Air Canada Sells 25% Aeroplan Stake For $2.5 Billion, Valuing Program At $10 Billion

Air Canada has just announced a $2.5 billion minority equity investment in Aeroplan, led by Blackstone and La Caisse. This was first rumored earlier in the week, and it’s now official. Will this have any implications for members of the program? Blackstone & La Caisse take equity stake in AeroplanShould Aeroplan members be worried about this?Bottom line Blackstone & La Caisse take equity stake in Aeroplan Air Canada has announced that funds managed by Blackstone and La Caisse, together with other Canadian institutions, are making a $2.5 billion minority equity investment in Aeroplan. The investor group is acquiring a 25% non-controlling equity interest in Aeroplan, valuing the program at $10 billion (Air Canada’s current market cap is $5.5 billion… so I guess the airline has negative value, minus the frequent flyer program?). Air Canada emphasizes how it maintains full operational control of Aeroplan and a controlling ownership interest after the minority investment. The Star Alliance carrier also states that Aeroplan remains a core part of Air Canada’s commercial strategy and customer value proposition, and the experience of members and employees will be unaffected by the transaction. Proceeds from this investment will be used toward the repayment of Air Canada’s upcoming $1.2 billion bond maturity, with most of the balance being applied to accelerate the share repurchase that’s part of Air Canada’s long term strategic plan. Earlier reports had suggested the proceeds would be used to fund new planes and aircraft interiors, but that’s not being stated by the airline directly. There’s certainly precedent to airlines using their loyalty programs for financing. At many airlines, loyalty programs are by far the highest margin aspects of the business, and the programs often make up a majority of the value of an airline. During the pandemic, the “big three” carriers in the United States raised more than $25 billion through debt deals that used loyalty programs as collateral. Keep in mind that this isn’t the first time that Air Canada is looking to outside firms to invest in its loyalty programs. Air Canada went into bankruptcy protection in 2003, and in 2005, the loyalty program was listed as a separate company, which was later renamed Aimia. So for a long time, Aeroplan was a completely separate, publicly traded company. The relationship between the two companies eventually soured, and in 2017, Air Canada announced it wouldn’t renew its contract with Aimia, and would instead start its own competing loyalty program. Eventually the company agreed to sell Aeroplan back to Air Canada for $450 million CAD ($323 million USD) in cash, plus the assumption of certain liabilities. So one does have to give Air Canada credit here — the airline bought the program for $323 million, and is now selling a 25% stake in the program for $2.5 billion! Air Canada is selling a $2.5 billion stake in Aeroplan Should Aeroplan members be worried about this? Broadly speaking, outside investment firms getting involved in businesses (whatever they may be) typically doesn’t lead to an improved experience for customers. They want margins to be as good as possible, often at the expense of trying to promote the overall brand. It’s one thing if Air Canada were just using its loyalty program as collateral for financing, but Blackstone and other firms are actually taking a direct stake in Aeroplan, so may have a bit more say. Do I like the sound of this? No. At the same time, this isn’t something I’d be overly worried about. Ultimately we’re talking about a minority stake. And honestly, in terms of value for members, I’d argue that Aeroplan was actually at its best when it was a fully separate company. Now, the lack of broad value nowadays isn’t the fault of Air Canada leadership, but instead, reflects how the miles & points world has evolved, especially with airlines increasingly limiting award space to members of their own frequent flyer program, and not making it available to members of partner frequent flyer programs. Aeroplan just isn’t the Star Alliance award booking powerhouse it used to be, and that’s because no program is that way anymore — you really often have to use each individual loyalty program to find availability. Aeroplan just isn’t as useful for redemptions as it used to be Bottom line Air Canada has reached a deal to sell a 25% stake in the Aeroplan program to Blackstone (among others) for $2.5 billion, valuing the program at $10 billion. So while the program won’t be fully spun off, it will have outside investors that presumably have expectations of getting some level of return. Going back nearly a decade, Aeroplan was fully spun off, and was owned by Aimia, only to then have Air Canada buy the program back at a huge discount. While I never like the sound of outside investors coming in, I wouldn’t expect there to be too many implications here, quite frankly. Either way, you’ve gotta respect buying the program for $323 million, and then selling a 25% stake for $2.5 billion. What do you make of Blackstone investing in Aeroplan?