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Is Qantas a cryptocurrency in the making?

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In 2017, Qantas (ASX:QAN) made more money selling points than it did selling international flights. Qantas is an airline; only madmen would call it a tech company. Yet over the past decade, that’s precisely what Qantas has become.

In 2007, the company’s loyalty program accounted for 11% of pre-tax profits. In the year to December, that figure has grown to 23%. The Loyalty division earned $369m in pre-tax profits compared to $327m from the International division.  

Qantas’s Frequent Flyer program has 11 million members – nearly half the Australian population – and points can be spent on everything from flights and hotels to coffee makers or a bottle of Penfolds. If Australia has a de facto second currency, surely it’s Qantas points.  

Qantas earns a couple of cents or so per point awarded, and its partners are clocking up points in the tens of billions. Of all the money spent using credit cards in Australia, some 35% is now on a Qantas-linked card. Retailers such as David Jones, Woolworths, and even online auction house eBay are clamouring to be associated with the program.

 

Crypto Qantas

From a consumer standpoint, however, the current points-based loyalty program has its shortfalls. Redeeming points can be a nightmare, with blackout dates, too much fine print, and the fact that points depreciate over time as inflation chips away at their value. A third of points never get redeemed.

Turning Qantas points into a blockchain-based cryptocurrency would solve a lot of those issues. Points could be bought and sold for Australian dollars, and the points’ value would be decided by supply and demand. Tracking and transferring points would be a breeze.

Operating an airline requires mountains of capital for the upfront purchase of planes and maintenance. The Loyalty division offsets some of this because revenue from merchants arrives when the points are issued, but Qantas only pays for a product or service when the points are redeemed, which may be a year later. Qantas gets to invest the cash in the meantime.

Switching to a currency-like system would remove this cash hoard, but it could benefit Qantas in the long term.

When a member redeems points for a free flight to, say, Melbourne, Qantas loses a paying customer who would otherwise have filled that seat. However, under a blockchain system, if a member wants to redeem points, Qantas could instantly check their dollar value in the market, and sell enough new points to offset the seat’s lost revenue.

Selling Qantas points would essentially become another way for the company to raise capital instead of issuing stock (and irritating shareholders). Although Qantas already sells points to its partners, the ability to sell into a public market brings a lot more flexibility. A blockchain-based loyalty program would almost certainly attract speculators wanting to bet on changes in the points’ value, so liquidity would increase.

 

Now or never

In February, Singapore Airlines announced that it’s turning its KrisFlyer miles into a blockchain-based digital currency, which can then be used by members to buy goods and services. For now, the blockchain will involve only merchants and partners so it isn’t a market open to public speculators like Bitcoin, but it’s a step in that direction. Singapore Airlines is the first airline to make that move.

Qantas hasn’t publicised any intentions to turn its points into a cryptocurrency, but we wouldn’t be surprised if this is where things lead.

The funny thing about loyalty programs is that they don’t make customers particularly loyal – booking flights is still a ‘commodity product’, where customers shop around based on price. This explains an average pre-tax profit margin of 3% for Qantas’s airline division over the past 10 years.

People love Qantas points for the unmatched range of goods and services that can be bought with them, not because they love flying Qantas. Loyalty points that can be traded on a market and redeemed for cash provide the ultimate breadth of choice. If Qantas doesn’t turn its loyalty program into a cryptocurrency, it’s going to lose customers to a competitor that does.

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Graham Witcomb is a senior analyst at Intelligent Investor, owned by InvestSMART (under AFSL 282288). This article contains general investment advice only. It has been prepared without having regarded to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of nabtrade. The article was originally published on 8 March 2018.