Air Canada spun off its frequent flyer program 13 years ago. Last year they announced that they wouldn’t be renewing their 15 year agreement, instead severing ties with Aeroplan and .
Last week Aeroplan made news talking up how they plan to compete against Air Canada with points transfers to other airlines, buying seats in bulk and even chartering flights for members. I interviewed their CEO on Friday. I’ve been nervous about my Aeroplan points balance without direct access to the Star Alliance. Although my interview with their CEO raised my estimation of the likelihood my miles would still have value. At the same time I’ve been looking forward to the new competition — Aeroplan competing against Air Canada, and the creativity that would follow. Air Canada’s news caused the share price of Aimia, Aeroplan’s parent company, to drop like a rock — down from about 9 Canadian dollars down to as low as 1.50. The news about Aeroplan’s aggressive plans to compete last week helped their share price. This morning there’s news that instead of starting from scratch with their new frequent flyer program, Air Canada is proposing to buy Aeroplan in conjunction with Air Canada’s credit card partners. The market equivalent value is comprised of the Aeroplan loyalty business proposal value of $1.64 per Aimia common share plus non Aeroplan loyalty program net assets valued at $2.00 per common share based on fair market value estimates contained in Mittleman Investment Management’s Q1 2018 investor letter.1
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This would allow Air Canada to start with all of Aeroplan’s members, instead of starting from scratch. It would take the pressure off of Air Canada to offer as rich a value proposition to members in order to compete with Aeroplan.
There’s a certain irony to spinning off the program, realizing income, driving down the value of that program and then acquiring it on the cheap.
In June 2005 Air Canada initially sold just 12.5% of Aeroplan for CAD$250 million, an implied initial valuation of $2 billion. They’re now proposing to acquirq back the entire enterprise for CAD$2.25 billion 13 years later.
Has Air Canada become Carl Icahn?
It’s just business. Seems like a good idea for Air Canada.
Sometimes “the market” is stupid. I remember several years ago, there was an investment craze for regional airlines. Investors saw these companies as steady profit makers. They didn’t appreciate the fact that “the profits” were largely controlled by the whim of the major airline that employed the regional airline. So Gordon Bethune spun off Continental Express as “ExpressJet.” The deal worked out much better for Mr. Bethune than it did for ExpressJet’s shareholders. So it has been for Aeroplan shareholders. Not every business transaction is a win-win.
WestJet should make a bid. United should make a bid.
AC only spun AE off because the vulture funds of Wall Street insisted they needed the value and $ return of the spin off to commit to refinance AC through its new holding company ACE. (They also forced ACE to spin off AC’s technical services division.). It was a short sighted “flavour of the day” by speculators who saw little value or profitability in pure airline plays, but “hidden value” in their FF programs.
This makes sense to AC for many reasons as noted above though I had hoped AC’s new program would be a pure play FF program benefiting those who fly vs those who spend and/or just churn their credit cards to generate miles. And it might be AC’s revenge on those institutional investors and vulture funds that forced the spin-off in the first place, benefiting only them and neither AC nor AE members.
I would be furious if I was a shareholder of this company (laughing).