Airpoints scheme valuation boosts rating ahead of capital raise

As Air New Zealand revamps its Airpoints scheme, the value of loyalty, now a star of the airline’s operation, has been outlined in an analysts’ report.

Forsyth Barr says the Airpoints scheme is scalable, light on assets and generates relatively stable earnings.

“We believe it is a higher multiple business than Air [NZ’S] aviation business and contributes a material part of current share price,” say analysts Andy Bowley and Scott Anderson.

“This may sound fanciful, yet a number of recent US airlines have used their loyalty schemes as collateral in recent funding events.”

The airline will raise capital in the first half of 2021.

Forsyth Barr has upgraded its rating of the airline to neutral, after applying the value of Airpoints as part of its revised net asset value approach.

Chief executive Greg Foran has said loyalty will be a “second growth engine” and the scheme is now under review. Among other changes, the airline may introduce a new upper tier of Airpoints. Besides the Elite Plus tier, the survey suggests there could be the opportunity to earn lifetime status at lower tiers.

A survey sent to Airpoints members indicated that a target range between 2800 and 3200 status points a year would be required to pocket an Airpoints Elite Plus membership, compared to 1500 points to reach the Airpoints Elite tier now, and 900 for Airpoints Gold.

Australia-based Executive Traveller said benefits of Elite Plus status gleaned from the survey included the possibility of free same-day flight changes for domestic, transtasman and Pacific flights, free parking at the member’s “home airport” and complimentary Elite status for the nominated partner of an Elite Plus member.

Forsyth Barr analysts say key sources of external loyalty revenue include bank partners, through aligned credit card schemes, and a number of retailers.

In normal operating conditions, loyalty represents just another earnings stream for an airline and can be valued as part of the overall profit base of the company, within an earnings multiple or cash flow-based valuation.

“However, when the aviation business is generating significant losses, the loyalty income stream which is typically defensive can easily be lost, particularly if it’s not split out,” says the analysis. “Book value approaches to airline valuations ignore the asset-light nature of loyalty schemes that generate income from third parties (credit card companies and retailers) irrespective of whether aircraft are flying.”

The Air NZ scheme has about 3.5 million members — up from 1.2 million eight years ago.

The airline doesn’t provide any financial detail on its Airpoints scheme, beyond the balance sheet disclosure for “revenue in advance” related to loyalty.

This liability reflects the amount of Airpoints dollars outstanding among

members.

Bowley and Anderson said the lack of disclosure, exacerbated by Covid-19, made it difficult to value Airpoints.

“However, based on an assessment of recent loyalty scheme transaction values, third party loyalty valuations and listed loyalty scheme providers we value

Airpoints at $725m.

“While appearing significant in the context of the airline’s market capitalisation of $1.9 billion it is only about 15 per cent of its pre-covid enterprise value.”

The analysts say their estimate of the scheme’s value has a “reasonable margin for error”.

Air New Zealand could extract more direct economic value from its Airpoints loyalty scheme by generating incremental revenue through selling points/ airmiles to third parties including credit card companies (many schemes issue a greater proportion of points to third parties than to their own airline).

The airline could grow its membership base; about 90 per cent of members are New Zealanders so the scope to grow the membership base is limited by its historic success and the New Zealand population.

However, the airline could grow its proportion of active members and expand its scheme to include more partners.