Air Canada spun off its frequent flyer program and that new company developed several loyalty businesses. However Air Canada decided that its future is better with a new wholly owned loyalty program, to be launched in 2020 and in May announced plans to cut ties with Aimia.
Copyright: ronniechua / 123RF Stock Photo
Earlier in the year an analyst at a hedge fund once asked me to help explain the valuation of air berlin’s topbonus program, the valuation of that spinoff made no sense on the fundamentals. It was a control and cash infusion play by Etihad, and now that the airline has gone bad so has that frequent flyer program.
With those two spinoffs imploding — Aimia’s stock dropped from about 9 before Air Canada’s announcement to less than 2 on Friday (3 years ago it was hovering around 19) — we may see a dampening of enthusiasm for spinning off frequent flyer programs for awhile.
In light of this Aimia is working to strengthen its balance sheet by disposing of “of non-core investments and assets” and has sold its Canadian Air Miles interests — “Trademarks, license and royalty agreements for Canada” (another program distinct from Aeroplan, not linked to an airline) to Diversified Royalty Corp for “$53.75 million, plus a possible additional payment of up to about $13.75 million within the next three years depending on the program’s performance.”
LoyaltyOne operates Air Miles and describes it as “Canada’s most widely used loyalty currency” and claims over 10 million household members (a number I believe they’ve used since at least 2010).
Aimia was generating $8.5 million a year from its interests, so in some ways it’s surprising they only managed $53 – $67 million in return. On the other hand the long term value of Air Miles may not justify treating the royalty and licensing deal as a truly safe annuity.
Programs with fixed value redemptions and low value redemptions don’t generate significant shareholder value because they don’t feed into passions and dreams of consumers. An LCD toaster isn’t worth zero, but it’s not the sort of redemption that proves to a member that their loyalty behavior was a smart one and ramps up future earn.