Analysis: Jet Airways Spinning Off Jet Priviledge

Mumbai based full service carrier Jet Airways recently released its annual report for fiscal year 2011-2012, and amongst the many things discussed was this (not so) little nugget about Jet Airways’ frequent flyer program JetPrivilege.

The loyalty industry is evolving in India. Your Company proposes to leverage this evolving business opportunity by setting up a marketing services company engaged in the business of managing reward points and loyalty programs for its program partners. Initially, the marketing services company will be a 100% subsidiary company. As and when negotiations with the potential knowledge partners crystallize into a concrete decision, it is proposed that some percentage of the Company’s stake be offered to the knowledge partners.

Your Company currently runs a frequent flyer programme, the JetPrivilege programme, through which members can earn and redeem JPMiles. The JetPrivilege programme is managed and operated in-house. Your Company proposes to transfer the JetPrivilege programme to the marketing services company and in the process transform the JetPrivilege programme into a larger retail-based coalition loyalty program and through its operations unlock greater commercial value.

Approval of the Shareholders for transfer of the JetPrivilege programme to the subsidiary company will be sought through postal ballot in due course.

Therefore, the Board of Directors, at the Meeting held on 24th May, 2012, granted its unanimous approval for an investment up to 100% in the Share Capital of the proposed maketing services company.

While Jet Airways did not give any timeline for the move, it is still interesting that they would choose to spin off JetPriviledge, especially in light of their comments about increasing ancillary revenue during the first quarter analyst’s conference call. Jet Airways is certainly not the first airline to spin off its frequent flyer program and use it for profit generation (known as a profit centre). Air Canada’s Aeroplan and American Airlines’ AAdvantage are both run separately as profit centres where the airline will sell off its miles to various partners (primarily credit cards), and then allow those partners to use the miles as rewards for their own loyalty programs, then provide award space where those miles can be redeemed for flights. At Western airlines, such profit centre frequent flyer programs have annual turnover of more than $1 billion and profits that run into the hundreds of millions of dollars.

The move also comes at a time when Jet is almost entirely remaking JetPrivilege. The program already has a ton of airline redemption partners, and the recently announced entrance into Star Alliance (pending government approval) will only make the frequent flyer program more attractive. Jet also recently dropped its 10 year partnership with CitiBank in favor of three different miles-earning credit card partners.

I think that the spin-off is likely to be very beneficial to Jet, as their frequent flyer program is already the most attractive one in India, and the potential addition of the entire Star Alliance global network to the redemption options will make Jet Airways frequent flyer miles a very valuable commodity. At the same time, Jet Airways has to be careful not to overuse the profit centre capability. Have you ever heard the saying, “if everybody’s rich, then no one is?” Similarly, if the spin off creates a ton more Jet miles, then the existing miles will be devalued. The prices for award redemption would go up, which could anger and drive away current Jet Airways frequent flyers, who in the end are much more important to the company’s prosperity than transitory mileage program partners.

About Vinay Bhaskara

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