The Appeal of T&E Co-Brand Programs: A Look at Aimia’s New Arrangements
On September 16, 2013, Aimia, the firm operating Canada’s Aeroplan multi-tender loyalty program (and Air Canada’s frequent flyer program), announced 10-year credit card issuing agreements with TD Canada Trust (“TD”) and Canadian Imperial Bank of Commerce (“CIBC”). The announcement represents a significant milestone for Aeroplan, one of Canada’s largest loyalty programs with 4.7 million active members, and one of the largest credit card program transitions in Canadian history. It also represents a significant and rather unique mitigation of Aimia’s and TD’s risk of re-launching the Aeroplan loyalty and credit card programs. According to press releases by the parties, the agreements include an increase in Aimia’s rate per mile and a $100 million up-front contribution from TD to fund investments in the Aeroplan program. As part of the deal, TD will purchase approximately 50% of CIBC’s Aerogold portfolio and will become Aeroplan’s primary credit card issuer beginning January 1, 2014. Per the public statements and agreement filings, CIBC will receive a 10% premium for the receivables sold to TD (half-funded by Aimia) and will extend its 22-year relationship with Aimia, retaining the remainder of its Aerogold portfolio and continuing to market and issue Aerogold cards through the bank’s proprietary channels.1
The terms of the September agreements, outlined in Table 1, are largely similar to the conditional agreement between Aimia and TD announced in June of 2013, and appear to offer meaningful advantages to all three parties – Aimia and TD in particular. Aimia is likely to benefit from the issuer competition, doubling Aeroplan’s access to retail banking channels while minimizing attrition risk during the transition. Furthermore, TD’s upfront investment in program enhancements will offset the cost of the re-launched Aeroplan products, including the new premium card, which will offer higher cardholder earn rates. TD and CIBC have each won the right to share in one of the largest and most valuable financial assets in North America. According to Aimia and CIBC disclosures, the Aimia portfolio consists of $6 billion in receivables, over $38 billion in purchase volume, and nearly 1.2 million cardholders. These figures suggest that Aeroplan cardholders are among the most desirable in the world, spending $32,000 per year and carrying $5,000 in balances. The 10% premium paid by TD, relatively modest by U.S. standards for such an attractive book of cardholders, suggests that TD’s ongoing economics to Aimia are very competitive, as would be expected to effect a decision of this magnitude.
The new arrangement would appear to add complexity to Aimia’s efforts to manage the Aeroplan credit card program, but steps were taken to minimize consumer confusion by discouraging competition for cardholders between CIBC and TD. The added complexity is a function of Aimia managing three credit card issuer relationships (TD, CIBC, and American Express) instead of two (previously Aimia had relationships with CIBC for revolving credit cards and American Express for charge cards). However, the September agreement reduces TD’s and CIBC’s incentives to target existing cardholders by subjecting the parties (including Aimia) to up to $400 million in penalties (to be paid among the parties) based on cardholder migration between the TD and CIBC card programs during the first five years of the term. Additionally, CIBC and Aimia will each have the right to terminate the arrangement after three years in the event that conditions related to the migration of CIBC Aerogold cardholders to CIBC’s proprietary credit card products are met.
In light of the outcome of the final agreements, it is worth noting the substantial risk that both Aimia and TD were prepared to take in the agreement announced in June. Given Aimia’s apparent lack of portfolio sale rights, the company could have suffered a significant loss of purchase volume and income, at least in the short term, as CIBC would have been able to flip Aerogold cardholders to a proprietary CIBC rewards credit card. Additionally, third party loyalty programs and other credit card issuers would have increased efforts to attract Aeroplan cardholders who may have been confused or dissatisfied by the transition. In the June agreement, TD not only agreed to a 15% increase in Aimia’s price per point versus that paid by CIBC, but also guaranteed the regeneration of a portion of the gross margin that Aimia enjoyed from CIBC gross billings in 2012: 65% in year one (2014) and 90% in years two and three (2015 and 2016).
To understand the potential risk for Aimia, the Aeroplan loyalty program, and TD, one can consider past examples of loyalty program transitions from one credit card issuer to another. In an investor presentation in June, Aimia said that it expected to convert 70% to 90% of CIBC’s existing Aerogold portfolio to a TD-issued Aeroplan card. In contrast, U.S. Bank’s stated success in retaining its Northwest Airlines WorldPerks portfolio in 2009 suggests that there are material risks associated with program transitions involving large-scale competing investments to both win-back and retain the same cardholders.
In the U.S. Bank example, the issuer held the rights to the portfolio, just as appears to be the case for Aimia and CIBC. As U.S. Bank’s issuing agreement with Northwest was ending (due to the airline’s merger with Delta Airlines), the bank introduced FlexPerks, a rewards credit card designed to mimic WorldPerks, and issued new cards to existing WorldPerks cardholders. More than a year later, U.S. Bank indicated that its FlexPerks portfolio represented 85-90% of the WorldPerks program receivables, accounts, and purchase volume at the time of the transition. U.S. Bank provided an update on the WorldPerks program in an investor presentation last month suggesting that the portfolio remains of equivalent size to the portfolio pre-merger. Of course, U.S. Bank made significant investments to market and build the FlexPerks program as would be expected in such a large-scale retention effort, and there has been no public disclosure of what percentage of the current FlexPerks accounts, purchase volume and receivables can be traced to former WorldPerks accountholders (i.e., whether US Bank retained or replaced the WorldPerks volume).
While the FlexPerks portfolio included newly-acquired accounts and benefited from market disruption caused by the merger of Northwest and Delta, this and other non-public examples of which we are aware, suggest that Aimia’s downside risk could have been higher than the 10-30% forecasted by the company. And although the TD agreement would have limited the short-term risk to Aimia’s earnings, TD’s guarantee would not have protected Aimia from a long-term decline in earnings or market relevance. The complex negotiation ultimately resulted in a structure that mitigated risk for all parties by splitting the portfolio and issuance rights between CIBC and TD.
While time will tell the ultimate success of this arrangement, Aimia’s belief in the power of its loyalty currency and its willingness to engage in brinkmanship to achieve its desired objectives is rather unprecedented. In a rather unique way, the September agreements have the potential to create long-term enhanced value for Aimia while minimizing transition risk, mitigating financial risk for TD, and providing certainty and stability to CIBC.
1 The status of Aimia negotiations with American Express, issuer of Aeroplan charge cards, was not discussed in the September 16, 2013 press release.
For more information, please contact Dave Woynerowski, Partner, firstname.lastname@example.org; or Cara Weikel, Consultant, email@example.com. Both specialize in Credit Card Issuing.
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