Air Canada Reverses Course, Leads the Charge to Bring Loyalty Back In-House

There was a trend over the last few years for airlines to try to spin off their loyalty programs into standalone businesses. On a spreadsheet, this looked like a smart move, a way to “unlock value,” as they say. Air Canada was one of the early, aggressive proponents of this, but it also appears to be the first to admit that it may have been wrong. The airline is bringing its loyalty program back in-house where it belongs in 2020 when its current agreement expires. With any luck, this will be the beginning of a trend.

Airline loyalty programs started off as a way to — wait for it — increase customer loyalty. These programs were meant to help sway people to stay loyal to a single carrier by offering incentives. In that sense, the loyalty program alone wasn’t a revenue-generator, but it was a cost center that was pay dividends through increased bookings. But over time, the programs changed. People loved the idea of getting enough points to fly for free, and it did shift behavior. It was powerful enough that non-airline entities wanted to start giving airline points away to get people to choose their businesses over others. To hand out those points, the companies had to purchase them from the airline. All of a sudden, loyalty programs could generate revenue on their own. The introduction of airline-branded credit cards really sent things into the stratosphere. Banks spent tons of money buying points from airlines (and even prepaid for millions of them as a way of bailing airlines out during bankruptcy proceedings), because that’s what kept people signing up for the cards in the first place. Over time, the loyalty programs became bigger and bigger revenue generators, and that meant some airlines looked at these programs differently.

When most people hear the words “unlocking value,” they probably cringe. Of course the goal of any business is to create value, but the idea of unlocking value is seen by the general public as more of a shell game. The idea is that the whole entity is worth LESS than the sum of its parts, so by breaking pieces up, the individual businesses can be worth more on their own. Hence, value is “unlocked.” Specifically thinking about loyalty programs, airlines were thought to be both the catalyst for their success and the heavy weight holding them back from achieving their full potential. Airlines were historically pretty bad businesses, and so the value of the loyalty program was depressed under that umbrella. As the theory goes, if you take the loyalty program away from the airline, then the value becomes much greater on its own.

What did this mean for the airlines? Well, when all that value was unlocked, it meant there would be a cash windfall for the airline. Let’s remember that the first decade of the 2000s were far from prosperous for the airlines. The promise of buckets of money was hard to ignore. That is the strategy that Air Canada began pursuing back in 2002 when it separated Aeroplan into its own business. In 2005 Aeroplan went public and between then and 2008 when Air Canada gave up control, it had raised more than $1 billion dollars. (And I’m talking real dollars, not those funny Canadian ones.)

Air Canada was riding high and others who were increasingly desperate to raise funds looked to the airline as a model. United created UAL Loyalty Services to eventually spin off that part of the business. Qantas had a similar plan. Neither ended up happening, but the idea was the same. In more recent years, pretty much any of the hangers-on associated with Etihad did or at least tried to sell off their loyalty businesses. Jet, Virgin Australia, Alitalia, and airberlin can all be included in that group. Aeromexico sold part of its program to the company running Aeroplan. Even as recently as 2013, Airline Business wrote that recent events “suggest fresh interest among some carriers to separate out their frequent flyer programmes….” It seemed inevitable that others would follow.

Then last week, the model of success, Air Canada, reversed course. Its agreement with Aeroplan runs through 2020, and it announced that when that day comes, it will start a new loyalty program that will be a part of the airline. But why? Was this a failure?

It wasn’t a failure in the sense that it did “unlock” some value and generate a lot of money. But the problem is that an airline loyalty program on its own is in business for itself, and that may conflict with what the airline wants. Aeroplan’s parent, Aimia, isn’t concerned about whether something it does generates loyalty for Air Canada. Aimia is there to increase its own profits. That means it wants to get more partners paying it for points, and it wants to reduce the cost of redemptions as much as possible. That may not align with Air Canada’s goals which are likely to vary depending upon the needs of the airline at any given time. Then there’s the issue of data. Airlines are starting to learn, like most companies, that they can do great things with data, big data. (Congratulations to those playing buzzword bingo today. You win.) The problem is, if the loyalty program owns the data, then the airline is at a disadvantage.

So yes, monetary value was unlocked immediately. But the hidden internal value that was given away was lost, and Air Canada is finding that it misses that… a lot… enough to scrap the plan and start over. I wouldn’t be surprised to see others try to sell off their programs to make a quick buck, because well, airlines get desperate. But in the long run, from a strategic perspective, Air Canada is showing that there’s too much lost in the process.

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19 Comments on "Air Canada Reverses Course, Leads the Charge to Bring Loyalty Back In-House"

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Gary Leff
Guest
“It wasn’t a failure in the sense that it did “unlock” some value and generate a lot of money. But the problem is that an airline loyalty program on its own is in business for itself, and that may conflict with what the airline wants.” That’s sort of Air Canada’s line on this, and to a certain extent it’s true — anything Air Canada wants Aeroplan to do, e.g. for its elites, Air Canada has to pay for — but fundamentally. Air Canada thinks they can make more money starting their own fresh loyalty program. They expect “the net present… Read more »
Tim Dunn
Member

great article…. US airline analysts have been beating the drum about the value of loyalty programs and AC’s move helps put the ice on their hopes for a breakup. Your statement here is dead on “the problem is that an airline loyalty program on its own is in business for itself, and that may conflict with what the airline wants.” Loyalty programs are part of the brand and revenue flow and it is impossible to separate them and achieve the best results for the entire entity without them linked.

maxe
Guest

Perhaps you are not aware that this could be an insult: (And I’m talking real dollars, not those funny Canadian ones.) Don’t forget, for a very many countries the US dollar of Trumpland is a joke. As a matter of fact, at this point, for very many countries the US, at the present state, are a joke.

enplaned
Guest

If you are at all familiar with Cranky you know it’s typical of his snark and not remotely to be taken seriously. Relax.

john-t
Guest

*yawn* Please remind me… how many of the world’s currencies are pegged to the mighty Canadian dollar? Have you seen any news published outside of Canadia that quote values in Canadian dollars? How many of the world’s commodities are traded against the Canadian dollar?

Davey
Guest
Unlocking value means an asset is deployed sub-optimally. If an airline flies a 777 from Minneapolis to Denver and suddenly gets smart and flies it to Beijing instead, it probably unlocks value. I don’t see liquidating a loyalty program as unlocking value. It’s akin to selling your customer lists. Yeah, you get something for it and in the short-run you recognize net income and cash flow. But its akin to eating your young, as Air Canada has found. Instead, new blood, new programs and new administration can optimize the customer relationships an airline has. Selling the list is the LAST… Read more »
A
Guest

Great explanation of “unlocking value.” I remember business school courses on that same sort of thing. A common argument is that it allows the company to focus on their “core business” and not get distracted by things they aren’t trying to be. Sounds great on paper but the reality is somewhat different I’m afraid.

Oliver
Guest

It is a continuous cycle that keeps management consultancies busy.

Year 1: we need to focus on our core business and unlock hidden value. Spin off XYZ, collect bonuses for successful execution.
Year 2: we can eliminate redundancies and reduce cost by acquiring ABC. Collect bonuses for success execution
Year 3: see year 1

Maybe not quite as often seen in the airline industry, but very common in other industries.

Dan
Guest

While this many not be Air Canada’s problem, I have to wonder what role award seat availability has in any of these contracts. Aeroplan is only worth something if the members feel they can reliably redeem their miles If Air Canada shuts off award availability because they feel they can make more money selling the seat, what kind of problem does that pose for Aeroplan? If Aeroplan wised up and put some guaranteed minimum availability in the contract that could cause the airline problems. Or is that addressed by Aeroplan buying the seat from Air Canada?

DougYWG
Guest

Re the timing of the value being ‘unlocked’ and disposal of Aeroplan…..Air Canada went bankrupt in 2003 and then had to re-finance and re-structure. I’ll never forget it. My wife and I flew to Paris on honeymoon with Air Canada and while there, the airline declared bankruptcy. As you can imagine, I thought “B*gg*er that!!”….trapped in Paris…on honeymoon…indefinitely…but no such luck. The operation never missed a beat. Damn Canadians!

davidrosen
Member
Good article. I’ve been following this myself. One of my former colleagues from my post-GSB experience pushed Air Canada to split of Group Aeroplan — but the dominant reason was actually a little different than merely the revenue-generating aspect of the currency and the large membership base (tho of course related). Aeroplan was actually the top innovator in creating what would become the model for “coalition” loyalty (versus proprietary loyalty that we experience in the U.S., albeit highly partner-influenced proprietary programs). Canada had a key trait that we just don’t see in the U.S. — essentially a nationwide petrol, department… Read more »
Hey
Member

Aeroplan has inconveniences – for example, checking account info, point balance inquiries nor reward travel bookings can be done at Air Canada’s website, only at aeroplan.com

Mike hunt
Guest

Real dollars not the funny cdn dollars…. Yeah stopped reading there.. You think muricans dollars have real value? Lol.. Keep invading countries in order to keep afloat ;)

Jeffrey Sax
Guest
I don’t think Air Canada is necessarily wrong on unlocking value regarding the whole process. They sold Aeroplan to the market as a ongoing company, and I don’t think that the market properly priced in that if Air Canada chose to end their partnership with the program, you end up with AirMiles. AirMiles having screwed up their time stamping of miles by giving too much notice, angered practically the entire Canadian population at once. The 70% drop in AIMIA stock reflects that he market sees 70% of the value of the stock is in the Air Canada partnership. Aeroplan will… Read more »
2bitsjohnny
Guest

It’s hard to use the term ‘value’ in the same sentence as Aeroplan when you consider all the damn fees you have to pay to redeem points for flights. I gave up on Aeroplan when it cost me nearly $500 in fees for a ‘free’ flight to Europe along with crappy flight & seat selection. Meanwhile, on Delta I was able to redeem my Skymiles for 4 tickets to Hawaii last summer and I paid just $44 in fees. Fool me once Air Canada, shame on you; fool me twice…

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