cent in the six months just gone.

Even in COVID-19 when planes were not in the sky, frequent flyers racked up a lot more points than they spent, which shows how important the banks and other third-parties points buyers are to the loyalty proposition.

The result is a swelling frequent flyer program with more customers and more points, a rusted-on customer base that seem to be perpetually in points accumulation mode, and now some of those customers are fed up.

They watch their frequent flyer balance closely – people in the airline industry will tell you that frequent flyers track their points balances closer than their superannuation balance – and want to cash in.

How do you fix it? Try to get them spending.

Now we know these customers like flying and special treatment – that’s why they are in the frequent flyer program or signed up for a Qantas-branded credit card in the first place. They want to use their points for flights and upgrades, not always on the Qantas shop’s wine, coffee machines or golf balls that they buy elsewhere.

So that’s why Qantas is creating a new tier of products that make it easier to book flights using points.

These flights, dubbed Classic Rewards Plus, are more expensive from a points perspective – but there are so many points out there (and growing every year) and so many frequent flyer members that want to spend them, that it can make sense for both Qantas and its frequent flyers.

Is it a genius move? Not really. Rather it is the frequent flyer shake-up that Qantas had to have given unrest in its customer ranks and the way its frequent flyer program has evolved and grown in the past two decades. Qantas needs to show customers it is serious about those points having value – that they are more than just a number on a statement or part of a social status game – and can be spent on something they want: flights.

$120m cost to Qantas

By doing that, it shores up Qantas’ proposition to banks and other companies that use frequent flyer points to sell their own products. These buyers need to keep buying if Qantas’ loyalty arm is to record $1 billion in annual earnings by the end of the decade, as planned.

Macquarie’s analysts say the restructure rectifies the problem. “Combined with tier FF members getting different levels of access to the seats, the risk was increasing that perceived value of the points was declining for many members, as they struggled to redeem them,” the analysts told clients on Tuesday morning.

“Whilst alternatives for redemption on classic are available, they are low-value options, no better than the competitive program offers. We contend points plus pay became a negative to the program as it highlights a sharp difference between the Classic program.”

As always, it will take a bit of time for frequent flyers to assess the new system, and we bet there will be some initial shock and complaints; that is Qantas getting back what it created – a system of entitlement, privilege and “loyalty”.

There are frequent flyer members who loyally used their Qantas credit card and flew Qantas at every opportunity for the past few decades, to be in the position where they use their points today. They want Qantas to show some loyalty back.

Classic rewards plus flights will be sold under a new variable pricing system and will kick in once the base-level classic rewards seats are sold out.

Macquarie’s analysts tested it out and found a one-way economy trip from Sydney to Tokyo valued points at 1¢ each vs the old classic system at 3¢, for example.

The changes are expected to cost Qantas $120 million in FY25, their first full-year, which is part of the airline’s announced $230 million “investment in the customer”.

Will Qantas recoup some of that from the third party points buyers?

Jarden’s analysts are doubtful. “We think it is unlikely that its partners have agreed to pay more for points inventories, leaving the earnings growth outlook reliant on a combination of membership growth and realised margin (breakage assumptions, fare mix benefits, ancillary network usages) from points redemptions,” they told clients.