What is wrong with FFP spin-offs?

05 September 2017

This year has already seen two major failures of spin-off FFPs, putting a likely end to what many claimed to be the big trend a few years ago. But some elements in the spin-off model might be worth to be kept with a slightly different approach.

The most unthinkable case in the industry is unfolding these days: A major FFP had to declare bankruptcy. Anyone with just a minimal knowledge of the business understands that a separated FFP with 4.3 million members and a reasonable partner network is a cash-cow and it is technically almost impossible to make losses with it. So why did Air Berlin’s topbonus have to declare bankruptcy?

The remarkable intentions of the topbonus management are expressed through their statement that they are now looking for an investor guaranteeing a viable future concept for the program. You can also read between the lines of such statement that this is something, which was impossible to realise with Etihad as major shareholder on board. Even if topbonus succeeds with that, it is though still highly doubtful whether the FFP has really a future, given the uncertainty about the future of Air Berlin itself. None of the most likely options – take-over by Lufthansa and merger with Eurowings, take-over by easyJet or transformation into an ACMI specialist – really leaves much room for an independent FFP. But obviously, members would already be happy if they had a few more weeks to burn all their miles.

Etihad owned (well, technically still owns today) 70% of topbonus, but little indicates that it has ever understood what it actually did or wanted. With all its failed investments in airlines, it was always looking for short term financial gains, which – what a surprise – have never materialised. The continued investments in loss-making carriers like Air Berlin became more and more difficult to justify over time and losses at virtually all airlines Etihad took de facto control of have skyrocketed since Etihad started its involvement. At one point, Etihad just had to justify yet another investment into Air Berlin by taking the majority share of topbonus in exchange, by completely overvaluing its share at 184.4 million Euros (at that time, the program had only 3.1 million members).

Historically and strategically, Etihad had never a plan for its loyalty investment and basically not really a clue what to do with it. You may associate Etihad with an excellent in-flight product and customer service – but not necessarily with loyalty experts. When they let down Air Berlin, there was simply no value anymore in the FFP part for them either since the FFP was always only an add-on to their major investment in Air Berlin.

Etihad was an investor bringing initial money to the table – but to the parent airline (in that case, to itself…), not to the FFP. There was no plan, no strategy, no value creation at the loyalty level – nothing. That is hardly the kind of shareholder you wish to have control over your business.

Although the similarities might not be too obvious, there are nevertheless some interesting parallels with the second major failure of the spin-off model we saw earlier this year, the Aimia/Air Canada case. The common point is that the focus of the program operator was to generate some short-term benefit (what Aimia did admittedly much better than Etihad!), but not to understand the long term dimension of loyalty. Such agenda must ultimately lead to failure or at least to suboptimal use of the opportunities.

So are loyalty program spin-offs poised for failure from the outset? Let’s say it all depends on the investor. There is no doubt that especially mid-sized programs are often in need of cash to develop and exploit their full potential since they may lack the internal visibility they’d actually deserve. Air Berlin could have been the perfect showcase for that model since it started from a basis with all elements for success (reasonable size of the program, big home market etc.).

But then, the investor also needs to have a long term vision and align to the overall objectives of the parent airline. Pursuing quick returns on investment – what a typical investor would ultimately be after – is a business model working in some industries. The loyalty industry is not one of them.

The perfect loyalty investor would inject the required cash, but not take management control and push for a quick return on its investment afterwards. It should rather be linked to the airline in a smarter way. For instance, a commitment to provide loyalty management support in exchange for compensation for meeting some predefined performance parameters. As such, this would take much more the form of know-how contribution with shared business interests with the parent airline where both sides work towards common business goals. The two failed spin-off cases this year didn’t ever have any of these elements.

The day you start to spin off your FFP because you are in need of cash, the further destiny of the whole venture is already put in stone. The only remaining question is when things will go wrong, not if. Such major strategic cut to your business model has only a chance to be crowned by success if you can act out of a position of force and conviction, taking your destiny in your own hands – but not if you act out of desperation.

At the end of the day, the revised requirements topbonus has formulated seem to be fully to the point. It is a pity for them that they didn’t understand them a few years back before taking an investor on board, which was pretty much the opposite of what they needed.

And good luck to all „consultants“ changing their statements every time the wind blows from a different direction since they now have to update their presentation decks. Ours remains the same. All these years, it might have looked old-fashioned to some. In retro perspective, it was visionary though.