Lufthansa Apparently Spinning Off its Frequent Flyer Program

Robb sends me this article in German suggesting that Lufthansa will be spinning off the Miles&More frequent flyer program into a separate entity. (Thank goodness for Google Translate built into Chrome!)

The article suggests that the Miles&More program — much smaller than those of US airlines like United, Delta, and American — contributed 700 million euros in profit to the airline in 2012, with 2013 results expected to be similar. That’s a net of about a billion dollars. Frequent flyer programs, even outside the U.S., are big businesses.

Air Canada’s Aeroplan was the first frequent flyer program to spin off as a public company, in 2005. At the time it was expected that United – -whose loyalty program exists as a separate wholly-owned subsidiary — would eventually do the same, but the financial crisis intervened.

Around the world the spinning off of programs hasn’t been exactly common, but it isn’t rare either.

  • Multiplus Fidelidade program was completely spun off from TAM in Brazil.
  • Virgin Australia’s program is spun off but wholly owned.
  • Qantas made moves to separate its program but aborted the attempt.
  • The Mileage Company manages the Avios program, not British Airways per se
  • AeroMexico owns just 29% of its Club Premier program.
  • Gol Smiles spun-off mid-year
  • Air Berlin sold 70% of its topbonus program to Etihad
  • Etihad also owns a majority of the Jet Airways (India) JetPrivilege program

In general spun-off programs which aren’t wholly-owned by their associated airline tend to bifurcate, serving the loyalty needs of an airline and also as an all-purpose loyalty program aimed at a mass audience of its non-flying members. A move of this sort likely puts Lufthansa more firmly into the broader loyalty game, focusing on the bulk of its 20 million members rather than predominantly on its frequent travelers.

To me it underscores how far frequent flyer programs have come over the past three decades — they’ve been the most successful marketing innovation likely ever — and a majority of miles are no longer earned directly by flying. That’s why, eventually, frequent flyer programs will be back in front of the Supreme Court, so that state contracts claims will no longer be pre-empted by the Airline Deregulation Act.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. To me this is a troubling trend, because you end up with award tickets where no airline wants to take responsibility. Here’s an example of what I mean. Last year I booked an Aeroplan award YYZ-IAD-ACC, the second leg on UA. A few months before the trip, UA discontinued the route. The natural way to re-route was YYZ-FRA-ACC (not as nice, but not a disaster), but there was no award inventory on YYZ-FRA at the time so I was automatically rebooked on some horrible 30+ hour four-segment itinerary, the best routing out of available inventory at the time (something like YYZ-YUL-MUC-FRA-ACC, since there was nothing TATL available out of YYZ or into FRA, starting at 6 am instead of 6 pm in order to get me to FRA in time for the ACC flight). Who has responsibility for fixing this?

    Since the ticket is through Aeroplan, of course one has to work through Aeroplan. UA would naturally take responsibility if they could, but this change eliminated ACC as a UA destination, so this was not possible. The natural second answer is AC, since after all it’s a ticket on their frequent flyer program. But AC says “It’s a UA flight that cancelled and Aeroplan is a separate entity, so your problem has nothing to do with us.” And Aeroplan says “We’d love to put you on YYZ-FRA but if AC doesn’t have award inventory it’s just not possible.”

    A dozen phone calls later it did get fixed — someone at AC capitulated and opened the award space — but it seemed like this was just a bit of luck and did not have to work out so well. It’s a comfy symbiosis where they can get away with being unhelpful because AC says “sorry, Aeroplan is separate and we have no responsibility here” and Aeroplan says “we’d love to help you but AC won’t play ball”. Whereas if Aeroplan were part of AC, they would have to do something about it.

  2. In 1996 we ( AA’s SABRE Decision Technologies) were spun off into the Sabre Group. The key IT department was sold as a separate entity to support AA and other airlines as well. At that time it was unthinkable and trendsetting. That was the reason I left AA in 2000. I wanted flight benefits and we were given a fixed contract that would phase out those flight benefits within 10 years. Mind,those were the glory years of non-rev flying!

    I wont be surprised if AA spins off the Aadvantage program … not a bit

  3. Wow.

    This confirms that ff miles a little more than fiat currency. I do wonder if contracts between LH and the new company will somehow preserve the integrity of mile and more points. If anyone can do this it’s LH. Weren’t Alitalia, I would be running.

  4. I read an article last week that Qantas may look at selling off Qantas Frequent Flyer again, as the airline needs cash. It was all set to do so before and stopped due to the Great Recession.

  5. I’m not sure I’m understanding the benefit to the airline of spinning off it’s FF program. How does that help the airline profit from the program?

  6. @Andrew – The benefit is that the airline, such as LH, gets a huge wad of cash any time it (or any other business) sells an internal units which books 700 MM Euros (1 billion dollars) in annual profits. At price to earnings of 10:1, that would raise a tidy $10,000,000,000. Compares nicely with UAL’s current market capitalization of $13,300,000,000.

    Basically, LH, like other airlines. has nurtured a loyalty program, but has come to realize that the alternative sources of miles (credit cards, mileage malls, etc.,) provide such a lucrative market that the program is a colossal profit generating unit. Like any business which nurtures a profit generating unit, at some time there is a temptation to cash in.

  7. “bifurcate”. That’s quite a word. Look that up in your Funk and Wagnall’s. 🙂

  8. The article doesn’t say that LH will sell the loyalty program or take another investor. It merely says that the loyalty program will be put into its own subsidiary. I’m fairly sure that United runs Mileage Plus as a separate wholly-owned subsidiary, so that is the same model. It take it to mean that there will be a clear profit and loss statement for the loyalty program, and that there will be increased commercial and management focus – which the article clearly does say – to involve and engage and activate the broader set of members, to work with more non-travel partners. However it also says to create more loyalty toward LH vs. the LCCs.

    Setting it up as a subsidiary certainly does open the possibility of taking on outside investors or selling it entirely, but I don’t see it as a foregone conclusion.

    As Gary notes, if the loyalty program does get spun off, the interests of the loyalty program and the airline eventually diverge. Hasn’t AC restarted its own elite program independent of Aeroplan?

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