AeroPlan on solid footing

[Kip Powick]

Financial partners and Air Canada provide 90 per cent of Aeroplan's revenue, establishing a solid base for growth, according to the loyalty program's preliminary prospectus to become an income trust.

The document shows that Aeroplan's business model, first and foremost, relies on revenue from various business partners paying for the right to purchase and award Aeroplan miles.

There are also two key but lesser-known ingredients in the reward program's recipe for success: the “breakage” rate — miles never redeemed — currently estimated at 17 per cent; and the “float” of a 30-month average time lag between Aeroplan selling miles to business partners and incurring the cost of redemptions for rewards such as Air Canada flights.

Last year, Aeroplan's revenue totalled almost $700-million. Of that amount, financial services partners accounted for 63 per cent, Air Canada 27 per cent, other travel services 8 per cent and consumer products partners the remaining 2 per cent.

ACE Aviation Holdings Inc., the parent of Air Canada and Aeroplan, is providing details of the popular reward program in a 154-page prospectus, hoping to entice investors to buy trust units expected to go on sale by the end of June.

Investors examining Aeroplan's merits could also look in their wallets to find out why the customer loyalty program is confident that it has the steady cash flow to ensure a smooth conversion next month into a new trust.

Aeroplan chief executive officer Rupert Duchesne recently asked a business audience to count the number of credit cards they had tied to loyalty points and, right on cue, out of the wallets came CIBC Aerogold Visa and American Express AeroplanPlus cards, among many others.

Canadian Imperial Bank of Commerce and American Express Canada Inc. are two key reasons that Aeroplan believes it will prosper because those financial institutions pay fees to the loyalty program.

Since May 20, when ACE announced that it will be selling off an 18-per-cent stake in Aeroplan, company officials have declined to comment on the prospectus, citing the “quiet period” for the new Aeroplan Income Fund.

After subtracting various expenses, there could be $140-million this year in cash distributions available to unitholders, the prospectus said.

The fund will have a yet-to-be-determined number of units priced at $10 each.

Details on the size of the initial public offering are expected by the end of June, when the final prospectus is scheduled to be completed. The yield could be in the neighbourhood of 8.75 per cent, said Harry Levant, an independent income trust analyst.

“We consider the distributable cash estimates to be aggressive but achievable,” Mr. Levant wrote in his Aeroplan analysis.

Aeroplan benefits from the so-called margin or spread between how much it charges to sell miles to its business partners and how much it costs to purchase a product or service from those partners.

The average cost to Aeroplan to purchase a reward from one of its partners is almost 1 cent a mile. Based on 15,000 miles, for instance, that works out to an average cost of $148.29, covering the gamut of rewards such as flights, electronics and vacations. Air travel rewards were the most popular choice last year, with 90 per cent of consumers choosing flights.

“Upon the redemption of Aeroplan miles by its members, Aeroplan incurs the cost to acquire the desired reward, which in aggregate is less than the revenue received from the sales of the air miles,” Mr. Levant said. Aeroplan, founded by Air Canada in 1984, has five million active members.

As part of Aeroplan's strategy, members are being encouraged to “double dip” — for instance, buying Esso gasoline with a CIBC Aerogold Visa card and thereby collecting Aeroplan miles from both CIBC and Imperial Oil Ltd.'s Esso retailing chain, Mr. Levant noted.

Aeroplan, which has 60 partners representing more than 100 brands, hopes to diversify its revenue base.

Fadi Chamoun, an analyst with UBS Securities Canada Inc., estimates the new trust's total value will be between $1.56-billion and $1.77-billion. Industry sources add that the IPO could be for nearly 18 per cent of Aeroplan, including an overallotment option, issuing trust units worth almost $288-million. ACE will retain about 82 per cent of the Aeroplan Income Fund.

A portion of the proceeds from the Aeroplan offering will be distributed to ACE by the end of June.