God save the points

God save the points

Loyalty programs: how much does it cost to airlines? In Brasil there are some second thoughts.

By Oso Oseguera, who is Editor in Chief at Chief Executive Officer North America and Latin America. He firmly believe life is better aboard a bicycle.

Just because you have miles doesn’t mean you should use them.

If a ticket is $250 and you can afford $250, it makes no sense to spend 25,000-50,000 points. That’s a bad cent per point value.

“If I was going to blow 20,000 points, I’d want the ticket to be at least $400, giving me almost 2 cents per point of value”, this is the recommendation from Gilbert Ott, an expert in travel and rewards and enthusiast who owns the website God Save the Points.

Listing loyalty programs have large tax burden inefficiencies for the airlines.

Take care of your points

UBS did a research report about it in Brasil. They calculate that having its programs separated from the airlines could cost US$71.5m to Gol in 2017E (2.2% of revenue) and US$69.9m to Latam (0.7% of revenue), due to tax inefficiencies on PIS/COFINS and on income taxes.

Gol and Latam do not consolidate their loyalty programs for tax purposes –as that would require a higher level of ownership– which leads to intercompany transactions.

Tickets bought by MPLU/SMLE register revenues for Latam/Gol while points bought by the airlines register revenues for MPLU/SMLE.

The monetization of such transaction incurs an extra payment of PIS/COFINS, which is a tax levied by the Brazilian government upon revenues.

UBS calculate that those extra taxes related to the loyalty/airline split cost each year US$8.9m for Latam/MPLU and US$7.6m for Gol/SMLE –the cost being shared by both parent and subsidiary– summing NPVs of US$79.5m (1% of LTM’s current market cap) and US$104.9m (7% of GOL’s market cap), respectively.

Both Gol (ex-SMLE) and Latam’s Brazilian operations (ex-MPLU) have not been profitable over the past few years. Will airlines renew their contract with loyalty programs?

UBS see this as the million-dollar question for the sector. While listed loyalty programs generate large tax inefficiencies, they also generate value by stimulating other revenue sources and innovation.

As contracts’ maturity approach (2025 for MPLU and 2032 for SMLE), if airlines do not disclose their intention to renew the contracts, UBS believe investors may stop pricing in contract renewals fully.

In our base case, 62% of MPLU’s and 34% of SMLE’s fair value come from years after the renewal.