Five recommendations to get corporate structure right for FFPs
4th June, 2020
Nik Laming, Airline Loyalty Consultant
This is the second post in our two-part optimizing airline loyalty programs series. In this, Nik has shared five recommendations to get corporate structure right for FFPs.
History has presented us with large and progressive events where airlines have failed and succeeded with loyalty programs. Innovators such as Qantas and Air Asia are pushing the boundaries of loyalty programs to become substantial data, media and digital businesses. In the previous article I explored these events and innovations. I have distilled the lessons into 5 key points below. The objective is to learn from innovators and past mistakes optimizing structure and governance to best serve members, partners, shareholders, and parent airline. What should we take from the past and how do we optimize corporate structure to serve all the stakeholders sustainably?
- Form a Separate Company Entity under Airline Holding Group -There is a huge opportunity for airlines to diversify income streams by adding digital and data businesses on top of a well-structured and managed loyalty program. The airline is left to focus on its core operations and ecommerce distribution functions and the new business serves as an incubator for new businesses to disrupt the market using the rich data and marketing engine of a loyalty program as the foundation. The sheer scale and discipline required strongly suggest adding loyalty as a separate entity under the holding company which results in the following corporate structure:
As more digital and data businesses are incubated it may become necessary to follow the AirAsia approach and put in a mini-holding company above X Loyalty, perhaps X Digital Ventures, but for now the simple addition of an independent loyalty subsidiary would be a major step forward.
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Experienced and Independent Leadership Team - The loyalty company must have an experienced and independent leadership team to ensure governance and maintain focus on the business in hand. It should not just be folded into the core airline hierarchy several layers down from the board with occasional CFO influence. There should be a board of directors for the loyalty business containing professionals from airline, loyalty, financial services and other industries with its own independent CFO and governance in place. It should not be dominated by the airline and treated as an afterthought as the stakes are now way to high.
The scope of the management team should be loyalty, data, analytics and digital business incubation such as payments, fintech, e-commerce and insurance. The skill sets required are diverse:
- Loyalty
- Fintech and payments
- Marketing and CRM
- Insurance
- UI/UX, mobile app and technology
- Partnerships
- Operations and member care
- Data management & analytics
- Privacy and other support functions
It therefore makes sense for the new business to become a centre of excellence for analytics, data monetization and targeted marketing which should be available to the airline and other anchor partners to use.
- IFRS Accounting and Establish a Trust - The IFRS accounting principles need to be followed with rewards properly accounted for at fair market value and as a cost of sale rather than a promotional expense. A trust should be established to ring-fence a sufficient percentage of future redemption monies owed to members. This is to ensure the program can continue to maintain the value to its investors – the members and partners under any situation and to prevent a cash-starved airline from dipping in to feed from the cash.
- Develop a Solid Legal Agreement - There must be a detailed, well thought through, totally binding and very long term agreement in place between the airline and the loyalty business to prevent it being exploited at the expense of any shareholder, but also to set out the rules and the way of operating very clearly. These agreements are often neglected but become incredibly important as sunny days turn to rain and leadership of the entities change together with revenue management policies, CFO pressure and market changes such as Aeroplan, AIMIA and Air Canada.
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Generate Cash from the Program but Consider the Longer Term - The holding company can choose to sell a minority stake to generate cash but more importantly as a strategic partner to provide support, increase governance, discipline, commercial drive, and rigorous accountability. However, it does need to be approached carefully and with caution. Under no circumstances should the airline ever relinquish control or its majority interest in the loyalty business.
When a crisis strikes or times are tough there are mechanisms for using the loyalty business as collateral, for finance or to pre-buy redemption seats as exemplified by AeroMexico. I would advise against pre-selling points to banks unless times are very desperate, and the terms are not too onerous as the amount of unencumbered cash generated net of future redemption cost will be relatively small.
The future is bright for airline loyalty businesses that are set-up, structured and managed for success. Digital disruptors are prospering under more realistic business conditions presenting opportunities for airline loyalty programs which come with a rich and well affiliated member base, broad digital marketing channels, low cost base and a strong underlying business model. As a long time practitioner, builder of loyalty programs and advocate of their transformation into digital and data businesses I am excited by the potential and will make every effort to continue to drive the industry in the right direction.
Nik Laming is the founder of Urban Leopard Ventures a boutique consultancy helping companies reboot and build loyalty programs to extract which deliver maximum value and revenue for airlines, banks, retailers and other companies. He is now focused on helping companies optimize and build loyalty programs into digital and data businesses.
Formerly he was SVP Asia Pacific at AIMIA both managing the SEA regional business and working with clients across all disciplines in loyalty marketing and consulting. Most recently he designed and built the GetGo coalition lifestyle rewards program for Cebu Pacific Air, an LCC and the largest airline in Philippines. A next-generation, lifestyle rewards program targeting and monetizing a broad base of 5.5 million members and serving 250+ partners.
He is a regular commentator and adviser on all things loyalty including the potential and requirements to create a new model - digital and data incubator business from traditional loyalty programs or under-utilized customer data assets.
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