A recent article published in the Chicago Tribune discusses the profitability of United’s frequent flyer program and its value as a stand-alone business. According to analyst Frank Boroch of Bear, Stearns & Co, United Airlines’ Mileage Plus program would be worth $7.5 billion if it were sold, just over two billion more than the airline’s $5.45 billion market value.
United, like all the airlines, makes money through the sale of miles to a variety of hotel, credit card, car rental and other partners. A portion of those miles, an estimated 15 percent of the 515 billion outstanding miles, will never be redeemed. By spinning off the program, the airline would lose the $3.8 billion liability of unredeemed miles from its balance sheets and turn the program into a $7.5 billion business, according to Boroch.
United hasn’t indicated that it will sell the program and United spokeswoman Jean Medina said, “We are managing our Mileage Plus program to the benefit of our customers and shareholders and will continue to do so.”
According to the Sydney Morning Herald, Qantas has developed a plan to split the airline into four separate businesses. Under the proposed reorganization, Loyalty Co. would be solely responsible for the operation of Qantas’ Frequent Flyer program. Analysts estimate that the program makes US$175 million per year in pre-tax profits. It has been suggested that Aeroplan would be a likely investor in the company. Whether Qantas will spin off its loyalty program, or how they might do it, remains highly speculative. In a recent Reuters article it was mentioned that Qantas Chief Executive Geoff Dixon reiterated the airline was reviewing the ownership of key assets, including its frequent flyer program and freight business, but said it did not plan to sell-off any units.
Editors’ Note: We wrote a cover story about the profitability of frequent flyer programs in July 2005. At that time, Air Canada had spun off 15 percent of its Aeroplan program and the Aeroplan Income Trust units were worth an estimated $10 a share. The move turned out to be profitable and Aeroplan now has a $4.27 billion market value. We looked at the value of programs and how going public would have an impact on frequent flyer program members and the airlines. You can read the article in the Archives section.
