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.
19 comments on “Air Canada Reverses Course, Leads the Charge to Bring Loyalty Back In-House”
“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 value of the program repatriation over a 15-year period to exceed $2 billion.” They think a new credit card deal, these deals are a lot richer than when the spinoff occurred, will mean more cash. It’s primarily about profit opportunity building the business themselves.
Meanwhile as of Friday’s close Aimia has lost 70% of its market value since the impending breakup was announced. That’s going to be a big hurdle for future spinoffs to overcome, at least ones trying to ‘unlock economic value’. Several spinoffs we’ve seen have been more about the tail wagging the dog, Etihad faced foreign ownership limits in airlines it invested in so they spun off related frequent flyer programs and bought into those.
Spun off frequent flyer programs don’t have a particularly great financial track record at least relative to their initial valuations. Aeroplan had gained only about 30% in a dozen years which is a pretty poor rate of return. airberlin topbonus doesn’t have strong financials, it was overvalued as a means of injecting cash into the airline while exerting control.
Of course there may be a bit too much optimism over airline frequent flyer programs as it is, the revenue is driven heavily by cobrand credit card deals low expenses. But the revenue itself may come under pressure as new technology pushes down interchange rates, and cost pressure may come too as programs have to compete with richer bank proprietary offerings [Amex and Chase are spending record amounts promoting their own products], eroding margins. United and American both already say they’re behind expectation in new cardmember acquisition.
Gary – I don’t know the answer to this, but is this the original term that was agreed to when Aeroplan was spun off? Meaning, did they always know there was an end date in 2020 unless an extension was signed? Presumably the end date was well known, even if it was earlier and there has been an extension since then. So the risk of the deal not being extended should be priced into the stock. (Maybe that’s part of the reason for the anemic appreciation.) But then again, maybe analysts thought there wasn’t much risk of that happening. Now, of course, the risk has shot through the roof.
The initial deal expired and required a re-up but it was pretty shocking to the market that it didn’t re-up. It was pretty unthinkable to Aimia as well until it started getting real. That’s why the stock has dropped 70% since the news.
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.
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.
If you are at all familiar with Cranky you know it’s typical of his snark and not remotely to be taken seriously. Relax.
*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?
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 thing a company wants to do.
Every airline has a relationship intangible in its core customer base. Unless it is acquired (and recorded under FASB ASC 805 and FASB ASC 820), it is unrecognized. But if an airline has several hundred thousand elite frequent fliers, they are not unlocking value by selling the relationship. They’re starting their demise as an organization.
Sounds like something Alitalia would do!
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.
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.
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?
Dan – I can’t say I know even remotely what the agreement on seat availability between Air Canada and Aeroplan looks like. But I would assume that there has to be some kind of minimum number of seats made available at a fixed rate. It would seem smart for Aeroplan to try to have some flexibility by paying higher amounts to get greater availability, but I have no idea if that’s in the contract or not. I can’t imagine, however, that Air Canada could get away without some sort of minimum guarantee.
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!
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 store, retail banking, food and drugstore retail structure that allowed them to essentially tie together brands that were relevant from the Maritimes to BC. The concept was so successful that a competing air miles program (Air Miles) came on board to offer Canadians (and the retailers, banks, etc. who were not part of the coalition) an alternative.
The concept was so compelling to Canadians (it was essentially how they shopped) that Aeroplan’s growth allowed them to either expand via organic growth or purchase the U.K. coalition play (Nectar) and expand into other smaller markets around the world. Again, the UK with a nationwide perspective on brands was a perfect fit — that was until consumes began to grow tired of the concept and merchants wanted their own proprietary loyalty relationships with their customers.
Aimia, as it rebranded upon the acquisition of Carlson Loyalty, really did a great job focusing on the coalition skill set (cross-merchant financial remuneration, deep customer analytics across multiple brands and categories, digital assets, coalition value prop) rather than the proprietary skills of alignment to a single coalition member’s financial and customer experience goals. Their success rate in competing for proprietary programs was so-so (but they did have very strong agency capabilities that kept their revenues strong).
I think this is a strong move for Air Canada. I’m not a huge fan of coalition loyalty — it’s just not very 2017. Frankly it really feels last century. I don’t have any insight on the success of Plenti — I think that we in California don’t get much exposure due to the regional strength of its partners (a testament to the fact that Canada may have been the perfect market for Group Aeroplan).
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
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 ;)
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 continue as a revenue based program because fixed-mileage awards are being lost but market fare awards will continue beyond he end of the AC deal.
I don’t think Air Canada necessarily wants to in-house the loyalty program, but who would buy the rights to run the AC program after seeing what the end of the deal with AIMIA did to them? By bringing loyalty in-house they get to start with a brand new redemption chart and rules, and I get to start with a program with a fresh set of Canadian credit cards with new sign up bonuses.
The biggest losers in all of this are TD and CIBC who just fought hard for The Aeroplan credit card franchise and ended up splitting it. It cost a huge amount of money and Aeroplan no longer has the market strength it did last month.
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…
2bitsjohnny – That’s not really a fair comparison. A domestic ticket has almost no taxes while an international one has many more. Yes, Aeroplan has additional surcharges above the taxes on some partner airlines, but Delta charges surcharges for anyone originating outside the US. No problem is perfect. It’s a matter of finding the sweet spots.