Gol Planning To Float Its Smiles Unit

According to an article on the WSJ yesterday (you can access it here – copy paste the article title on the Google search to have access to the full version), the Brazilian airline GOL is planning to list its frequent flier unit Smiles.


The Smiles used to be the frequent flier program of Varig, Star Alliance carrier in Brazil that went under, and Gol it and its frequent flier program back in 2006.


It is quite interesting that the airline is valuing the Smiles at around $1 billion USD, when the stock market value of the airline alone is $1.58.

Is is interesting that:

The company says the biggest risk to its business, however, is if more customers redeem points. About 66% of Smiles points were redeemed in 2011, but that rose to 82% in 2012.

It is unclear what exactly they are referring to. Are they expecting to 66% of the points issued in 2011 to be redeemed at some point in time or was the number of miles redeemed 66% of the new ones issued in 2011. Same question goes for 2012 as well.

Smiles makes money by selling points to partners or to members, which are redeemed for prizes such as airline tickets, concert tickets, furniture or other items. The company makes money by investing those revenues for the period between receiving the cash and spending it to buy prizes, as well as by redeeming prizes at a higher value than Smiles paid. The company also benefits from customers who don’t redeem all the points they have earned.

Like with all these programs, they get the money up front and must record part of that as a future liability. The difference in price of selling the mile today and the future expected liability can be recorded as profit.

If the future expected liability changes drastically i.e. people start redeeming the miles for flights & merchandise in greater number that the company has expected, the company may have to record a loss. Of course the programs make the rules, so they can devalue the “currency”, in this case the (S)miles, to keep the future liability down.


In the long term, I don’t think that anything good will come out of the airlines selling the frequent flier units or spinning them off like Air Canada did. It could be a short term positive gain for the airline to collect some cash, but it won’t do anything in the long term, however.

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