Long ago, in a galaxy far far away, Air Canada needed cash. To get that cash, it spun off its Aeroplan loyalty program. Many hailed this as the future of loyalty, and other airlines, like Aeromexico and Cathay Pacific, did the same thing. But there is a real downside to spinning off your program, and Air Canada found that out first-hand. It has now brought Aeroplan back under its watchful eye, and the new program details were released awhile back. I meant to get to this back then, but other stories tended up burying this one. But I’m back with it now, because it shows why Air Canada wanted its program back.
When Air Canada spun off Aeroplan in 2002, it was focused on short-term survival above and beyond anything else. It believed there was value to be “unlocked” and it figured it could raise cash. Over the next few years, it sold bits and pieces until 2008 when it was out completely.
At that point, Aeroplan’s owners found themselves in a somewhat challenging spot. They had to maximize the value of the program, but a lot of that was locked into the value that was generated for Air Canada. So, they took the time to diversify into a program that could earn and burn with a variety of partners around Canada. It negotiated credit card deals, and built the thing up, but ultimately far too much of that value was tied to Air Canada.
So in 2017 when Air Canada announced it was going to start its own program, the value of Aeroplan plunged. It plunged enough that Air Canada decided to just buy the program back and revamp it to do what it wanted.
Under the new program details, Aeroplan has been oriented toward providing benefit to Air Canada, something that was much harder to achieve with Aeroplan as a separate entity.
For example, it used to be that redemptions on Air Canada were either at the standard level or at insanely high “market fares.” Now, Air Canada can integrate the program more closely with its revenue management systems. The promise is “every seat, every Air Canada flight, no restrictions,” but what that really means is that Air Canada can properly price awards dynamically so that it will be happy to sell any seat for points, knowing that it can set the price that works for the airline without having to think about the profit of Aeroplan alone.
Aeroplan will also eliminate fuel surcharges for awards on Air Canada. This helps to push people to redeem on Air Canada more than on partners, but it also reflects that Air Canada can set the price right in number of miles so that it can provide what appears to be a very consumer-friendly change. Further, with miles valued properly, Air Canada will take miles to pay for taxes and fees if travelers prefer.
Now, in general I’m not a fan of variable pricing of awards from a consumer perspective, because it makes it hard for travelers to save up for something. But Air Canada is at least putting some brackets on this to set expectations. It has put out an award chart that gives travelers the range they’re likely to encounter when trying to redeem.
The chart breaks the world down into regions, and then it has expected pricing in mileage bands from there. Here, for example, is the Atlantic.
Let’s say you want to fly Business Class from Los Angeles to Copenhagen. That’s 5,624 miles so it falls into the second band which says the base level is 70,000 points, but Air Canada can range up to 180,000.
Of course, if you spend 180,000 miles on that, you’re probably making a mistake, but Air Canada can at least make that offer when it controls the program.
This also makes any points+cash offers easier to put out there. This is all about Air Canada optimizing its revenue, no longer about Aeroplan trying to maximize its revenue regardless of the benefit to Air Canada.
Points as a currency become even more useful. Air Canada can price upgrades, wifi, or really anything else in points as it sees fit. It becomes a part of regular business as opposed to a negotiation with a vendor.
We haven’t even touched on the elite program. Air Canada Altitude was the elite program, but it was kept at arm’s length from Aeroplan. Even customer logins were different, and the benefits were less integrated. Now, the same tiers exist, but it’s firmly part of Aeroplan. Elite members will get discounted redemptions for travel on Air Canada, and points earned outside of flying can also count for status qualification.
There’s also a whole suite of credit cards which will directly benefit the airline instead of benefiting Aeroplan and then having some benefit passed along to Air Canada.
What becomes very clear is that the loyalty program has tremendous value for the airline, and when you separate the two, they start working toward different goals. Aeroplan had been built to provide as much benefit for its owners as possible, but Air Canada decided it needed a program that would actually benefit itself in more than just a transactional way. This new program shows that.
A cautionary tail for our domestic carriers. In particular AA & UA as they will need quick cash soon beyond what can be obtained from the capital markets.
Actually, it’s at least as much a cautionary tale for anyone who is dumb enough to buy a loyalty program sold by an airline.
AC’s tortuous trip it has been on with its loyalty program is precisely why US airlines have protected their loyalty programs during covid. Investors are now finding how valuable those programs are which led to huge loans to the carriers as part of AA, DL and UA’s process of gaining liquidity. DL’s $9 billion set of loans and lines of credit led to the largest debt offering in airline history – and it was done in the private sector, like UA, while AA’s loyalty plan is pledged as collateral to the government for AA’s loans. Think about the implications of having the government hold your loyalty program as collateral if you want to wake up in the middle of the night in a cold sweat.
DL led the N. American industry in converting its loyalty program to dynamic pricing which clearly has allowed Skymiles to become so much more valuable to DL than AA or UA’s programs are to them. It is noteworthy that DL obtained twice as much “other revenue” (almost entirely loyalty plan revenue than UA; DL and UA are the only two US carriers that have reported 3rd quarter financials up to this point.
AC’s biggest problem right now is that Canada is locking down much more aggressively than the US which is hurting AC much more than its US competitors. AC relied heavily on connecting US passengers via Canada to AC’s global network and that will be much harder to do as US carriers compete more aggressively for every passenger during their covid recovery.
AC’s plan is what they had to do but they will be weaker relative to their US competitors for years to come.
On the human side, it’s disheartening to see the industry so desperate that it mortgages its crown jewel, which, in Delta’s case, is SkyMiles. It clearly shows the level of crisis. The business side, however, is two-fold. While Delta certainly is gratified in raising $9 billion through SkyMiles, that’s another $180 million more per year Delta will pay in interest than Southwest will pay on a similar $9 billion dollar borrow, assuming Southwest is paying a 2% lower interest rate, as you have described previously. And while that is cheaper paper than AA and UA are getting, it still isn’t really cutting it.
first, debt is necessary for every airline until the bleeding stops. The statistic that matters is how quickly cash burn ends. There will all be all kinds of prognostications about when it will happen; when cash burn actually stops is when debt can start being repaid.
And AA’s debt service will cost more than $1 billion/year more than Delta’s and at least $500 million more than United’s.
and let’s also not forget that Delta has been able to accelerate the retirement of older aircraft because it has the cash to restructure its business; AA has a new but very expensive fleet that never delivered the operational cost advantage that new aircraft should deliver. United can’t afford to retire aircraft because they are all collateral for debt even though hundreds are parked and hundreds more are on order. United will be paying for older aircraft that secure debt while taking delivery of new aircraft.
Southwest will be in the position of retiring scores of older aircraft as soon as the MAX starts being delivered. AA and UA are the two that have major fleet costs confronting them.
and, again, UA’s loyalty program netted 2/3 of the money that DAL’s Skymiles program did while AA’s is even lower and held by the US Treasury.
and none of the US airlines are in the position of making the same mistake Air Canada did with its loyalty program.
Prognostications, indeed. Bastain said Delta would break even by the end of the year. Completely unreasonable, even when he said it. Now he says Spring of 2021. Completely unreasonable as well, with or without middle seats.
Despite your protestations yesterday, Delta did not meet its Q-3 EPS Wall Street expectations. At least according to Investors Business Daily, Yahoo Finance, Market Watch, The Street, and several very credible and highly respected analysts. The consensus is that Delta came up about 10% short, a startlingly big miss. In other words, it wasn’t just me saying it.
in case you missed it, UAL missed estimates.
maybe, just maybe, comparing apples to apples and considering the present environment is why the entire industry is underperforming.
None of which relates to the loans backed by loyalty programs or that Skymiles is clearly worth much more than AAL or UAL’s loyalty programs – or at least actual investors were willing to lend Delta more money than American, United or anyone else including Air Canada that have tried to either use an airline loyalty program for collateral or spin it off.
send a note to CF and ask him to discuss airline financial results; for today, the topic is loyalty programs.
Agreed, SkyMiles is a tremendous asset. But now, Delta has played it’s ace in the hole. All that’s really left are some really nice hulls that have lost tremendous market value as no one can use them anymore. The NYC slots have great value also. Perhaps Gary Kelly would be a potential fire-sale buyer(??). Unless, of course, LGA and JFK slot restrictions are completely removed. Then he will just walk right in with his MAXes.
Delta said that it has $10 billion in unencumbered assets, in the same ballpark as Southwest, so your statement is not correct.
again, you do realize the discussion is about loyalty programs broadly and Air Canada specifically?
Last I checked the SEC filings, AA is getting their AAdvantage collateral federal rate lower than Delta is getting their skymiles rate and didn’t have to publish their AAdvantage program details for the world to see like Delta and United. Less $$ ($9B vs up to $7.5B )for it but a lower rate and no detailed disclosures, which does matter…
Not sure what the issue you have with the US Treasury is, but I’m not sure how turning Skymiles into a Cayman Islands subsidiary is a nobler endeavor? The only reason Ed and Glen don’t want the federal loan is because it restricts their ability to take a golden parachute in the next 2-3 years and retire. So, if you want them to be able to retire with a big bonus and liked turning skymiles into a separate entity (making selling it off in the chance of chptr 11 a much easier likelihood and something Delta won’t be able to control in that instance), you’re right, turning Skymiles into a Cayman Islands subsidiary and taking a higher interest rate was the right choice. If you think a lower interest rate for Delta with ties on executive compensation is better for Delta in the next 2-3 years, the Treasury loan seems like the obvious choice.
So as cute as it is to talk about AA’s total debt load interest expense vs Delta’s Skymile loan expense, Delta is paying a higher interest rate for their Cayman Islands’ Skymiles loan. And the topic is mileage programs as collateral. You’ve made it quite clear in every other post you’ve ever written that AA has higher debt. I think we all know that.
Interest rate for private loans – including United’s loyalty backed loan – is higher than the government loans so this is hardly an AA/DL thing.
All airlines have Treasury loans because the loan portion of CARES Act phase 1 was 70% grant and 30% loan.
Yes, private loans do not have the restrictions that government loans have but touting that AA gets a slightly lower interest rate misses the point that AA had no other choice but to take government loans; and AA most certainly has made similar disclosures about the AAdvantage program to the Treasury as DL and UA made to the market; the AA disclosures are just not public YET but you can be assured DL and UA know exactly what level of detail the Treasury required of AA or any other airline that pledged its loyalty program as collateral and revealed nothing more than AA was required to reveal to the Treasury.
A lower interest rate only matters if you can pay off the debt; AA is still considered universally as the least financially stable US airline with the least access to private capital markets and the least amount of collateral available. AA is reducing its presence in key markets precisely because it does not have the staying power to compete across its network as other carriers do. and a smaller presence in key markets will impact the value of the AAdvantage program.
And, once again, the Treasury will not lose money on the loans it made to airlines. If you don’t see the strategic nightmare that AA could be in if the Treasury (under any administration) sees that AA is heading to bankruptcy with the AAdvantage program used to pledge US government loans, then I can’t help you see how fragile of a position AA is in. I can tell you that the Treasury will think nothing of selling off AA’s collateral (the AAdvantage program) to airlines that have the lowest obligations to the government and those that can pay the billions that a big 4 loyalty program is worth. DL and WN are the only two airlines that fit that bill.
The idea that AA couldn’t have done what Delta and United did with their AAdvantage program in the private market is just not true and dumb to even posit. They chose to take a lower rate, which matters for them.
Of course the treasury knows about AA’s program. The idea that delta and United have spies in the US Treasury telling them confidential info about AA’s program is just dumb but I suppose you already know that. And if bankruptcy is looming for any airline, I’d rather have a mileage program owned by a pro-union administration (of either party) than a Cayman Islands tax-haven. Let’s think about which one will do better long term. It doesn’t take a lot.
Debt and interest rates will matter. Delta’s relative liquidity vs AA is measured in months, not years. The pandemic recovery is measured in years, not months.
If one airline goes down and restructures, it will only make it likely the others will too or otherwise face a more nimble competitor.
There’s a reason Delta went private and turned Skymiles into a Cayman Island subsidiary and accepted a higher interest rate in return. It’s about their CEO retiring with a giant bonus. Simple.
I’m not sure if there is as much light being spread as heat but I’ll make one more attempt.
EVERY airline negotiated with the Treasury; they know what the Treasury required and there is no reason to believe that any carrier got any better deal than any other. In fact, Treasury gave specific interest rates to carriers based on their credit rating. If the private sector required disclosures regarding frequent flyer program value, the Treasury most certainly did too. Nowhere did I say that DL or UA is spying to get AA”s information but it is not hard to guess, esp. since there are Wall Street analysts that have built models for all airline values based on public statements – and the DL and UA loyalty programs are not far from those estimates.
Money is cheap right now; it matters far less the interest rate being charged and much more how long the money will be borrowed. AA spent $700 million/year more in interest expense than DL in 2019 and $300 million more than United. AA’s interest expense is and will be a much bigger factor in their ability to recover and it has nothing to do with a very small difference in interest rates.
AA has borrowed the highest percentage of money of ALL large jet carriers from the government and the lowest percentage from private sources.
You can argue the value of a fractionally lower interest rate being worth more than having control of your own finances through private channels if you wish. I have a feeling that you will see that there were solid reasons that have everything to do with protecting the future of the company why DL and WN did not take any more government aid than necessary.
As many have learned, when the government comes and says they are here to help, BEWARE!
It’s shocking to think any airline ever thought otherwise.
Chances are they didn’t but the consultants told them that “unlocking hidden value” sounded better than “desperate cash grab.”
Pledging loyalty program for loans seems like a scam to me. Loyalty program never has the same value when it’s not owned by the said airline.
It’s a way to sell the same loan-supporting capacity twice. Delta’s existing debt holders thought they’d have the benefit of the loyalty program to ensure Delta paid off their debt.
But then Delta sold off new debt that had first call on the loyalty program. That structurally subordinated the existing debt holders in an unanticipated way.
You can do that once, and Delta was lucky that the once was when they really needed the cash. But the next time Delta tries to sell debt at the corporate level, they will either have to accept restrictions on their ability to issue debt backed by the loyalty program, or the debt buyers will simply factor in the fact that Delta may issue debt with first call on the loyalty program.
Either way, next time around, Delta’s ability to issue as much debt will be more constrained. It’s very much a “fool me once” kind of thing.
Collateral including loyalty programs is pledged once and only once. There are restrictions on all corporate debt; there is nothing accurate or different about what you seem to think is or has been offered to DL than to UA. And from a US government perspective, DL and WN have the lowest percentage of assets pledged to the government. DL and UA have private sector loyalty backed loans but UA also has a government CARES Act phase 2 loan as does other carriers except DL and WN.
AA obtained multiple loans from Treasury using its loyalty program so they clearly can separate portions of the program into distinct portions which can be used to guarantee separate loans and that concept isn’t unique to AA. It does highlight the risk that AA will be in if it can’t repay all of its debts on time and the ability of Treasury to start selling off parts of the AAdvantage program – or for AA to choose to let parts go and save other parts for a restructured airline.
I agree FC. As you think of each loyalty program, you associate it with it’s air carrier. Decoupling the two weakens brand recognition for both.
Just in total character for Air Canada and Rovinescu. Remember this is the airline month after month at the top of the U.S. s..t list for not refunding paid pax. Aeroplan was always a mugs game …. actually more like a shells and pea game…as rules, rewards. restrictions and value of miles kept changing against the frequent flier. I gave up on Aeroplan years ago…the last flight was to get from Toronto to Vancouver meant flying east to Ottawa, sit for four hours and then get westbound with a stop en route. .Airlines should have to show passenger rewards as a liability on their books and not be allowed the game of sell/buy that AC is doing. Again this is the “broke” airline that just waited out Air Transat and got the only meaningful leisure market and European market competition in Canada…they got it for a bargain 1:7 ratio…and Canada will lose any kind of even slim airline competition. They just sold aircraft and leased back for a profit. They have raised millions on the market this year…. anyway. Nobody is going to hold them accountable or responsible.
Let me preface my comment thusly:
I think the world of Cranky and GREATLY enjoy his analysis and somewhat quirky sense of humor. But…
The ONLY coverage AC deserves is refunds Refunds REFUNDS.
NOTHING else is appropriate or newsworthy.