May 6 (Bloomberg)—Qantas Airways Ltd.,  Australia’s biggest carrier, said investors are ignoring the value of a 7- million member frequent-flyer program that’s more profitable than its two airline units.

“We want to see investors value it appropriately in the share price,” Qantas Frequent Flyer Chief Executive Simon Hickey,  44, said by phone yesterday, without giving a value for the unit.  “We’re a very steady business with good cash flows and a steady growth profile.”

Enrollment has surged 21 percent since July,  helped by a link-up with Woolworths Ltd., Australia’s largest retailer.  The airline is aiming to add another 1 million members by June 2011.  That growth has failed to stop a 12 percent plunge in Sydney- based Qantas’s share price this year, the worst performance among the 14 stocks in the Bloomberg Asia-Pacific Airline Index.

Qantas can generate at least A$200 million ($180 million) of earnings each year from its frequent flyer unit, according to analysts at Southern Cross Equities Ltd. in Sydney. The stock trades at 10.4 times estimated earnings, compared with a multiple of 14.5 for Singapore Airlines and 12.3 for Cathay Pacific Airways Ltd. AMR Corp.,  owner of American Airlines, trades at 12 times earnings.

“That discount is unlikely to last,” Charlie Aitken, director of Southern Cross Equities Ltd., said in a report last week. “The power of Qantas’ frequent-flyer business is not understood by the equity market, but it is this division that will ultimately drive Qantas to a price-to-earnings multiple premium to its global peers,”  said Aitken, whose firm has an A$4 share price forecast on the stock.

Share Performance

Qantas shares fell 2 cents to close at A$2.64 in Sydney, while the benchmark S&P/ASX 200 index declined 2.2 percent.  The company has a market value of A$6 billion.

Groupe Aeroplan, the operator of Air Canada’s loyalty program, trades at a multiple of 11 times estimated earnings.  Based on Aitken’s earnings estimates and Aeroplan’s multiple, the Qantas program may be worth more than A$2.2 billion.

Analysts at JPMorgan Chase & Co. estimated the business was worth between A$2 billion and A$3.5 billion in 2008,  before Qantas linked its program to Woolworths.

The tie-up with Sydney-based Woolworths has helped the Qantas frequent flyer program double its number of members born after 1980, thereby paring its reliance on older corporate travelers,  Hickey said. The program has also used online marketing, such as Facebook Inc.’s social networking site and Google Inc.’s iGoogle personalized home pages.

‘More Relevant’

“We have become more relevant for the whole population,” Hickey said. “Not everyone is jumping on a plane and accruing lots of points from business flights.”

The program may also eventually look at overseas takeovers to expand its reach, Hickey said. Groupe Aeroplan Inc. bought the operator of Nectar cards, which are now found in more than half of U.K. households, for 368 million pounds ($557 million) in 2007.

“Ultimately, there is probably an opportunity there,” Hickey said. “But I think that in the short term, you should look to your home market first, and we are continuing to drive success in this market.”

Loyalty Unit

Frequent-flyer programs make money by selling points to partners, who then give them to consumers. Qantas’s loyalty unit posted earnings before interest and tax of A$157 million in the six months ended December, or about 44 percent of the company’s total profit before corporate costs. The Qantas brand airline had a profit of A$60 million and the Jetstar budget carrier had earnings of A$121 million.

About 90 percent of Qantas frequent-flyer members use their points with the carrier, either for flights or upgrades,  Hickey said. The program has more than 400 partners in addition to Woolworths, including Hertz Global Holdings Inc., UAL Corp.’s United Airlines, British Airways Plc and American Express Co.

Qantas scrapped plans to sell off its frequent-flyer unit through an initial public offering in 2008 and has no plans to revive such a move, Hickey said. Groupe Aeroplan, the operator of Air Canada’s loyalty program, held an IPO in 2005. Its market value is now more than three times the size of the airline’s.

‘Fortunately They Didn’t’

“Qantas was going down that same track of splitting out the various activities. Fortunately they didn’t,” Peter Harbison, managing director at the Sydney-based Centre for Asia Pacific Aviation, said in e-mailed comments today. The value of the program reflected in Qantas’s current share price is “pretty fair” given slumping demand for corporate travel, he said. Airline stocks “have proven to be such poor investments.”

Qantas’ Hickey declined to comment on a May 3 report in the Australian Financial Review that he is a candidate to become chief financial officer at Qantas following the departure of Colin Storrie in March. Instead, Hickey said he’s concentrating on the loyalty program, including the roll-out of an Oracle Corp. Siebel computing system to replace a 22-year-old program. The switch is scheduled to be completed next year.

“I’ve got lots of great plans for QFF,” he said “I’ve a big agenda here and I’m very focused on it.”

—Editors: Neil Denslow, Iain Wilson.

To contact the reporter on this story: Robert Fenner in Melbourne

To contact the editor responsible for this story: Neil Denslow at

original Business Week article

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