Aeroplan announced last night that discussions with Air Canada on extending their relationship had broken down.

Air Canada announced this morning that it’s going to launch its own new loyalty program when Aeroplan exclusivity ends in June 2020.

The relationship between the two entities is unique because Aeroplan was spun off from Air Canada and is part of a separate company, Aimia. They had a long term contract, and for most of the time there was little contemplation that the contract wouldn’t be renewed.

However Air Canada sees an opportunity to build its own valuable business. They expect “the net present value of the program repatriation over a 15-year period to exceed $2 billion.”

For some customers that’s likely to be great, because it means more competition in Canada. Aeroplan is going to have to try to retain their customers without an exclusive Air Canada relationship which gave them access to Star Alliance awards. Air Canada is going to have to entice customers to join a new program.

Copyright: ronniechua / 123RF Stock Photo

What to Expect

Aeroplan remains the exclusive frequent flyer program for Air Canada.. for now. You’ll continue to earn Aeroplan miles through June 2020. Even as the companies prepare for a break, customers flying Air Canada will earn Aeroplan miles which may no longer be redeemable for Star Alliance travel in May 2020.

Air Canada today announced its decision to launch its own loyalty program in 2020 upon the expiry of its commercial agreement with Aimia, the operator of Aeroplan. Effective June 30, 2020, Aeroplan will no longer be the loyalty program for Air Canada. Aeroplan has been independently owned and operated by Aimia for almost a decade. By operating its own loyalty program, Air Canada will be better able to strengthen its customer relationships and deliver a more consistent end-to-end customer experience.

Miles earned with Aeroplan stay with Aeroplan. “Air Canada intends to continue to offer Aimia redemption seats for Aeroplan members after June 2020, with pricing competitive with other third-party rewards programs.” Aeroplan offers hotel, car, and merchandise rewards and has time to negotiate additional opportunities for members.

Elite status (including lifetime status) will be honored in the new program.

I spoke with senior leadership at Air Canada about their plans. Their number one goal is to win back customers, so they’re going to offer huge enrollment incentives when the time comes.

With a three year advance announcement there’s plenty of time for customers to plan. For instance, I have half a million Aeroplan miles I’m going to be thinking more about. The timeline also gives them a path to negotiate with financial institutions on a credit card deal. That in turn will determine what other transfer partnerships they’re able to establish. There’s a lot of work ahead for them.

No doubt card signup bonuses are going to have to be large, and earning propositions significant, since they’re starting at ground zero with members. Air Canada has a portfolio of Altitude elite members, and other customers who fly the airline (some of whom aren’t Aeroplan members) but they don’t have the 5 million member database that Aeroplan does and they don’t get to keep that database come June 2020 either.

So executives believe that the program they offer 3 years from now will be at least more generous than what would have been offered by Aeroplan at that time (although they weren’t willing to commit to saying more valuable than Aeroplan today because of uncertainty of what the loyalty landscape will look like 3 years in the future).

In the meantime, Air Canada plans to make some improvements to their Altitude elite program in the near term rather than waiting for the launch of the new unified program in 2020.

Burn Those Aeroplan Miles Over the Next 3 Years

Aeroplan is part of a billion dollar company, Aimia. It has huge value, and there’s no question Aimia will fight for its life. They’ll negotiate to continue to buy seats on Air Canada, and they’ll offer other rewards as well. It’s likely that they’re going to need to offer very rich rewards for the time being in order to entice their customers to stay with them rather than moving credit card and other transactions over to the new Air Canada program that launches.

In that sense, Canadians may well enter a real golden period for loyalty value propositions at a time when we’re seeing arguably less value in the U.S.

However Aeroplan is going to be buying tickets like any other volume third party, they are not a member of the Star Alliance. For most readers of this blog Aeroplan is a repository of transfers from American Express Membership Rewards or for hotel points during transfer bonuses, with the key use being redemption for premium cabin international awards.

Although I’m suggesting Air Canada as a great airline to fly to circumvent the US electronics ban, I’ve been an Aeroplan customer rather than an Air Canada customer and the way I use my miles is likely to go away.

And though Aeroplan will work hard to offer a compelling value proposition until we see what that looks like I’d encourage spending down those miles and potentially accumulating again later under the new post-Air Canada exclusive program.

Nail in the Coffin for Frequent Flyer Program Spinoffs?

With every airline earnings call Joe DeNardi from Stifel asks about spinning off frequent flyer programs. He believes they’re worth far more than the airlines themselves, and that this would ‘unlock their value’. For instance American AAdvantage could be worth $30 billion to $40 billion while the whole airline itself is valued by the market at significantly less than that.

Now, frequent flyer programs are valuable. AAdvantage could have $2 billion in annual earnings, though it’s hard to say since the amount of detail released by American is fairly limited (but we can assume that their Citi-Barclaycard co-brand credit card deal is worth order of magnitude $2 billion in revenue per year and projected to grow).

However the valuation being put on the program is simply too high. These earnings are far from riskless. American has already said their credit card signups are below expectation (United has said theirs are too). And changes to interest rates or interchange rates have every ability to negatively effect the largest revenue stream the programs have. Maintaining current revenue is far from guaranteed in the future (and may even not be at all likely), so valuations of 15 to 20 times earnings seem very hard to justify. And that’s before we even get into questions of devaluation and what that means for program engagement.

However the news of the impending Aeroplan-Air Canada breakup presents a whole new wrinkle for frequent flyer program spin-offs, one that may make investors skittish. Aeroplan went public at a higher valuation per member than we’ve seen from other programs and its stock has underperformed the market as it is. Now the first program to go public has an uncertain future.