Air Canada re-intoducing its own FF program

[travelislife]

I think it’s a smart move by the current owner of Aeroplan. How much was the value going to drop once Air canada left them behind and set up their own thing?

 

[dfcatch]

AC is holding all of the cards.

The equation for AC is pretty simple:

If they have to compete head to head with Aeroplan (which is desperate to survive), AC will have a sizable marketing spend to attracts Aeroplan members to move over to the AC program.

Whatever that $ figure is - is the amount that is the maximum that they will offer to purchase Aeroplan, and in the process avoid having to spend on acquisition and competition as they will have bought out their only competition.

If Aeroplan agree - AC wins.

If Aeroplan wants more money and says no - AC still wins as Aeroplan will not win a war with the airline. Aeroplan will wither away and be modestly more successful as a retail coalition compared to Air Miles - but that’s it.

AC can’t lose.


From AIMIA’s perspective - if they hold out - but want Aeroplan members to be able to transfer to AC (almost a mandatory feature), Aeroplan will have to purchase those credits from AC (which AC will then use to fund more acquisition marketing).

AIMIA can’t win - except by accepting a buyout offer.

To the above question about how AC will split out the programs - they don’t need to.

They will transfer Aeroplan members over to the new AC program, with their points, and they will absorb all of the existing Aeroplan earning partners.

Then they will shut Aeroplan down. (Or adopt the name and then shut it down).

Whether preplanned or not - brilliant maneuvering by AC.

AIMIA is well and truly snookered.

 

[RooFlyer]

I'm not following some of your arguments:

If they have to compete head to head with Aeroplan (which is desperate to survive), AC will have a sizable marketing spend to attracts Aeroplan members to move over to the AC program.

There wouldn't be 'competition' between Aeroplan and Air Canada's new scheme, at least as far as Air Canada's flyers are concerned. They would all be with AC, but leaving their miles behind. There will be a decent spend on advertising/awareness, but not so much to 'win customers over'. The big issue for AC is that their flyers are going to have their miles orphaned within Aeroplan when the split came, unless used first. That's making members VERY unhappy.

AC could certainly lose if Aeroplan wants too much money - they will have very unhappy flyers if they don't get to buy Aeroplan, OR they will be paying a lot more than they should to buy a none core business, most of which they don't want (the general points business). This would not only hurt their bottom line, but also their stock price / standing. What airline anywhere can afford to splash out on a non core business?

I agree that Aeroplan would be severely weakened by the departure of AC from its portfolio, but its a pretty big business overall and corporately might in fact have a better 'home' within an allied business, it its to go on the market. This is a danger for AC - if Aeroplan is smart, it will try for a bidding war and pressure AC flyers to get AC to bid strongly!

They will transfer Aeroplan members over to the new AC program, with their points, and they will absorb all of the existing Aeroplan earning partners.

I come to the 'non-core business' argument again. They shouldn't want it and you can bet their shareholders wouldn't want them to pay for it.

The amazing thing is that this has only come up now. I imagine AC would have looked at this scenario either initially or subsequently, but something has happened now to push the deal.

Best scenario for AC and its flyers is that AC makes a joint bid with another bidder (or has an agreement with them) to acquire Aeroplan, and AC takes the AC miles liability. Kinda bizarre - joining a bid to take on a liability! Accountants should have a field day.

 

[dfcatch]

I'm not following some of your arguments:



There wouldn't be 'competition' between Aeroplan and Air Canada's new scheme, at least as far as Air Canada's flyers are concerned. They would all be with AC, but leaving their miles behind. There will be a decent spend on advertising/awareness, but not so much to 'win customers over'. The big issue for AC is that their flyers are going to have their miles orphaned within Aeroplan when the split came, unless used first. That's making members VERY unhappy.

AC could certainly lose if Aeroplan wants too much money - they will have very unhappy flyers if they don't get to buy Aeroplan, OR they will be paying a lot more than they should to buy a none core business, most of which they don't want (the general points business). This would not only hurt their bottom line, but also their stock price / standing. What airline anywhere can afford to splash out on a non core business?

I agree that Aeroplan would be severely weakened by the departure of AC from its portfolio, but its a pretty big business overall and corporately might in fact have a better 'home' within an allied business, it its to go on the market. This is a danger for AC - if Aeroplan is smart, it will try for a bidding war and pressure AC flyers to get AC to bid strongly!



I come to the 'non-core business' argument again. They shouldn't want it and you can bet their shareholders wouldn't want them to pay for it.

The amazing thing is that this has only come up now. I imagine AC would have looked at this scenario either initially or subsequently, but something has happened now to push the deal.

Best scenario for AC and its flyers is that AC makes a joint bid with another bidder (or has an agreement with them) to acquire Aeroplan, and AC takes the AC miles liability. Kinda bizarre - joining a bid to take on a liability! Accountants should have a field day.

1/ Assuming this takeover bid fails and we have AC & Aeroplan...

There absolutely is competition.

The bulk of Aeroplan members are NOT active flyers, just like with QFF.

Regular flyers will switch to AC, miles orphaned won’t be a problem as Aeroplan will have no choice but to allow transfer to AC/direct redemption (which they would continue to have, but without the 8% guaranteed Saver inventory).

For everyone else - Aeroplan will do whatever they need to do to be a decent travel rewards program that appeals to the bulk of its members.

2/ You overestimate the problem of orphaned Miles. It’s not a problem.

Secondly - the “non-core business” is actually core business. It’s all partner Billings revenue which AC absolutely wants.

3/ Aeroplan / AIMIA is on life support. They are not big, nor successful without AC.
That’s why their share price got reaccommodated with the original announcement last year.

Withiut AC - Aeroplan will struggle to remain relevant. There will be no bidding war. That’s just a fanciful proposition.

In fact - AIMIA has been letting go of assets and business units worldwide at fire sale prices.

They are 100% NOT in a strong negotiating position at all.

4/ This is a consortium bid. In conjunction with the banks and Visa. None of whom want to upset their cosy cobrand monopoly. And Visa doesn’t want AC to go to Mastercard. AIMIA’s investors will want this.

5/ The liability is NOT a problem at all. The bulk of the liability is actually deferred revenue, not a true cost liability.

AC can’t lose.

It’s just a question of whether AIMIA rolls over now - or AC beat them to a pulp after.

 

[RooFlyer]

@dfcatch, I respect your industry knowledge, frequently demonstrated on AFF, but your comments above both misrepresent what I'm saying (I don't think intentionally) and we obviously have a different definition of 'non core business' .

For instance, I didn't say that the liability would be a 'problem' - merely that it was the liability for miles redemptions that AC wanted to acquire directly. The Air Canada CEO said it in the announcement, quoted above:

Straight to the point: we heard from many customers who were excited about our plans, and would prefer to transfer their Aeroplan Miles to the new Air Canada loyalty program. This is what this proposed deal allows us to do – if successful, all Aeroplan Miles would transfer into the new Air Canada loyalty program in 2020.

To me its pretty simple at first, but gets murkier when you look at the type of deal being proposed.

* Air Canada spun out its FF program years ago into what became Aeroplan.

* Over the years, Aeroplan became less and less useful for AC frequent flyers. The airline retained control of 'status' and 'upgrades', while Aeroplan managed the miles part. It was messy and Aeroplan, as it grew into a general points business, became less and less responsive to AC flyers. AC '100K Super Elite' and '75K Elite' members loathed it.

* As a 10 year member of Aeroplan (100K or 75K level mostly), believe me, it sucked! (I know, my bad but I didn't know as much about FF programs then as I do now, but for high status fliers, the AC upgrades etc were pretty good).

* When AC announced they would develop their own FF program once the Aeroplan contract ended the biggest issue for ACs frequent flyers was the orphaned miles issue. Without doubt, sorry, no question.

* So now AC have announced they may acquire Aeroplan. Reading between the lines, this looks like an Investment bankers deal, which in my experience (and I have quite a bit) usually end up much better for the bankers than the company. If it is a bankers deal, you can bet that AC won't be running most of the Aeroplan business if it is acquired!! Plump it up, lick of paint, on-sell or float it (been there, done that ). If the rest of the Aeroplan business is so bad, no bank in its right mind would back an airline to put it on its balance sheet!

Aeroplan would have its own investment bankers, advising it how to maximise its value. They and Aeroplan management would be criminally negligent if they didn't try to get their own deal up. It all depends how badly AC and the banks want their deal - but the totality of that deal hasn't been revealed yet, I bet.

 

[dfcatch]

Your characterization of AC Altitude and Aeroplan is accurate and reflective of most AC flyers.

Orphaned Miles IS a concern of flyers - but it’s NOT a problem as it will be resolved one way or the other.

Aeroplan is not a bad business - but it’s a quadriplegic business without an airline.

Imagine QFF with Flight earn/burn as part of the airline and the partner earning/toaster burning as a separate business.

The separate business is actually quite profitable.

BUT - it’s a dumpster fire if the airline also redeveloped its own partner relationships.

So imagine QFF exactly as it is today - with the airline and highly profitable. That’s how it will look if AC buys Aeroplan.

Aeroplan is only in the poo if it has to compete with a full-bodied AC with its own full FF business including partners.

So - AC wants it all. They want the members, the data, partners, toaster deals - everything. And they don’t want Aeroplan as a separate competitor. They can beat them if they have to - but why fight and risk cuts and bruises if you can have it all without throwing a punch.

There will be no further slice and dice / spin-off.

AC wants full control and full profit.

AIMIA wants to stop the blood loss, amputate, and survive.

This is an investors deal - and the deal looks good for both parties.

Just a question of price and brinkmanship.

AIMIA is in trouble - it’s investors are concerned - this could be the “way out”.

But AC members would fare better if Aeroplan survived and AC was forced to have a competitive program.

 

[RooFlyer]

An update. Air Canada raised its offer by 30% in the cash component, but Aimia (owner of Aeroplan) rejected it, wanting a lot more. To me this shows they weren't that desperate (rightly or wrongly ). Aimia have announced partnership with Porter Airlines. They are a SE Canada regional airline and have 29 Dash-8s in service . Also in talks with OneWorld, which is an interesting twist. AC frequent flyers probably wouldn't mind some convertibility into OW flights, although that rules out Canadian domestic flights.

See OOAAT article. Says there may be more to go on this thing, and he's probably right. See this article: Aimia remains open to Air Canada approach . If Air Canada comes back, its going to cost 'em ... An interesting balance between the balance sheet and screaming AC frequent flyers, who are still looking at their unused miles marooned in Aeroplan.

 

[dfcatch]

If Air Canada comes back, its going to cost 'em ...

Air Canada has a price. The formula is pretty simple.

"Max Offer to buy Aeroplan = AC's estimate of marketing costs to acquire it's 5m natural base membership."

If they can purchase Aeroplan for less than that amount - you betcha they will keep going higher.

If AIMIA gets too greedy - then AC says no, and beats the poop out of them later.

AIMIA has an equation too...

"Min Offer to Accept = Min cost of being beaten to a pulp by Air Canada, losing all valuable members to AC, and ending up a fancier version of Air Miles, but with a points transfer program"

 

[moa999]

This is an investors deal - and the deal looks good for both parties.

Apart from those AIMIA investors who saw their shares drop by 75%.

Agree it's now probably the best option.

I think the one thing this does is mean no investors will buy an FF spinoff.

Makes it very difficult for the PE fund that owns 35% of VFF. Aeroplan was probably seen as a possible buyer or IPO.
Now I suspect the only out is sale back to VA, and they aren't flush with cash.

 

[RooFlyer]

Air Canada has a price. The formula is pretty simple.

"Max Offer to buy Aeroplan = AC's estimate of marketing costs to acquire it's 5m natural base membership."
<snip>

Oh, sure, never make your first offer your final offer, but its the financial backers that make AC's position interesting. Their acquisition metrics would not be the same as ACs - more a rate of return thing I would think (including ancillary card etc business).

I still don't understand your argument about the cost of AC acquiring it's 'base membership'. I'd be staggered if nearly every current Aeroplan member who is an AC flyer didn't immediately join ACs new frequent flyer program. Why wouldn't they? Virtually guaranteed.

Interesting also that Aimia took so long (it seems) to get into talks with other airline parties. If it was so terribly weak without AC, you'd think they would have done this over a year ago to 'survive'. Seems they are doing it now to get AC to jack up their offer.

 

[dfcatch]

Oh, sure, never make your first offer your final offer, but its the financial backers that make AC's position interesting. Their acquisition metrics would not be the same as ACs - more a rate of return thing I would think (including ancillary card etc business).

I still don't understand your argument about the cost of AC acquiring it's 'base membership'. I'd be staggered if nearly every current Aeroplan member who is an AC flyer didn't join ACs frequent flyer program. Why wouldn't they? Virtually guaranteed.

Interesting also that Aimia took so long (it seems) to get into talks with other airline parties. If it was so terribly weak without AC, you'd think they would have done this over a year ago to 'survive'. Seems they are doing it now to get AC to jack up their offer.

The banks want to be associated with AC - they don't want to be stuck with AIMIA. Because if they are - then AC will do deals with their competitors. That's why Visa is being so aggressive here - they don't want to lose charge volume to Mastercard. Their metrics are all about protecting their current market share - they don't want to take a loss here.

Yes - actual flyers will virtually immediately sign up for AC's program and credit there.

3 problems though:

1/ As you know - there are frequent flyers, and then there are "frequent flyers" - how often do we see folks who fly regularly that have no clue about their FF accounts/benefits.

2/ There are infrequent flyers who, through inertia, won't move without significant prodding.

3/ The vast majority of the Aeroplan members are not flyers... They dream of being flyers.... That's why they redeem for toasters in the end.

The number of engaged frequent flyers that AC can take for granted (that will instantly sign-up) is tiny.

They also then have to compete with Aeroplan for partner relationships and billing volume. That's where the real money is.

Aeroplan has been actively pursuing and talking with counterparties for some time now. The noise we are hearing this week is more ambit claims than a sudden surge of activity.

 

[Quickstatus]

AC decision to spin off their previous FF program in the early 2000s was by any measurement a bad one. It lost control.

Airlines are ostensibly profitable because of their inhouse frequent flyer program and the P/L may be substantially supported by their FF program

 

[RooFlyer]

Air Canada and its banking consortium get Aeroplan =-but pays C$450 mill (up from C$250 mill then C$325 mill) and takes ~C$2 billion in Miles liability.

For consumers. Interestingly Air Canada is saying that its new program will still go ahead.:

Air Canada Q&A

Q: Will Air Canada still launch a new program in 2020, or are you keeping Aeroplan?
A: Air Canada remains committed to delivering on our promise to build a new loyalty program that better reflects the way our customers live and travel. What’s more, if the deal is successfully concluded, customers’ Aeroplan Miles will be transferable into the new Air Canada loyalty program when it launches in 2020.

Devaluations of Miles being tipped.