WOW: Air Canada Wants To Acquire Aeroplan

Air Canada has just made a massive announcement that on the surface surprises me.

Air Canada and Aeroplan were supposed to cut ties

Aeroplan is Air Canada’s spun off loyalty program. A bit over a decade ago Air Canada sold their loyalty program due to the financial situation they were in, and that contract is coming up for renewal in 2020.

Last May Air Canada announced that they wouldn’t be renewing their contract, and that they’d be cutting ties with Aeroplan in 2020, which is obviously devastating news for Aeroplan. This was a logical move — Air Canada sold off Aeroplan when they weren’t doing well financially, and now that they’re doing better, there’s no reason to continue to spin off the program.

Airline loyalty programs are pretty consistently profitable, and they can probably make more money running the program in-house, rather than selling it. Furthermore, an airline can better manage their program and provide a more seamless experience if it’s run in-house.

All along we’ve wondered what this meant for the future of Aeroplan, since they’d be an airline loyalty program without an airline. Obviously they were hoping to get creative, but the stock of Aeroplan’s parent company, Aimia, has tanked since the announcement.

Air Canada now wants to acquire Aeroplan

Air Canada has announced something that I’m frankly very surprised by, and that I never thought would happen. Air Canada has made a proposal to acquire Aeroplan in a $2.25 billion deal, including $250 million cash, and $2 billion in Aeroplan points liability. The deal has an expiry date of August 2, 2018, so now we’ll have to see how Aimia responds.

Here’s how the deal would be structured:

The Proposed Transaction, if accepted by Aimia, will ensure value and continuity for their members as well as customers of Air Canada, TD, CIBC and Visa. The proposal implies an estimated market equivalent value of $3.64 per Aimia share, a 52.3% premium to the 30-day VWAP and a 45.6% premium to spot closing price as of July 24, 2018. The market equivalent value is comprised of the Aeroplan loyalty business proposal value of $1.64 per Aimia common share plus non Aeroplan loyalty program net assets valued at $2.00 per common share based on fair market value estimates contained in Mittleman Investment Management’s Q1 2018 investor letter.

What is Air Canada thinking here?

As I said above, initially when it was announced that Air Canada would cut ties with Aeroplan, I assumed there’s no chance they’d actually want to work together going forward. Air Canada has been paying Aeroplan for miles for all of these years, and it’s not like Aeroplan was even the most beloved frequent flyer program. So the way I view it, there’s not that much of Aeroplan that Air Canada would want to preserve as they transition to a new program.

On the other hand, this is in some ways a very noble thing for Air Canada to do (and I realize they’re not doing this out of the kindness of their hearts, but…). Aeroplan members are understandably concerned about the future of their miles, since the future is uncertain for Aeroplan. While people technically collected miles with Aeroplan for all of these years, they were largely loyal to Air Canada, so is it fair that their miles are no longer associated with Air Canada? Wanting to continue to honor members’ miles is largely a good thing.

On top of that, presumably there’s some back-end technology and data that Aeroplan has that could be very useful to Air Canada.

While this is potentially good news on one hand, on the other hand it’s potentially bad news for Canadian consumers, depending on how much potential you think Aeroplan has as an independent loyalty program. Aeroplan has five million members, and Air Canada essentially wants to eliminate them as a competitor going forward. Whether or not you view that as a big deal probably depends on how much potential you see in Aeroplan post-Air Canada.

That being said, $2.25 billion seems like a lot of money. There’s value in acquiring the five million Aeroplan members, there’s goodwill associated with honoring the miles, presumably there’s some technology and data that Air Canada would want access to, and while they’re at it, they might as well eliminate a potential future competitor.

Furthermore, I suspect their cost here isn’t really $2.25 billion. Yes, there’s the $250 million purchase price, but I imagine the liability associated with the $2 billion worth of miles will end up being a lot less than face value.

The people running Air Canada are smart, and I’m sure they know exactly what they’re doing here. I’m just surprised by this announcement. Those with large sums of miles with Aeroplan should be hoping for this deal to go through, in my opinion.

What do you make of Air Canada wanting to acquire Aeroplan?

Comments

  1. Holy hell, that is sleazy as heck. I hope the Canadian antitrust regulators block this — Air Canada pretending to terminate a partnership to send Aeroplan shares diving with going concern only for the purpose of a cheap acquisition. Literally late capitalism.

  2. @ keitherson — I don’t think there was any “pretending” here. Their contract with Aeroplan ran out, and I think there was no way they would have extended it. It would have been silly to extend it. They never really wanted to sell their frequent flyer program, but rather they sort of had to given the financial situation they were in at that point.

    So I don’t think that was ever the strategy, but the optics aren’t great.

  3. I agree — Air Canada could have negotiated in the beginning to buy back Aeroplan, instead of dumping them and then having Aeroplan scramble to come up with a way to survive. This seems like a strategy to get a cheap purchase price for Aeroplan.

  4. Did you guys know that Aimia is also behind the scenes in Multiplus miles company, from the former Tam to the current Latam?

  5. There’s nothing generous about this. AC is offering $250 million in cash, which is far less than they received (in today’s dollars) when they spun AP off over a decade ago. Plus they will control the value of the points “liability” which makes up the vast bulk of the purchase price.

  6. The other thing to keep in mind is that Aeroplan has little value to any company except Air Canada.

  7. I think AIr Canada wanted to buy it all along but probably thought Aimia was asking too much and needed a reality check of what it’s market value really is. I don’t think it is sleazy at all. Sellers sometimes become emboldened to hold out for an unrealistic price when they feel they are coveted. A few years of reality check with nobody else beating down their door with offers helps correct that sort of thinking.

  8. For one, $2 billion of this quoted purchase price is a cost that AC won’t really have to “spend.” They probably did the math and calculated that it’s cheaper to pay $250M and make whatever changes they want versus starting a new program from scratch.

    Canada has no real antitrust regulators (they’re pretty well captured by industry), and in any event, AC doesn’t actually compete so there’d be no grounds to stop the merger. Since aeroplan had a limited chance for success without *A inventory, this really is the best outcome for everyone — including Aimia’s shareholders.

  9. Imagine being an AC elite waking up on July 1st 2020 and realizing you have no miles in AC’s new program after years if not decades of “loyalty” while your accumulated AE miles become of questionable value. Plus as AC you’re finding the cost of creating an infrastructure and staffing a new Points program is much more than anticipated, plus the incentive bonuses needed to attracted skilled senior staff from AE or an American program…makes sense to buy your competition.

    As for shareholders being burned two years ago, most of those would have been institutional. Those of us who owned AE/AIMIA shares most likely got them for free when the company was spun off from ACE, AC’s holding company. As one of those shareholders (as well as with AC) I’ll vote to accept the AC offer which safeguards the interests of everyone.

    As for anti-trust, the deal doesn’t lessen competition as Air Miles is still the major competitor up here in Canada and there remains two companies in the Points business, so other than being charges with short selling (or buying) AC’s deal seems quite logical and in everyone’s best interests.

  10. As a Canadian who would like to see a program where we can transfer miles to other programs, I hope this deal does not go through. If you are an AC loyalist, you have to think AC’s program will not be competitive without Aeroplan there.

  11. End the partnership to send the share price down, then purchase Aeroplane for a lower pricetag, very cheap shot Air Canada. I just don’t buy it when anyone says it was an unintentional move by AC.

  12. August 2nd is next week! That is fast!

    I hope devaluation doesn’t happen too soon as I plan on burning my points in November for next November!

  13. How to make sure you still get invited to corporate events:

    “The people running Air Canada are smart, and I’m sure they know exactly what they’re doing here.”

  14. Aeroplan’s stock price has dropped from CAD$9 to CAD$2.5 since AC announced the breakup last summer and now AC gets to buy it at a bargain. What a move!

  15. @ Raffy — Fair, but there’s no way it would have made sense for them to buy at a higher price. Aeroplan’s value comes from their association with Air Canada.

  16. @ Meike — I don’t think there’s a blogger in this space who attends fewer corporate events than I do, so I’m not too worried about that. 😉

  17. I am disappointed. One of the most exciting things Aeroplan announced was the ability to transfer points to 20+ airlines. We don’t have nearly the same credit card transfer options the United States has and many times airlines reserve award seats for their own members. AMEX is limited to just a few airlines. I saw this as hugely valuable to Canadian consumers. However, I have to give them credit – drive down the share price, buy back, devalue the loyalty program and eliminate a competitor all in one swoop. It’s good business sense but horrible for consumers.

  18. @ YYCguy — You’re much more optimistic than I am regarding Aeroplan’s 20+ transfer partners. I simply see no circumstances under which they would have allowed 1:1 transfers, the economics of that simply don’t make sense. They said it would be a “unique” option, so I imagine they’d offer significantly less valuable transfer options, closer to those offered by points.com. So call me a skeptic, but I didn’t read too much into that.

  19. Besides this looking like a move to cheapen the deal on AC’s part…perhaps AC also realized that their loyal customers were starting to get concerned. Not only did I swap my credit card to a non-aeroplan program, I’m also seriously considering switching airline alliances based on the lack of information and almost certain devaluations we face. Heck, AC availability is already pretty poor through the current program. Way to chase everyone off to Amex, AC.

  20. Really intriguing. I don’t think there’s anything amoral about how Air Canada played this — if they had made false or prejudicial comments about Aimia that would be one thing. But it seems like they simply leveraged the monopoly position that the original spin-off put them in (monopoly in the sense that they’re the only one “selling” miles to Aeroplan).

    More interesting, were there any other major frequent flyer program spin-offs? The first instinct is that other airlines would LOVE to spin-off their programs for $XX billion, then buy them back for a fraction of that down the line. However it really seems to prove that a frequent flyer program without a “captive” airline is an unsustainable position.

  21. @lucky – good to hear because what most of us want is unbiased analysis and opinion. It’s becoming increasingly obvious that some of the airline/points reviewers out there are nothing more than corporate shills. One very popular vlogger in particular (not an omaat contributor) is so over the top in his sycophantic reviews that he’s lost all credibility. He’s entertaining maybe, but informative – not in the least. Hopefully OMAAT won’t ever be like that.

  22. Aeroplan stock price when AC spun it off in 2005: $11.71
    Aeroplan stock price when AC said it was pulling out in 2017: $9.14
    Aeroplan stock price yesterday: $2.50
    Price offered by AC to buy Aeroplan back: $3.64

    Don’t tell me this wasn’t part of AC’s plan when they decided not to renew their contract with Aimia. It’s shady AF, but nothing will be done about it because this is Canada.

    Aeroplan has more than 5 million active members, which in a small country like Canada is a huge proportion of the population. They also have established relationships with numerous partners, as well as tons of consumer data on their members. These are all things AC wouldn’t have if they started their own program.

    The other thing to remember is that this removes a competitor from the already limited Canadian points market. AC would have had to make any new loyalty program reasonably attractive in order to build membership, and Aeroplan is already scrambling to make sure their program offers value so members don’t jump ship. Absorbing Aeroplan allows AC to continue offering a mediocre plan to the existing membership base and maybe even slip in a devaluation along the way. That’s good for AC and bad for consumers, which is the standard MO in Canada.

    My guess is Aeroplan will take the offer. Look for them to spin off or sell Aimia’s non-Aeroplan assets once the deal is complete.

  23. @ Meike — I totally share your sentiments and agree. I pay for virtually all of my hotel stays and flights, and the only people I answer to is you guys

  24. @Lucky, ‘noble’ is not a word that I would use to describe AC’s offer. As previous posters have noted, AC has always been in the driver’s seat. Last year’s announcement of creating its own new loyalty program was a premeditated attempt to drive the value of the Aeroplan Program down…and it worked! The 2 billion dollar points liability value identified in the purchase is a joke! AC can pull a Qatar Airways move by limited seat redemptions, charging x2 miles, adding ‘service charges’ to redeem points and devalue the points with no warning…and they will because there is no legislation in Canada or the US that forces companies with loyalty programs to maintain a consistent valuation on points. It is unethical to the extreme.

  25. DON’T trust Calin or Ben Smiths motives. This is NOT an altruistic transaction as Smith was once quoted as saying there were “too many reward seats on flights”. Should they get control of Aeroplan watch for availability levels to tank even further, particularly in J. I hope most W coast Canadians have discovered AS’ Mileage Plan but it works even for YYZ users as they have some great partners such as AA, BA, CX, DE, EK, HU & FI with good award availability particularly in the premium cabins.

  26. If memory serves me correctly (or even close) AC sold Aeroplan for $600 million years ago. My first thought upon reading this, AC was leaving but wants the 5 million members. By announcing its intent (not illegal) it KNEW 🙂 the stock would plummet, then it could swoop in with an offer of what is essentially just $250 million (peanuts). Liabilities and debt is just that.

    It is sneaky, but hard to prove. Interesting moves up North.

  27. It should be noted that Aimia is not just Aeroplan. They also own roughly half of Aeromexico’s frequent flyer program which could be worth in the vicinity of $500 million CAD. They also have a few other smaller cash flow businesses and analytics. What I’m wondering is if this offer is for the whole company or just Aeroplan? If the latter, what happens to the company after this acquisition?

  28. @Omar: You nailed it. This is a lifeline for Aimia and we can be sure there’s lots of back-channel issues not mentioned in this medium. Questions: Did Aimia make deals with others, for after 2020? You bet they did. airlines, retail, you name it. Might some of them be exclusive deals, effectively locking Air Canada’s program out of big stores? Ahem.

    So, Air Canada rolls their own, finally gets their boots and mittens on and goes knocking on doors at big retail, only to find that Aimia was there before them, locking up exclusive deals. If Air Canada found Imperial Oil, Loblaws, BMO, Scotia, TD, CIBC, Hudson Bay inaccessible, they’d need a Plan B. This is it.

    I’m actually impressed more with Aimia’s Hail Mary Pass, than with Air Canada, which thinks they own the country. They thought they could walk away from Aeroplan and now they’ve got to cough up $250 to buy it, leaving Aimia to maybe compete with them LOL.

  29. Got an email from Aeroplan today. Essentially emphasizing:

    1. As of July 2020, the program will allow you to convert miles into points with nearly 20 frequent flyer programs covering all major airlines and many hotel loyalty programs.

    2. Come July 2020, we’re committed to offering great value on flight rewards. The following round-trip flights will be offered beginning at the same mileage levels that we provide today:

    – North American short-haul: 15,000 miles
    – North American long-haul: 25,000 miles
    – Mexico and Caribbean: 40,000 miles
    – Europe: 60,000 miles
    – Asia: 75,000 miles

    3. In September, we’ll introduce a new online travel booking tool where you’ll be able to rent a car and book a stay at one of 250,000 hotels worldwide using cash directly on aeroplan.com. Each time, you’ll earn miles, creating a whole new way to accumulate faster. Booking flights with a cash or miles option will follow, evolving Aeroplan into a broader online travel booking service.

    Seem like the deal went off??

  30. @Lucky Aeromexico just made an offer to buy Aimia’s stake at Club Premier for USD 180M. Aimia owns 48.85% of Club Premier and Aeromexico owns 51.14%.

  31. @Siyu Chen, I think your email delivery was delayed because that message from Aeroplan was sent out well before AC’s announcement.

  32. I think either WestJet or American should make competing offers, which would be the ultimate troll to AC, since without Aeroplan all of their frequent fliers will have zero points when the arrangement with Aeroplan goes away. At a minimum it would drive up the acquisition price.

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