Paula: Welcome to Let’s Talk Loyalty, an industry podcast for loyalty marketing professionals.
Paula: I’m your host, Paula Thomas, and if you work in loyalty marketing, join me every week to learn the latest ideas from loyalty specialists around the world.
Paula: Welcome to episode 82 of Let’s Talk Loyalty.
Paula: Today, I am chatting to Evert de Boer, managing partner at On Point Loyalty, a global consulting and investment firm focused exclusively on the airline loyalty space.
Paula: In today’s discussion, Evert talks us through a white paper and some fascinating research that his company published in January 2020, entitled The Top 100 Most Valuable Airline Programs.
Paula: And it was really fascinating to get a sense of some of the valuations of these loyalty programs.
Paula: In addition to that report, we chat through all of the various changes that have happened as a result of the COVID-19 pandemic, and how, in some ways, these have really elevated airline loyalty programs, which are increasingly becoming more recognized for their extraordinary financial power.
Paula: So, Evert de Boer, welcome to Let’s Talk Loyalty.
Evert: Thank you very much.
Evert: It’s a pleasure to be here.
Paula: Wonderful.
Paula: And I should also wish you happy new lunar year.
Paula: I believe that has just happened there where you’re based in Singapore.
Evert: That’s right.
Evert: We just kicked off the start of the Year of the Ox, and I hope it’s gonna be a better year than last year.
Paula: Wonderful, Evert, absolutely.
Paula: I think everybody shares your intention.
Paula: So, listen to me.
Paula: I’m sure plenty of our listeners are very familiar with the work that you do in On Point Loyalty.
Paula: Incredible amount of research and white papers and reports that we’re gonna talk about today.
Paula: So, do you want to first of all tell me your, I suppose, answer to my favorite opening question, which is what is your favorite loyalty statistic?
Evert: Yeah, sure.
Evert: And I think it’s a great question because, well, for many reasons, I think there’s a lot of interesting statistics out there.
Evert: And for some, I genuinely believe that people do not really appreciate them or know them.
Evert: And I gave your question some thought, and what I would like to do is to share actually three sort of data points with you, because I think it paints a very telling picture of loyalty, particularly in the airline context.
Evert: So, the first kind of statistic is that, many people traditionally think of awards in a loyalty program as free, as in they don’t generate any revenue for the airline.
Evert: And as a result, they are reluctant to open up inventory, so airline seats in the case of an airline, because they feel that you’re basically forgoing revenue.
Evert: I think the interesting point behind it is actually that, if you consider that airlines are selling those miles or points to partners, you can do a quick math, and the math is pretty straightforward.
Evert: So assume that a member would on average in the US.
Evert: I’m taking the US just make an easy example.
Evert: In the US a member would redeem 25,000 miles.
Evert: If you then look at the associated revenue for that ticket, that so-called free tickets, the airline could have sold those 25,000 miles.
Evert: And maybe, let’s take a conservative approach, a penny and a half each.
Evert: That means that that free ticket would have generated $375 in revenue.
Evert: If you then, yeah, it’s material.
Evert: And if you then factor in breakage, again, conservative rate of between 10 to 15%, it means that a free ticket is actually yielding more than $400.
Evert: Now, if you compare that with the average fare of domestic travel in the US award travel is actually yield to creative.
Evert: In other words, selling a seat in 25,000 mile increments delivers a greater yield than selling the seat through other channels.
Evert: And then of course, on top of that, you can factor in things like lower distribution cost, less commission, and a bunch of other things.
Evert: And just you start to see a completely different picture in terms of the notion that award travel is always free.
Evert: As a matter of fact, award travel can actually be yields a creative for the airline.
Paula: My goodness.
Paula: I think you’ve just blown my mind, Evert.
Paula: You know, because I think I have a very good respect for the profitability of airline loyalty programs.
Paula: And I want to credit our friends in Loyalty Magazine, actually in the UK, they did run many excellent loyalty conferences over the years.
Paula: And I remember specifically hearing that loyalty programs for many of the world’s largest airlines are more profitable than the airline itself.
Paula: So that’s at the overall level, but for you to make that incredible point there about the level of yields that’s being generated by these free seats is unbelievable.
Evert: Yeah, and I think it’s a very simple illustration of the financial power of these programs.
Evert: And then if you take it to the next level, if you look at it on an aggregate level, it actually means that the loyalty program can, it can be more profitable than your core transportation business, meaning that selling, the business of selling miles to partners can generate not only a higher profit margin, but it also offers very different business characteristics because a loyalty business inherently is a very different business from running an airline.
Evert: So if you put those two together, all of a sudden, you’re sitting on your own little, very profitable, controllable business, whereas the airline business, traditionally airlines, they struggle to meet the weighted average cost of capital.
Evert: It’s an incredibly difficult business to run with high peaks, but very low thrust as well.
Evert: So yeah, the loyalty business offers a very clear departure from that.
Evert: And as a result of that, it also means that if you look at, especially the big US airlines, is a material part of their profit comes from the loyalty program.
Evert: And in some cases, more than 50% of the profit generated by the airline comes from the loyalty program.
Evert: And that’s kind of my segue into my final point, statistic.
Evert: And there’s actually two.
Evert: The first one is, so keep in the back of your mind that these loyalty programs are very possible.
Evert: They’re punching above their weight, you can say.
Evert: But that’s not reflected at all in what the airlines traditionally have put out.
Evert: So take any of the investor relations disclosures by big US carriers, and you will see 150 slides where they talk about fleet routes destinations, new seats, ISE, catering, all that stuff.
Evert: And at best, a handful of slides on their loyalty program, because it’s sort of taken as table stake, and it doesn’t really, in my opinion, of course, I’m biased, but it doesn’t really get the attention it deserves.
Evert: And the last sort of little anecdotal data point there, in 2013, Ayata, that we all know as the sort of the airline overriding association.
Evert: Exactly.
Evert: They commissioned the report from the prestigious management consulting company McKinsey about profitability in the airline industry.
Evert: And basically, the message was, the profitability is not very good.
Evert: And in this 52-page report, there was exactly zero mentions of loyalty programs.
Paula: Oh, my goodness.
Evert: I say it in a slightly facetious way, but I think by now, my point hopefully is clear that these programs are very strong and profitable and they offer lots of upside.
Evert: And historically, I don’t think they got the attention that they should deserve.
Paula: Absolutely.
Paula: Well, you make the point beautifully, Evert.
Paula: And I think I mentioned to you last time we spoke that I heard a shocking statistic, which again, I think, repeats exactly what happened, obviously, in 2013.
Paula: And I remember seeing Willy Walsh, who was then the chief executive of Aer Lingus, subsequently became the chief executive of British Airways and I now know is with IAG.
Paula: I think his role is currently chairman.
Paula: But Willy Walsh literally said in 100 years of aviation, the airline industry had made a loss.
Paula: So I think that’s again, neglecting the power, the financial power of the loyalty program, even within Aer Lingus.
Paula: And I think you’re on a mission to prove to everybody the incredible asset that’s available literally just below the surface that we need to leverage.
Evert: Yeah, exactly.
Evert: Exactly.
Evert: And Mr.
Evert: Walsh, I think, is set to become the new CEO or chairman of Ayata.
Evert: So hopefully, there will be an opportunity for him to say, well, industry, yes, of course, Ayata needs to do what it needs to do with all the certification and safety and all the operational stuff.
Evert: But perhaps there is an angle as well to educate the airlines on the potential goldmine that they’re sitting on, because I think probably for tier one carriers, they’re sort of capitalizing on it.
Evert: And certainly with everything that has happened last year, there is a big mindset shift.
Evert: But for tier two and tier three carriers, it is still not getting the attention it deserves.
Paula: Okay, so let’s just go back 12 months, maybe 12 and a half months, actually, Evert, because you released an extraordinary piece of work, which was the first piece of yours that I read.
Paula: And for listeners, it’s entitled The Top 100 Most Valuable Airline Loyalty Programs, published in January 2020, and the second edition of this particular report, because you had done one previously in 2017.
Paula: And there’s some extraordinary insights, Evert, in terms of literally the valuations, again, led mainly at the moment by the US Airlines.
Paula: So let me just pull some of the top figures out for listeners.
Paula: And again, I know this report is available on your website, which is onpointloyalty.com.
Paula: So I’m sure there’s plenty of people will want to read it.
Paula: So just to give people an example of this goldmine that you’re referring to, the top one is currently or was currently, I should use the past tense for this.
Paula: So the Sky Miles program from Delta Airlines last January 2020 valued in round figures at almost $26 billion, followed in second place by AA Advantage by American Airlines, again, $23 billion.
Paula: And in third place, the Mileage Plus program from United Airlines, worth just over $20 billion.
Paula: These are extraordinary figures, Evert.
Evert: Yeah, they are.
Evert: At the same time, yes, they are absolutely extraordinary figures.
Evert: I always also say that, you know, I don’t think that we’ve got the, you know, the scientifically exact number necessarily right.
Evert: Of course, it is directional.
Evert: What we’re saying is, listen, there is tremendous value in these programs, we think, and we’ve gone through this, you know, big exercises where we basically collect data on 150 airlines, we collect more than 50 data points per airline, and it basically cuts across airline statistics, the program statistics, the country, the primary country, operating country statistics, and we essentially pour that into our model, and then the model generates a pro forma P&L.
Evert: So we basically project what do we think the business would look like if you were to run it as a separate business, and to that, then ultimately you can apply a certain valuation multiple.
Evert: And of course, you know, the multiple is influenced by a number of factors, including, again, the growth profile of the airline and its stability and its level of indebtedness and things like that.
Evert: But ultimately, yes, you get a number on the valuation of the program.
Evert: And it is material for these big airlines.
Evert: Of course, it’s very large.
Evert: But even for, you know, the top, let’s say the top 50 airlines, it is in many cases, it is a material number.
Evert: And I think it’s really one of the reasons why we published the report is really sort of try and open the eyes of the various stakeholders and say, listen, there is a potential opportunity here.
Evert: And we just don’t think that in many cases it’s being done, you know, just as by the level of attention and investment and sort of overall standing it has in the industry.
Paula: Absolutely.
Paula: And obviously, a huge amount changed very quickly after you published that effort.
Paula: And I think what it did first and foremost was reaffirm again the direction and the estimated values of these programs.
Paula: And I think what you shared with me is United Airlines seems to have, I think you said, cracked the code in terms of leveraging their loyalty program to essentially raise funds to continue operating through the pandemic.
Paula: So I’d love for you to explain to me and all of the listeners what exactly happened throughout 2020, particularly with the US Airlines and leveraging their loyalty programs as assets.
Evert: Yeah, that’s also a good question.
Evert: So let me just take you back historically what airlines have done in the past to sort of generate capital from their programs.
Evert: There’s a number of different ways you can do it.
Evert: Traditionally, airlines have or programs have used the approach of pre-selling miles to partners, basically in an effort to generate liquidity, they pre-sell the miles to partners, and that generates cash in the door.
Evert: And that’s good, but at the same time, it can lead to yield erosion, because typically if you do large pre-purchase deals, whoever is buying them, typically the financial services partner, will negotiate a reduction on the price per mile.
Paula: Of course.
Evert: The second sort of way that has been done in the past is where the airline has set up the program as a standalone company, and they basically sold a part or the whole of the company to external investors.
Evert: Of course, the famous example is Aeroplan, that was sold by Air Canada Enterprises in 2005, through an IPO, through multiple tranches, and actually, eventually they sold off the whole thing.
Evert: And that was followed by a number of other divestitures, where it’s essentially an equity carve out, whereby the shareholder carves out a piece of the business and sells that to a typically strategic or financial investor, or in some cases goes for an IPO.
Evert: That is, you know, it’s also good because it raises capital, but at the same time, if you sell something, you know, it’s gone, you’ve sold it.
Evert: So you lose that piece of equity.
Evert: And with that may come, you know, of course, if you bring in different shareholders, they also want something to say.
Evert: So it becomes a more complex operating environment.
Evert: I think what United has done is very innovative in the sense that, so they didn’t want to go for the big pre-sale.
Evert: They didn’t want to go for an equity carve out, but they still obviously had their cash needs they needed to meet.
Evert: I think that they obviously, airlines are very familiar with leveraging all sorts of assets like aircraft and gates and traffic lights and everything else.
Evert: I think in the case of United, I think they found that the value that they could get from that was limited.
Evert: So they were sort of on the lookout for alternative ways to meet their financing needs.
Evert: And they actually came up with a structure that allowed them to raise capital by collateralizing the future cash flows of their loyalty program.
Evert: So the loyalty program sells miles to partners, predominantly financial services partners, that is a very stable and robust income stream.
Evert: So United effectively was able to come up with a structure, and I think with the help of the people at Goldman Sachs, to come up with a structure that allows them to basically raise the capital by collateralizing essentially the cash flows and some of the IP in the program.
Evert: And I think it is very interesting for a number of reasons.
Evert: One is that it is the first time that this model has been used.
Evert: So they maintain the full ownership in the program.
Evert: At the same time, they get the capital they need.
Evert: And secondly, what is very interesting is that when you borrow money, you have to pay interest.
Evert: If the airline goes to the capital debt markets, it pays a certain price depending on the profile of the airline.
Evert: What United and the other carriers were able to do is by leveraging their loyalty program or making the loyalty program company as the entity that went to the market.
Evert: They were able to realize a risk discount of between 200 and 300 basis points.
Evert: In other words, going through the loyalty program to issue bonds or borrow money is a far more effective way of raising capital rather than using the airline.
Evert: And again, this is one of those little angles that I don’t think that airlines have realized traditionally.
Evert: Because traditionally, it’s just, you’re on the program, you sell the miles, it’s a nice revenue stream, you take it to profit as much as possible, it helps you to run the airline, and that’s about it.
Evert: I think now we’re really on the cusp of airlines looking at it to say, well, hang on, I need to take one or two steps back and look at the bigger picture.
Evert: And get my head around what the program can do, not only just from generating cash from selling miles, but also some of the characteristics of that business allow me to do things in a smarter way, in a different way.
Evert: And I think that realization has really sunk in in the industry.
Evert: And United was followed by Delta and Spirit a few months later.
Evert: Delta actually did the largest ever capital debt market transaction for airlines ever by raising $9 billion against those more favorable terms.
Evert: So I think, of course, these are large programs or very large programs.
Evert: The Delta-American Express relationship is spectacular for its size, its duration, for its contract.
Evert: It’s unbelievable.
Evert: I think that at some point, they were predicting that the revenues from the American Express Delta co-brand part were going to reach $7 billion, which effectively is more close to the passenger revenues of EasyJet or Etihad.
Evert: So the co-brand itself generates as much money as an entire airline would.
Evert: It’s unbelievable.
Paula: It’s very exciting, Evert.
Paula: I have to say, I think you’ve chosen your career well to focus in this sector.
Paula: I actually did want to ask you, and you mentioned EasyJet there, Evert, and I know they do have an invitation-only loyalty program.
Paula: And maybe it’s just a feature of the fact, as you said, that this is only sinking in for airlines now.
Paula: But where I come from, we have a very well-known low-cost carrier called Ryanair who don’t yet have a traditional loyalty program.
Paula: I know they have lots of different models.
Paula: But would you see that all airlines, even those that are currently just focused on the core business, will start to build these as new types of assets?
Evert: Yeah, absolutely.
Evert: I think, you know, actually, I’m a bit surprised, or maybe baffled is a better word.
Paula: Good, it’s not just me.
Paula: Yeah.
Evert: So let’s go through them one by one.
Evert: So easy yet, you know, in my view, a program that is by invitation only, I don’t get that.
Evert: I totally don’t get that.
Evert: I think they’re leaving a huge amount of money on the table by doing that, to be honest.
Evert: And quite frankly, the same goes for Whishare and Ryanair.
Evert: And I think with some of these LCCs, there is this built in, yeah, let’s call it the prejudice that says airline loyalty programs, that is for big, fat, legacy, full service carriers, because our loyalty program is low price.
Evert: And as a matter of fact, this is what Tony Fernandez, the CEO and chairman of the AirAsia Group used to say, we don’t need loyalty, low price is our loyalty model.
Evert: And he’s come 180 degrees on that, because realizing, well, two things primarily.
Evert: Number one is that the loyalty program can generate incremental and accretive value for the business.
Evert: In other words, the example I gave earlier on where you sell miles or points, whatever you want to call it to partners, can be a very rich and attractive distribution channel rather than always just using the sledgehammer of low prices.
Evert: And secondly, taking this business and building it into a sort of a data driven, very customer analytics focused business where you can layer on additional new business ventures around mobile, around wallets, with FinTech.
Evert: It is potentially a huge opportunity.
Evert: And you see that AirAsia has embraced it.
Evert: If you look at some of the LCCs in South America, they have embraced it.
Evert: Spirit in the US, Southwest has a longstanding, successful program.
Evert: So yeah, to make a long story short, for EasyJet and Ryanair, which are not to have deployed any sort of meaningful loyalty initiative, I’m surprised that the shareholders haven’t sort of raised the alarm and said, well, guys, what are you doing?
Evert: Because if you were to extrapolate the numbers that we have in our report against the number of passengers they carry, the GDP per capita in the markets that they operate in, the RPKs they produce, I can tell you already without doing the math, you’re going to get to a huge program with a very, very high valuation.
Evert: So yeah, like I said, I think the reason is it is a mindset of loyalty is for legacy.
Evert: Plus, we’re so focused and so laser focused on costs.
Evert: We don’t want any incremental costs on our cost per flown mile.
Evert: I think those are sort of very myopic views on what the business could do for them.
Paula: Yeah, yeah, absolutely.
Paula: As you said, historically, the airlines just had all the glory, all the power, all the visibility.
Paula: And if the annual reports aren’t even recognizing some stunning figures, in fact, I pulled out Evert from again some of your reports, because what I liked you talked about is the more open information that’s coming through now that these new debt financing structures are coming through since the pandemic.
Paula: And one figure you quoted was that United revealed in 2019 an EBITDA of 1.8 billion US dollars, which was 34% of the group EBITDA margin.
Paula: I just think that was extraordinary.
Evert: Yeah, absolutely.
Evert: And I think that, again, we seem to be on the cusp of a new era in the sense that the programs or the airlines are offering a greater degree of disclosure around performance of the programs, which is really a catalyst of what’s happening in the market.
Evert: Others are doing it.
Evert: So it’s generating this sort of aha moment or what about me?
Evert: Realization with other stakeholders in the industry.
Evert: And yeah, those sort of levels of profit margins around, if you look at, if we just look at the program, a typical profit margin of a program is, let’s say between 25 and 30% of the revenues, which exceeds any public margin of an airline typically.
Evert: So there’s this beautiful asset that’s sitting there, that is consistently and materially profitable.
Evert: Yeah, I think the airlines will start to talk about it more and more.
Evert: I think historically they were reluctant for a couple of different reasons.
Evert: I think one of them is that if you present it overall, meaning you mix the airline with the loyalty program, you can, well, I wouldn’t say sweep it under the rug, but if the airline is underperforming, and you add in the loyalty program, it looks a little bit better.
Evert: I think in reality, though, I think the investors and analysts, they know how much the airline is producing.
Evert: So I don’t think you’re sort of, you know, you can’t…
Paula: You’re disguising it.
Evert: No, exactly, exactly.
Evert: It is what it is, ultimately, at the end of the day.
Evert: So you’re leaving money on the table.
Evert: It’s actually an interesting example in that context is there were two airlines in Brazil that IPO their program.
Evert: Tom IPO MultiPlus and Goal IPO, at least part of its SMILES program.
Evert: I won’t go into the technical details, but if you look at the market cap of those two airlines, pre and post IPO, sort of historical wisdom would say, or your intuition would say, well, if you take a part of the airline out and you list that separately, then clearly that must reflect on the market cap of the airline.
Evert: So you were expected to go down, right?
Evert: And in reality, what happens on the day they IPO those businesses, if you look at the accurate, the airline market cap stays the same.
Evert: And the same is, it’s volatile.
Evert: It goes up and down, up and down, up and down.
Evert: The market cap of the loyalty program is incremental value on top of the airline market cap.
Evert: In other words, it is, you’re not taking something out.
Evert: You’re getting a bonus on top of the existing market cap.
Evert: So that sort of supports the notion that the market looks as the airline, and that’s a highly volatile business, is driven by this big macroeconomic factors that you can’t really control.
Evert: Like you can’t control, like nobody can control the price of fuel or overall economic growth numbers.
Evert: Whereas the loyalty program, you can actually control, and you can bond a stable business with that.
Evert: So yeah, so that goes back to the earlier point.
Evert: Why didn’t they disclose it?
Evert: Because they think it will have a negative impact.
Evert: Whereas in reality, there’s actually a positive impact if you show that you’re developing this business.
Evert: I also think that showing the market that you are, if you say, look at our problem, we’re investing in it, we’re developing new capabilities, we’re actively driving the customer value proposition, our breakage is really low.
Evert: All those messages, they’re good for the airline, they’re good for the program, and they’re good for program partners, because they look at the program and they look at the airline and they say, wow, look at them.
Evert: They’re actually investing in the business, rather than just sending a bill every month for the miles, for the points that you buy off that.
Evert: It really underscores how seriously you take the business as a segment, and you’re investing in it.
Evert: And I think that’s very positive.
Paula: Indeed.
Paula: And you made the point to me before, Evert, as well, that there seems to be an increasingly shift to splitting out the operations of the loyalty program.
Paula: I think IAG have done that, for example, to allow them, I suppose, the freedom and the cultural approach to running the loyalty program, which has to be very different to the mindset of an airline executive.
Evert: Yeah, exactly.
Evert: I think what we’ve seen is this trend in the industry where there is a realization that the loyalty business is fundamentally different from the core airline business.
Evert: So in order to give it a greater degree of velocity or a higher degree of agility, just to give you a simple example, I have seen so many airlines where the loyalty program department wants to do something, but the response is, and particularly in IT, the response is, yes, you’re on the list, but we have other things we need to attend to first, because in an airline, it’s all about operational integrity and safety and meeting standards and reliability.
Evert: So you can come with a business case and say, if you can make this change request, it immediately yields a creative, it makes total sense for everybody, and the answer will simply be, sorry, but we don’t have the resources for it right now.
Evert: So if you take that, and you do that times a thousand, then you basically have a business case to say, okay, the business, the loyalty business is so different, let’s put it in a separate structure, because it can move faster, but also that separation provides this level of clarity around KPIs, accountability, because when the loyalty program sits within the airline, and it sort of relies on, you know, informal agreements or gentleman agreements between the loyalty program and revenue management, it’s all on a sort of best-in-the-business basis.
Evert: You can’t really run a business like that, because people will come and go, you will lose knowledge, nobody will know what exactly the KPI.
Evert: So shift it to a separate structure, it will give accountability and transparency, and at the same time, it will allow it to develop faster, and in some cases also, you know, attract different talents, because, you know, there’s, it may be hard to believe, but there’s people out there that say, I don’t want to work for an airline, I want to work for, you know, an up-and-coming, exciting startup, digital business.
Paula: Yeah, data company.
Evert: Exactly, exactly.
Evert: So there’s that advantage as well.
Evert: And then on top of it, of course, is it sort of, if you do separate it, then you can do, you can start to do, if you want, segmental reporting.
Evert: If the airline decides, yes, we want to tell everybody, this is the program, this is the revenues, and now we’re growing it, and now we’re investing in it, you need to have a separate structure for that.
Evert: So yeah, and you’re right.
Evert: A lot of companies are going down this path.
Evert: IAG is one example.
Evert: Another one is Lufthansa.
Evert: So number one and two in Europe have followed this path.
Evert: But also in Asia, for example, A&A, separate structure, Qantas, separate business units.
Evert: Yeah, so I think it’s something that we will see more and more of in the industry as well.
Paula: Wonderful.
Paula: They’re great examples, Evert.
Paula: And because I’ve always been more on the, let’s say, the product or communication side of any loyalty programs, to me, again, my inherent frustration was always competing for communications capacity.
Paula: So when you’re part of a big company and they want to talk about the next sale or the next discount, and this is very much, I believe, prevalent in airlines as well, the communications capacity is driven by commercial and they don’t see the loyalty communications as a priority.
Paula: So I think what you’re talking about in terms of this new structure, again, just gives that relationship building capacity that before might have been confused, again, with your previous example of, here’s the next airline sale.
Evert: Yeah, exactly.
Evert: I think that structure kind of helps to address some of the issues.
Evert: I also think that some of it will remain because ultimately there is a finite amount of attention span or share of minds that a consumer has.
Evert: So even though if you were to run a separate program, then I think to some degree, there will always be a conflict, so maybe not a conflict, there will be a limit to how much messaging you can do.
Evert: I do think that loyalty programs, because of the way they’re set up with all the data that they have, they’re intrinsically better structured to deliver on very high precision marketing using the data from their own resources and from partners as well, complex campaign management systems that do continuous testing and upgrading of messaging.
Paula: Wonderful.
Paula: And I think my final question for you then, Evert, I did an episode recently about the media value of loyalty programs, and there were some extraordinary case studies being quoted by many financial services where, for example, a soulless email by a brand like American Express on behalf of a partner was valued at about a quarter of a million dollars.
Paula: So is this something that you’re seeing is being factored into the valuations of the, let’s say, more advanced loyalty programs at the moment, or is that still something that could be developed further, or what’s your view on that whole piece?
Evert: I think that’s probably an area that could be developed further.
Evert: I don’t think it features as strongly in the current sort of valuation approaches, although, like you say, it can be material.
Evert: The one thing I would put a caveat on though is that we see a lot of sort of messaging in the market to loyalty programs saying, you know, data monetization is the way forward.
Evert: You’re going to get huge value from that.
Evert: And that I would be a little bit more reluctant to sort of immediately embrace, because at the end of the day, you know, you’re competing in a landscape with extremely large and sophisticated players like Google and Apple and Facebook.
Evert: So to think that you can sort of, you know, yes, you have a lot of data, but it doesn’t mean that, you know, data monetization is necessarily a given.
Evert: But yeah, I think, you know, the example that you give of American Express, the partner offer.
Evert: Yeah, of course, they very smartly leverage the brands, the halo effect of the brands, and there’s a lot of value in that.
Evert: And I think that’s what the successful programs do.
Evert: They take the brands of the airline and basically leverage that to upsell and, you know, widen the scope or the sphere of influence of the program.
Evert: And that seems to work quite well.
Paula: Absolutely.
Paula: Yeah, I think there’s a lot more to come on that one, Evert.
Paula: So I think we should definitely just, you know, obviously keep an eye on it.
Paula: I know you’re laser focused on this segment.
Paula: Is there any other, I suppose, vertical effort that you think can follow the phenomenal success in terms of, you know, splitting out the loyalty programs and leveraging them as an asset?
Paula: And, you know, I don’t know whether hotels are following this direction or do you see it happening elsewhere?
Evert: Yeah, I do think that there is a number of sectors that could benefit from applying some of the same philosophies.
Evert: At the same time, I think that airline loyalty programs, they really sit in the sweet spot when it comes to this sort of, you know, value optimization.
Evert: And that’s really, and that’s for two reasons predominantly.
Evert: The first reason is that airline or airline loyalty programs, there is a big delta between the perceived value and the actual value of the reward.
Evert: In other words, if you redeem for tickets from Dubai to London, that represents real value.
Evert: For the airline or the program, the cost of giving you the ticket could actually be very low.
Evert: So that is very attractive to play with.
Evert: The economics of that are very attractive in a loyalty program.
Evert: That’s one.
Evert: The second factor is what we talked about earlier.
Evert: The intrinsic financial performance of the airline industry is on the lower side.
Evert: And I put it very cautiously.
Evert: It means that if you run the loyalty program as a business, there is a huge sort of gap between the core business and that of the loyalty program.
Evert: If you take those two factors and you look at other industries, they’re not present to that same extent.
Evert: So if you go to other industries, for example, the nature of the rewards is less attractive.
Evert: So the member or the consumer would look at it and say, well, if I run Big Pharma, well, that was a bad example now because it’s very attractive.
Paula: We’re highly motivated right there.
Paula: Yeah.
Paula: But you’re right.
Paula: The supermarket doesn’t have the same level of, I don’t know whether it’s aspiration or attractiveness.
Evert: Exactly.
Evert: So that’s one thing.
Evert: And also, the supermarket or the hotel company or the financial services institution, their financial performance would typically be okay.
Evert: In some cases, it would be very good.
Evert: So there’s less of an incentive to run the loyalty program as a standalone.
Evert: I do think that these companies can benefit.
Evert: I think it’s in nobody’s interest to have a loyalty program that’s hidden in the organization somewhere without clear KPIs.
Evert: That’s sort of doing everything on a best effort basis, not really getting recognized.
Evert: That’s good for no one.
Evert: That’s absolutely clear.
Evert: So that I think the airlines or the other industries rather can learn some lessons from the airlines for sure.
Paula: Wonderful.
Paula: My goodness, Evert, I have learned loads in the last half an hour, 40 minutes talking to you.
Paula: Is there anything else that you wanted to mention before we wrap up?
Evert: No, I think, well, we covered a lot, hopefully.
Evert: Yeah, I think, you know, the main message really is that these programs, they are very important.
Evert: Traditionally has punched below their weight.
Evert: I think it’s slowly starting to shift, and I think that’s good for everyone.
Evert: So, yeah, I think the industry will continue to evolve, and hopefully these programs will continue to play their part in delivering real results for their constituents.
Paula: Wonderful, yeah.
Paula: No, as we all say, I mean, the pandemic is devastating.
Paula: It’s really, really been a big issue, but there are some silver linings, so it’s extraordinary to have conversations like this.
Paula: So listen, thank you for bringing our attention to all of those incredible insights.
Paula: Evert de Boer, Managing Partner at On Point Loyalty.
Paula: Thank you so much from Let’s Talk Loyalty.
Paula: This show is sponsored by The Wise Marketer, the world’s most popular source of loyalty marketing news, insights, and research.
Paula: The Wise Marketer also offers loyalty marketing training through its Loyalty Academy, which has already certified over 170 executives in 20 countries as certified loyalty marketing professionals.
Paula: For more information, check out thewisemarketer.com and loyaltyacademy.org.
Paula: Thanks so much for listening to this episode of Let’s Talk Loyalty.
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