QANTAS: restricting online purchases with points

First Virgin Australia’s velocity restricted points transfers to the KrisFlyer program, and gift card redemptions, and now Qantas is limiting purchases from its online store.

Qantas online shop restrictions

You can only buy two items of each product each day at the Qantas Loyalty store in response to what they style as ‘high retail demand. Qantas is not admitting there is any ‘run’ on points redemptions, but is styling the measure as a way of democratising demand. Sure! Pull the other one!

Why the restrictions now?

We know that times are tough, but I wish airlines would just be more honest. Basically they are trying to stem a run down of their reserves.

When Frequent Flyers redeem their points for Flights, essentially, this costs the airlines little or nothing. They are only ‘selling’ off perishable capacity. Once a plane is in flight, you can’t sell that seat. Exchanging Frequent Flyer points for flights or upgrades is also the best ‘value’. You get ‘more’ for your points.

On the other hand, buying from the store actually costs Qantas Loyalty, or Velocity money. They have to buy in the inventory, store and manage it, so it costs them proportionally more than and airline seat.

So this measure to effectively limit, or at least delay redemptions in their stores, is one way of reducing costs and calls on their cash reserves. The airlines are bleeding money, and currently have little if any income.

Qantas and Virgin Airlines points liability

Both airlines are carrying a big points liability. This is allocated a value on their books. For Qantas the figure is something like AU$2.4 billion, and for Virgin Australia, it is around AU$500 million. You can see how if everyone decided to redeem their points online for non-flight items, that could be a massive drain on cash reserves.

On the other side of the coin, these loyalty programs are very lucrative for both airlines, partly because, many customers never redeem their points before they expire. Arguably, the Qantas loyalty program is a more profitable venture than Qantas International!

Qantas booked $374 million from it loyalty program last year, while Virgin pocketed AU$122 million from its program, while actually flying planes lost them about AU$315 million last financial year. The Velocity program is so lucrative for Virgin, that they bought back 35% from a private Equity firm for AU$700 million last year. Affinity Partners only paid AU$336 for it back in 2014. Quite a tidy profit over 5 years.

2PAXfly Takeout

Both Virgin and Qantas will be painting various survival paths. They will largely depend on their cash reserves, topped up by there ability to cut costs. People with more expertise than me think Qantas probably has enough reserves (at around AU$4 billion) to last a year or so. On the other hand Virgin Australia with only about AU$1 billion, probably has enough to last only three to six months without some contribution from its shareholders (mostly other airlines), or some other line of credit or government support.

The Australian Government is throwing about AU$1billion dollars at the Australian airline sector, but most if this is the cancelling or delay of fees and charges – most of which the airlines are not currently incurring, because they are not flying. So although a nice gesture, and I am sure much appreciated by the airlines, it’s not the same as cash in the pocket!