By Funminiyi Oduko
Our valuations team at PwC recently sat down and examined a very specific aspect of the airline industry. Taking the past decade as our timeframe, we looked at deals where airlines had spun off or sold their frequent flyer programmes (FFPs) as separate businesses.
First we calculated the enterprise value (EV) of each demerged FFP. Then we compared the FFPs’ enterprise values with those of the airlines that had sold them. And guess what? We found that each FFP was worth between 15% and 50% of the airline that had spun it off.
There are about 30 listed airlines globally, with a combined enterprise value of around US$250 billion. Even just a back-of-an-envelope calculation suggests there are many tens of billions of dollars tied up in airlines’ customer loyalty schemes, waiting to be released. It’s hardly surprising that FFPs are often described as the industry’s “crown jewels”.
So, what does this mean for airlines — and their investors? To find out, let’s start by examining the current ownership structure of airline FFPs. And looking across the industry, there are essentially three models for FFP ownership, each bringing its own pros and cons.
At one extreme, the most common model involves the airline running its FFP as a wholly-owned in-house operation, fully integrated into the business. This brings the benefit of total control, and means the airline doesn’t have to negotiate commercial agreements with the FFP.
But on the downside, as an internal function the FFP has little incentive to maximise revenues or seek profit opportunities through entrepreneurial innovation or diversification. And whatever value may be in the FFP remains locked up and largely invisible from outside the business.
The second ownership model — effectively the middle one of the three — is where the FFP still sits inside the airline group, but as a separate legal entity. This approach brings the benefit of clarifying the financial performance of the FFP as distinct from the rest of the business. It also gives the FFP more flexibility and autonomy around how it’s run.
However, with this model the legal separation and commercial contracting processes can be quite complex — especially around the thorny issue of how many seats the scheme will take and the price it’ll pay for them. The airline may also feel that its control over the FFP has been diluted.
The third model — at the other extreme from the first — is where the FFP becomes a totally separate business, spun off through a trade sale or flotation. This brings the benefit of enabling the airline group to realise the full cash value of its FFP asset, while also enabling the demerged FFP to develop new strategies, partnership and business models to accelerate its growth.
The downside is that spinning off its FFP is something the airline can do only once, meaning the timing of the deal is vital to getting full value for the business. And clearly the airline loses all control over the FFP, which has its own independent management and commercial agenda from then on.
So, to return to my question: what does all this mean for airlines? In my view, any airline that currently owns and runs its FFP in-house should seriously consider whether it should take action to realise its value. Given that this value might be equivalent to 50% of the entire group, the resulting injection of cash could represent a massive boost to the business.
What’s more, experience with FFP spin-offs in the past shows that an FFP tends to grow faster and — if listed — gain a higher stock market rating than the airline it came out of. The FFP’s ongoing performance and value also become much more visible than when it was part of the group, in turn attracting further investment.
The message is clear: with crown jewels, you only know what they’re worth when you have them valued. I think it’s time all airlines took a look at how much cash is locked up in their FFPs.
Funminiyi Oduko | Senior Manager, Valuations
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