Morningstar | Air Canada Acquires Aeroplan Loyalty Program at a Bargain; Raising Fair Value Estimate. See Updated Analyst Note from 22 Aug 2018
We are raising our fair value estimate to $32 from $29 for no-moat Air Canada after the carrier finalized plans to acquire the Aeroplan loyalty program from Aimia for CAD 450 million ($345 million) in cash. We expect this acquisition will generate roughly CAD 1.4 billion in added value on 40% to 60% profit margins from miles sold to reward program partners. High operating margins stem from miles sold at two to three times cost and 10% to 20% of miles remaining unclaimed. After the announcement, shares rallied more than 8%. We find Air Canada is slightly undervalued at a price to fair value of 0.83, but due to our very high uncertainty rating, shares continue to trade in 3-star territory.Air Canada spun-off Aeroplan in 2005, forming Aimia, and continued selling miles to the loyalty program up until it announced it would terminate the relationship in 2020, which would eliminate a sizable portion of Aimia’s mileage portfolio. In the wake of this announcement, Aimia’s market value fell over 60% in 2017, giving Air Canada the ability to purchase Aeroplan at a bargain. Air Canada’s original asking price was CAD 250 million, but Aimia rebuffs brought the final price up to CAD 450 million.
This acquisition lets Air Canada reap the benefits of a highly profitable, 5-million-member loyalty program. Aeroplan credit card partners include Canadian Imperial Bank of Commerce, or CIBC, and Toronto-Dominion, among the largest customers, each with deals set to expire in 2024. According to CBC/Radio-Canada, Toronto-Dominion and CIBC mileage purchases, combined, amount to about CAD 650 million in revenue per year. American Express also has a deal to purchase Aeroplan miles, but this agreement terminates in 2020 when Air Canada expects to commence its new loyalty program. So far, CIBC, Toronto-Dominion, and Visa are expected to offer credit partnerships for Air Canada’s newest loyalty program, with several other deals under negotiation.
Air Canada is a domestic and international airline Company. Co. is engaged in the provision of scheduled passenger services in the Canadian market, the Canada-United States transborder market and in the international market to and from Canada. Through its subsidiaries, Co. also operates in low-cost carriers segment, providing service to customers in lower density markets and also in higher density markets at off-peak times throughout Canada and the United States. Co. also provides air cargo services on domestic and the U.S. transborder flights; tour operator services which operate in the outgoing leisure travel market; and ground handling services.
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