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?