What Would Air Canada Buying Aeroplan Mean For Consumers?

Earlier today I wrote about the surprising news that Air Canada submitted an offer to acquire Aeroplan. Aeroplan is Air Canada’s spun off loyalty program, and their contract is ending in 2020. Last year Air Canada announced that they’d take back their own loyalty program, though the surprising news is that they now want to acquire the very loyalty program that they’re cutting ties with

I had the chance to speak with an Air Canada executive a while ago about these changes, and had the chance to ask some questions. So I wanted to report back on my impressions of a potential deal here.

There are two perspectives on this deal

The way I see it, there are two ways you can view this deal.

One perspective is that this is sleazy and bad for consumers. The argument is that shares in Aeroplan’s parent company have nosedived, so Air Canada was just trying to drive down the share prices all along, knowing full well that they’d eventually acquire Aeroplan and maintain it as their loyalty program. Along similar lines, this is terrible for consumers, because Air Canada is trying to eliminate a major loyalty program that could eventually compete with them, and that has a membership base of about five million people.

The other perspective is that Air Canada is being pretty logical here. It makes perfect sense that Air Canada would want to terminate their agreement with Aeroplan, given that they’ll make more money and be able to run a more successful loyalty program if it’s in-house rather than outsourced. Virtually all of Aeroplan’s value came from their association with Air Canada, so Air Canada would be silly to overpay for an acquisition. Furthermore, this could be a win-win, as Aeroplan members would have their miles honored with Air Canada. Arguably Aeroplan would have never been a real competitor with Air Canada’s loyalty program, given that a loyalty program without an airline has little chance of succeeding.

What I’ve learned about this offer

I’m told that Aeroplan and Air Canada engaged in good faith negotiations over a year ago, before the announcement came that Air Canada would take back their own loyalty program. They couldn’t come to an agreement, which isn’t surprising. Air Canada knew they wanted to take back their own loyalty program, and that’s good for Air Canada loyalists (as I’ve been saying from day one).

Aeroplan and Air Canada couldn’t come to an agreement. That’s fair enough. Reality hit Aeroplan (and their parent company, Aimia) pretty hard after the termination of the contract was announced.

The way Air Canada views it, taking over Aeroplan would create assurance for customers and remove any doubts they may have about their miles. Miles would covert at 1:1 ratio, so there would be no funny business.

No matter what, Air Canada intends to launch their own loyalty program, and they’ve already purchased a lot of new systems that will be required for a new program. They’re not looking to maintain Aeroplan, because they can do so much more with their program in-house. Instead they view a takeover of Aeroplan as providing more stability, giving them access to intellectual property, and making the transition more seamless.

I think the next logical question is regarding how Air Canada basically dominates the Canadian market, and they don’t have a true global competitor. Why would they bother even having a decent loyalty program, if they’re not even having to compete head-on with anyone on a global scale?

This comes down to a few points:

  • Air Canada increasingly has domestic competitors, especially as WestJet moves upmarket
  • While there’s not that much domestic competition in Canada, it’s a country that has a lot of service from international carriers, so they have tons of international airlines to compete with; even at their biggest hubs, they don’t have 50% market share
  • There’s a big incentive to have a good program given the value there is in bank rewards programs and co-brand agreements, so there’s a lot of potential

My take on all of this

My take is based on two points:

  • Air Canada and their customers are better off with an in-house loyalty program
  • I question whether Aeroplan has an independent future

Let me explain that in a bit more detail.

Air Canada has historically faced so many challenges by having an outsourced loyalty program. They’re limited in terms of the information they can share between companies, the experience isn’t seamless, there are challenges associated with redeeming miles, etc. There’s no doubt in my mind that all else being equal, an in-house program is better than an outsourced one.

Regarding the second point, Aeroplan has made a lot of promises about what their program will look like from 2020 onwards, though personally I don’t think they’d be a true competitor to Air Canada’s loyalty program. Creating a loyalty program without being associated with a specific airline is really tough, so while I think the program would continue to exist independently, I question whether they’d be a true competitor to Air Canada. I doubt it.

With that in mind, I actually think this news might be good for consumers. Canadians have a lot of Aeroplan miles, and having those continue to be valid with Air Canada would be good news.

I’d definitely feel differently about this if I thought that Aeroplan had a bright future as an independent operation, and that they’d keep Air Canada in check. But personally I don’t think they stand much of a chance independently. So in terms of honoring miles and creating a seamless experience for customers, I don’t view this as being bad for consumers.

Like I said, I’d have a different perspective if I didn’t think that Air Canada definitely wanted to bring their program in-house, and/or if I thought Aeroplan had a bright future independently.

What’s your take on this?

Comments

  1. There is no question of competition. Post 2020, Aeroplan would be a travel agent selling tickets in exchange of miles since they would not have access to Star seats. It would be more like Aeroplan selling more of MFFR.

  2. Ben – regarding the funny business – I’d agree with you EXCEPT there is no guarantee what Air Canada is going to do with the new loyalty program. Suppose they take 2 million AP miles liability and devalue and offer a SkyMiles program with no award chart? I want to see proof from Air Canada the new loyalty program offers fixed award charts preferably without scam charges. Otherwise, there is no guarantee my miles are any worse off staying with Aeroplan. You are assuming the new loyalty program will be comparable with Aeroplan when it fact the most likely outcome is a massive devaluation.

  3. @ YYCguy — You’re of course right, we don’t know what the new program will look like, and that’s entirely possible. But purely in terms of economics, Air Canada is in a better position to deliver a better value on award tickets than Aeroplan is. Why? For example, if a business class seat is empty last minute, Air Canada would have an incentive to make that available using miles, while Aeroplan would have no way to access that, short of paying for the seat, which would be astronomically expensive.

    So you’re right, we don’t know what a new program will look like, but I do think Air Canada is in a better position to deliver value than Aeroplan is.

  4. Freudian: “Miles would covert at 1:1 ratio”.

    Agree with @YYCguy. Nearly 3 years since last major devaluation. Perhaps this would extend the redemption rate freeze through the transaction close at least?

    The timing of yesterday’s Aeroplan CEO Jeremy now-hollow member email campaign is curious at best.

  5. Under which ownership structure would Aeroplan members be more likely to see removal of the extortionist award surcharges?

  6. Competition is a good thing. I don’t think Aeroplan should accept this offer. With Aeroplan announcing the opportunity to transfer points into other FF programs, for example, Lifemiles (where they don’t add fuel surcharges) hench skirting AC then its a win win in my books!

    If AC is interested in a seamless experience then why don’t they offer to convert Aeroplan points 1:1 in their new program? I’m sure Aeroplan would be willing to give them all the points and take the liability off their books!

  7. I would say that Air Canada would be best to let Aeroplan go by the way side and to start from scratch. The only issue there is their customers flying and earning FF miles will be screwed out of earning until the day Air Canada has their own program.

    By starting their own program they could also rework credit card deals and bring in more revenue v spending this billion dollar plus offer to purchase Aeroplan.

  8. @ iv — Aeroplan hasn’t indicated what the transfer ratio would be. I would be willing to bet with near certainty that we’re not talking about a 1:1 ratio. That simply wouldn’t make sense from a business perspective.

  9. @Lucky, the Canadian market is very different from The USA.

    For example:

    Amex MR transfer ratio to Delta, Etihad, Asia Miles, Alitalia is 1000: 750
    Royal Bank to American Airlines 1000: 700

    Plus keep in mind Aeroplan points are very easy to accumulate in Canada. Their shopping portal is very lucrative with x5 points several times a year and x10 3 times a year!

    Plus, when you factor in the savings of fuel surcharges that are currently levied on AC/LH/LX/ etc… I’d take a 25% point reduction to transfer to Lifemiles with no surcharges!

  10. @ iv — Certainly a different market, you’re right, but my point is that I’d be willing to bet that the transfer ratios won’t be lucrative in any way. In other words, it’s not a function of 1000:750, but rather I’d bet for less than a 2:1 transfer ratio. Significantly less.

  11. My hunch is AC, TD and CIBC are suddenly alarmed at WestJet (WJ) getting close to Delta along with the WJ service, aircraft and cabin upgrades coming. WJ is already tied to Royal Bank of Canada so it would be a coup for WJ and its parners to acquire Aeroplan. That would mean a WJ/Delta/RBC plan and migrating to a “no fixed reward chart” redemption a la Delta but routes and redemption options would would be extensive, Canadians would be motivated to pick that program over AC for future flying and their main credit card and maybe their entire banking relationships for what are generally top tier personal customers.

    Lets not kid ourselves, once in control AC will be just as quick as US airlines to move to “no fixed reward chart” but can’t until 2020 while everything is in flux.

    AC and its banks need to roll-out their new plan now along with a 1:1 transfer and a reward chart, safe for say 7 years, to quickly snatch their best existing customers away from Aeroplan so thay can’t fall into the hands of what could be some very attractive airline and banking competitors.

  12. PJTO is right. Whether AC buys Aeroplan and changes it or starts their own program, it will in no way benefit the Canadian consumer.

    They can’t wait till 2020 indeed.

  13. ‘given that a loyalty program without an airline has little chance of succeeding.’

    You have to remember Canada is the land of coalition programs and they have developed and survived without Airlines. Our market is very different than the US and the majority of Aeroplan members are not airline loyalists or frequent flyers they are average Canadians earning miles on their credit cards and non airline partners. Aeroplan can easily survive on their own and this move by Air Canada makes sense why not start with 5 millions members instead of 0.5 million members who are airline loyalists and frequent flyers. Those numbers are more appealing to the credit card issuers as well!

  14. Bus. is Bus. Henry Ford did the same thing sucked everyone in then announced Edsel would be taking control as a CRASH then 100% of the company for NUTTHING sounds like Air Canada . They should’ve seen this coming ..

    CHEERs

  15. Air Canada management probably think they have done incredibly well driving down the share price but they are playing with fire. Suppose Aimia went talking to Alaska Airlines. Would they be interested in acquiring Air Canada’s elites? Possibly – it could be an amazing play from them.

    If I was Aimia, I would also be seeking an actuarial review of the value of accumulated units. As rewards have got less valuable, I suspect fewer units are cashed in so the value of Aeroplan liabilities might be significantly over-stated.

  16. Couple of points. This is a hostile offer which means that Aeroplan has no choice in rejecting the offer . Only option is for them to recommend to shareholders to not tender their shares. Air Canada TD bank and CIBC offered a 46% premium over yesterday’s share price. It will be difficult for shareholders to reject that and my feeling is that most will tender their shares. What is interesting is the 2ngiant bank partners in this. This is as much about the banks and their battle with RBC and Amex as it is about Air Canada.

  17. Assuming Aeroplan works like US ff programs, promises about future (and even current) terms and conditions mean absolutely nothing. Does Canada have a similar approach to changes in ff programs as the court in NWA v. Ginsburg? Whose law applies?

  18. @john: Canada is much less litigious than USA. The likelihood of a successful legal action over loyalty program Terms is nil. We are firmly clamped on the hind teat, here. We daren’t look up

  19. Aimia also owns Air Miles – a program without an airline. BofM are major partners and the program has been in existence about the same length of time as Aeroplan. I do not know how successful it is but I have been a collector since inception and there are some good rewards that I take advantage of. But, significantly, not flight redemptions which were wonderful in inception but worthless today.

    I keep hoping that there is some future for Aeroplan perhaps taking over the West Jet program which is a total waste of air.

    Consider the track record of Air Canada over the years and you have to know that they will definitely trash air travel rewards in Canada. Remember:

    – Air Canada trashed Wardair’s charter flights from western Canada to Barbados by lowballing the fares until Wardair had to withdraw then immediately switching all the flights to their regular scheduled horrid planes for the rest of the season (Air Canada was owned mostly by the Canadian Government and headquartered in Montreal so was out to kill western competition – only the government subsidy could support even one season of 50% airfares).

    – Air Canada then killed Wardair when it tried to become a scheduled national airline with international charter operations. Again by unfairly lowballing flights in competition to selected Wardair flights.

    – After Canadian Airlines International absorbed the failing Wardair and tried to continue Air Canada and the Canadian Government again unfairly allocated all the profitable international routes to Air Canada and all the losers to Canadian. Canadian had to fly multi daily flights to Japan China and the rest of Asia during the recession in Asia while Air Canada was given London and Western Europe where the profits were huge.

    – When Canadian Airlines was in severe financial stress American Airlines offered to help bail them out by increasing the stake to 30% or more (can’t remember the details) but the Canadian (Quebec dominated) Government refused to allow the funding. As a result Candian became the better part of Air Canada.

    – Not surprisingly when the economic downturn put Air Canada in jeopardy the investment rules were rewritten and highly increased foreign investment was now allowed saving Air Canada. I think this was about the time that Aeroplan was spun off to raise cash.

    So nothing in Canada is done in a vacuum. Air Canada is still based in Quebec and if there are any benefits to the upcoming in-house loyalty program you can be sure that they will be very limited and specific to focused markets (like all their route pricings are today).

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