Frequent flyers baulk at the cost of Qantas redemptions

It was always going to end in tears: when the airlines started rolling out their first loyalty programs in the 1980s, the whole concept was exciting and irresistible for consumers airline managers alike.

What could be more seductive than free flights if you gave your business to one carrier instead of having to go through the time-consuming drudge of shopping for cheap deals with all their restrictive conditions when it came time to take yourself away on a holiday?

It was tailor-made for business flyers as the more your company spent on moving you around, the more the benefits of free travel accrued to you personally.

But the back end of frequent flyer programs was a complex, daunting and even dangerous juggling act where airline accountants fretted about ever-growing "contingent liabilities": in return for the alluring commitments to consumers, there was actually a requirement that you would eventually have to cough up the free travel – that is, a proportion of the revenue in the original ticket sale had to be set aside to pay the operating cost of the "free" redemption.

In an industry with the thinnest margins of any consumer business in the world, that was always going to take a huge amount of discipline and accuracy in forecasting the level of liability being amassed and the seating capacity necessary and available for frequent flyers.

The liability issue exploded in the airline recession that followed the terrorist attacks on America in September 2001.

Planes began emptying around the world because of the new threat, so fares fell in order to fill them up again. And all the old assumptions around which frequent flyer programs were originally designed were turned on their head.

For a start, because of lower fares – a relentless trend since the beginning of the jet age, in fact – the old idea that, if you were an airline, you needed to fill only 60-65 per cent of your seats to make a profit went out the window.

The new imperative is that you must be flying 75-80 per cent full or you’re financially doomed. That has left fewer seats than ever to be used by frequent flyers.

In any case, the old idea that there was enough fat in the original ticket sale to cover the rewards liability was unsustainable, so suddenly "free" rewards became cheap rewards executed through devices like fuel surcharges, which are now used primarily to penalise frequent flyers, as I wrote last month.

Around 2001, airlines like Qantas began to realise the tremendous consumer appeal of cross-fertilising general retail loyalty schemes with airline loyalty schemes.

In fact, banks, supermarkets and other retailers were prepared to buy frequent flyer benefits from the airlines in a further sophistication of the whole liability issue, out of which emerged Qantas’s decision to split off Frequent Flyer as a separate business, with the bizarre consequence that Frequent Flyer has continued to make strong profits even when Qantas’s international airline business has been losing hundreds of millions of dollars a year.

In Qantas’s case, throw in the final complication of a major new alliance, which has been anything but seamless when it comes to frequent flyers.

We learnt last week there was a major disconnect between Qantas and its new partner Emirates in one crucial area: the amount it was charging, compared with the Australian airline, for frequent flyer redemptions, with the result that there is a surge in the number of Qantas passengers redeeming their frequent flyer benefits on Emirates services.

Senior executives of both airlines are to meet in the next few days to thrash out the issue which stems from this basic mismatch: Emirates is a fast-growing low-cost full-service airline that simply won’t issue disincentives for all its new customers joining the flock using its frequent flyer program, while Qantas is a high-cost airline attempting to shrink its business to a level that will enable it to make money again and is charging a big premium for people, including frequent flyers, to use its international services.

We’re told a Qantas customer can save more than $600 on the money needed to be forked on the frequent flyer "benefit" of a return flight to London by flying Emirates and not Qantas.

 "A possible resolution could be for Qantas to lower its fuel surcharges to better match Emirates," Matt O’Sullivan writes. "But a reduction would mean that Qantas would take a hit to its revenue.

"Conversely, any increase in charges by Emirates is likely to face a consumer backlash."

Airlines including Qantas are facing pressure to reduce their surcharges after a 15% fall in the price of jet fuel since the start of the year.

Qantas’s fuel surcharge on a return economy or business class ticket to Europe is $760 compared with just $150 on Emirates in economy and $230 in business.

There’s a real prospect that the Qantas-Emirates alliance will see Qantas simply becoming the local Emirates agent.

If you’re one of the nine million Qantas frequent flyers, had you already discovered the discrepancy? Are you loyal to the Qantas brand and is it worth the premium? Have you already booked a Qantas frequent flyer redemption on Emirates? Have you found better value in Virgin Australia’s Velocity program or other airline schemes?