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.
