AIM.TO - Aimia

[petec]

Financing maturities profile: The company plans to extend its financing maturities to 2020 with the drawdown of $200 million of its $300 million revolving credit facility.  The proceeds will be used to redeem $200 million of senior secured notes ahead of their January 2018 maturity. This will also have the benefit of reducing the interest rate by around 60bps to 4.4%, whilst maintaining a debt/Adjusted EBITDA ratio of around 2x.

 

Thanks.

[samaniv]

I think the above poster is referring to when Air Miles tried to set an expiry on their points - they received a lot of bad press - and said withdrew their stance on expiring points as a result.

 

I am very surprised that Air Canada is trying to build their own loyalty coalition. I though it is prudent not to screw with your largest customer. I also though Aeroplan had become somewhat synonymous with Air Canada - so it seems like a new coalition will be a ton of work with a lot of potential to go wrong.

 

What the hell is AIMIA doing with its capital allocation? They now have a 20% yield on the common - they need to cut that. They should conserve cash..

 

 

 

[petec]

I don't think it will be that hard for AC to build a new programme - they've done it before, after all!

 

Incredibly dumb of AIMIA to think customers won't change their behaviour.  Worst case is that redemptions accelerate, free cash evaporates, and they realise they should never have paid their float as dividend.  Ought to be conserving every dollar.

[clutch]

Simply put, my thesis was that Aimia was going to renew the contract...I was wrong.

 

Now that the thesis didn't turn out, I moved on. Can't speculate further on how the management will turn around this situation...

 

This one stings!!

[sculpin]

Here's what the analysts are saying. Given this news I would have to think there will be a move of shares into potential strategic buyers, activist hedge fund or even private equity who could manage this much better for themselves or shareholders. Bought some preferreds this morning.

 

GMP Securities....

 

Aimia Inc. REDUCE

AIM-TSX

Last: C$8.93

Target: C$4.00

 

Air Canada not expected to renew the Aeroplan partnership; Downgrading to REDUCE

 

Aimia and Air Canada announced today that Aeroplan will no longer be the loyalty program for Air Canada effective June 29th, 2020. Until that date, business with Air Canada is unchanged; Aeroplan members will continue to be able to redeem points for flights with Air Canada and their Star Alliance.

 

We are changing our rating on Aimia to REDUCE based on the following:

 

Limited options to replace Air Canada. While Air Canada represents ~10% of revenues, the company is the backbone of the Aeroplan coalition in Canada, where more than 75% of miles redeemed are with Air Canada. Hence, the departure of Air Canada could put the Canadian Loyalty coalition at risk.

 

Potential member erosion. One of the attractiveness of the Aeroplan program was Aimia’s access to 8% of Air Canada seats at preferential rates. Hence, the departure of the airline partner will reduce the attractiveness of the program and potentially lead to a substantial decline in members.

 

Near-term pressure on cash flows. We are concerned that Aeroplan members may decide to terminate their membership earlier than June 2020. Hence, the departure of several members could put pressure on cash flows as they redeem their miles.

 

Potential for departure of other partners. The remaining partners in the Aeroplan coalition are likely to revisit their options given the cloudy outlook, which could result in the departure of other partners.

Recommendation and valuation

 

Changing our rating to REDUCE and decreasing our target to $4.00. While the impact to Aimia’s near-term profitability may be limited, we believe investors will apply a significant discount to current earnings given the cliff on June 2020. Aimia generates more than 70% of its profitability in Canada, hence with the viability of the Canadian coalition in question, valuing Aimia becomes challenging. We estimate that post Air Canada’s departure, Aimia could generate EBITDA in the range of $150-200m (vs $261m expected in 2017) to which we apply a 7x multiple.

 

To access the full report and applicable disclosures please click here

To access our full research library or manage your GMP Research profile, please click here

 

Martin Landry

(514) 288 4016

mlandry@gmpsecurities.com

 

IAS.....

 

Aimia Inc. (AIM-T, Last: 8.93, Target and Rating under review) – Negative. Focus for today for Aimia is this statement in the Q1 results: Recent discussions lead Aimia to the believe that Air Canada does not currently intend to renew the Aeroplan partnership expiring in June 2020; Aimia is exploring post-2020 alternatives. We did not see this coming. While it’s business as usual for the next 3 years, the real question will be how both companies deal with the end of this agreement. From Air Canada this morning, it sounds like they will continue issuing reward seats to Aeroplan post 2020, which is extremely important. We would expect that the cost of rewards might increase for Aeroplan members (to be in-line with other third-party loyalty programs). The question will be if CIBC and TD cardholders will continue to use these cards in order to collect Miles, and if Amex (which was on a one-year contract) will renew its agreement with Aeroplan. Stock will be off hard this morning. More to come …

[bizaro86]

I know personally, I will be making very sure I spend all my aeroplan miles on flights in the next couple of years, and will stop trying to earn them immediately. If everyone does that, they could burn through a lot of cash in the next few years.

 

The downside for Air Canada is that folks will be less motivated to fly them in 2018-2019 to earn points since the points earned in those years will be less valuable going forward.

[petec]

Holding on to my prefs.  Bought them at just over $10 where my thesis was that they would probably be money good if AC didn't renew.  I maintain that view today with an emphasis on the probably.  Key risk is capital allocation.

[samaniv]

Does anyone have any idea what management may be thinking? Why would they not cut the dividend? It does not make any sense from a capital allocation standpoint...  Is their argument that they don't want the stock to drop? They should be focusing on doing what is right for the business not for the stock price...

 

Even if we end the Air Canada business, I think an argument could be made that ex-AC they have enough revenue to justify their current price?

 

Even without Air Canada, do you guys think they have enough cash to pay off debt and preferred? I think so.

[Guest MikeTheCannon]

Here's the email Air Canada just sent out:

 

Earlier today, we announced a big change that we want you to know about.

 

We announced our decision to replace Aeroplan with a new frequent flyer program that will launch in June 2020 following the end of our commercial agreement with Aimia. As you may know, Aimia has owned and operated Aeroplan for almost a decade.

 

We are announcing this decision three years ahead to provide as much notice as possible to our customers, employees, and partners.

 

We are building a new program that will be inspired by you

 

Over the next three years we’ll be listening to you to build a program that better serves the way you live and travel. Along the way, we intend to make improvements to Air Canada Altitude and other elements of the customer experience.

 

You can continue to earn and redeem your miles

 

Through June 2020 Air Canada is committed to business as usual. You can continue to earn and redeem Aeroplan Miles for Aeroplan Rewards, including flights with Air Canada and our Star Alliance partners just like you do today. Aeroplan Miles earned through June 2020 will stay in your Aeroplan account, subject to the conditions of their program, after the new Air Canada program is launched.

 

After June 2020 miles from Air Canada and Star Alliance partner flights will be credited to the new program, and you will be able to redeem those miles for rewards including Air Canada and Star Alliance partner flights. To get you off to a running start we will have enrollment offers, welcome bonuses and other promotions which will be announced as we get closer.

 

Keeping you in the loop

 

You can expect to hear from us regularly in the months ahead as new improvements are launched, and as more details regarding the new Air Canada program take shape.

[Green King]

As far as I can eyeball it they can do a West Jet + American AirLine partnership to replace Air Canada. :)

[misterkrusty]

GK - why do you think American Air Lines?  Not disagreeing, just curious about your logic

 

a while back I read someone (can't remember who) speculate that if AC fell through, they could maybe partner with WestJet and Alaska Air (I think they said Alaska Air based on replicating current routes currently offered thru AC and Star Alliance)

[Green King]

GK - why do you think American Air Lines?  Not disagreeing, just curious about your logic

 

a while back I read someone (can't remember who) speculate that if AC fell through, they could maybe partner with WestJet and Alaska Air (I think they said Alaska Air based on replicating current routes currently offered thru AC and Star Alliance)

 

Mostly eyeball. West Jet has Canadian routes and they just need a US partner. Any of US majors would love to fill that spot.

Alaska will also work. The US has bad historically cheap flights as compared to the Canada. People will bid up for incremental fill in capacity.

 

http://ac.fltmaps.com/en

https://www.westjet.com/en-ca/travel-info/flight-info/route-map

https://www.alaskaair.com/content/route-map.aspx

http://aa.fltmaps.com/en

http://dl.fltmaps.com/en

 

looks like aa is better here. didn't know that had some many hubs in Canada.

 

Personally hoping for United Airlines. FIGHT CLUB.

[Studesy]

I just started looking at AIM with the large decline in price occurring today.  I see that prior to the news and price decline, many of you held the Series B Prefs.  Which series do you see as most attractive today? Which series is first in line? Could there be any arb opportunities between the prefs or between the prefs and common? TIA

[NormR]

Um, so why doesn't the firm pay off the debt ASAP, cut the dividend to common AND pref. shares, and struggle through. 

[Green King]

Um, so why doesn't the firm pay off the debt ASAP, cut the dividend to common AND pref. shares, and struggle through.

 

+1 I also think it is odd since management would have known this day in advance of the dividend decision.

[Cardboard]

What needs to be cut is the common stock dividend or $120.3 million paid in 2016 vs only $16.9 million to the preferreds which is a cummulative obligation if unpaid.

 

Listening to the call this morning, there was not a lot of questions by analysts that were answered properly and there was a lot of empty, pampering talk over this. I believe that they kept the dividend to soften the blow on the share price but, that is really dumb considering the true impact on the business. They also kept on mentioning that it is business as usual for 3 years and that the ratings agencies would be fine, etc. LOL!!!

 

Announcing a renewal of the NCIB was also likely done for similar reasons. Please note that they did not buy back any share under the last one as they were keeping cash to redeem the $200 million note in December due in Jan 2017 (that was smart).

 

Until they find a solution to stabilize the business outlook over the long term and honoring all their obligations, continuing to pay the common dividend is breaching fiduciary duty IMO.

 

Cardboard

 

 

[samaniv]

I guess we can only pray that some activist comes in and forces management to cut their dividend / improves capital allocation.  I also think it is a breach of fiduciary duty to pay all their cash out to common shareholders, essentially screwing the preferred holders.

 

 

What needs to be cut is the common stock dividend or $120.3 million paid in 2016 vs only $16.9 million to the preferreds which is a cummulative obligation if unpaid.

 

Listening to the call this morning, there was not a lot of questions by analysts that were answered properly and there was a lot of empty, pampering talk over this. I believe that they kept the dividend to soften the blow on the share price but, that is really dumb considering the true impact on the business. They also kept on mentioning that it is business as usual for 3 years and that the ratings agencies would be fine, etc. LOL!!!

 

Announcing a renewal of the NCIB was also likely done for similar reasons. Please note that they did not buy back any share under the last one as they were keeping cash to redeem the $200 million note in December due in Jan 2017 (that was smart).

 

Until they find a solution to stabilize the business outlook over the long term and honoring all their obligations, continuing to pay the common dividend is breaching fiduciary duty IMO.

 

Cardboard

[Cardboard]

It may be a blessing in disguise to have this happening now or 3 years and change before the expiry vs at the last minute as usual. The discounts on both stock and preferreds are very attractive for a potential acquirer or activist or PE firm and there is a lot of time to make moves.

 

I was just looking at Club Premier and AeroMexico is part of SkyTeam or Delta. I could see lots of interesting combination to really hurt Air Canada long term with their re-creation of what they did in 1984 or when Aeroplan was formed.

 

Is there anything that would prevent Aeroplan/Aimia to allow its members to exchange their points for flights at other airlines? I would really love being able to use mine on Delta for example.

 

Aimia or formerly Aeroplan was also a spin-off from Air Canada in 2005 who wanted to get their hands on precious cash during the heydays of income trusts. They then sold the rest after they were bankrupt for the 2nd time (not the smartest either!).

 

Another interesting player is Onex which was interested by Aeroplan back in 2003 when the transaction fell apart after Air Canada filed for bankruptcy for the 1st time after acquiring Canadian Airlines.

 

Cardboard

[petec]

Is there anything that would prevent Aeroplan/Aimia to allow its members to exchange their points for flights at other airlines? I would really love being able to use mine on Delta for example.

 

 

I don't think there can be.  Points are a currency earned and owned by the members.  And most aren't earned at AC but at via credit card use.  I doubt AC can ban members from spending currency earned on cards at another airline if Aimia does a deal.  One of the Brazilian loyalty schemes has commented that they would be able to transfer to another airline if something similar happened to them.  But the devil will be in the contract detail.

[fisch777]

Perhaps they can auction all the expensive artwork in the fancy HQ?

[Uccmal]

It may be a blessing in disguise to have this happening now or 3 years and change before the expiry vs at the last minute as usual. The discounts on both stock and preferreds are very attractive for a potential acquirer or activist or PE firm and there is a lot of time to make moves.

 

I was just looking at Club Premier and AeroMexico is part of SkyTeam or Delta. I could see lots of interesting combination to really hurt Air Canada long term with their re-creation of what they did in 1984 or when Aeroplan was formed.

 

Is there anything that would prevent Aeroplan/Aimia to allow its members to exchange their points for flights at other airlines? I would really love being able to use mine on Delta for example.

 

Aimia or formerly Aeroplan was also a spin-off from Air Canada in 2005 who wanted to get their hands on precious cash during the heydays of income trusts. They then sold the rest after they were bankrupt for the 2nd time (not the smartest either!).

 

Another interesting player is Onex which was interested by Aeroplan back in 2003 when the transaction fell apart after Air Canada filed for bankruptcy for the 1st time after acquiring Canadian Airlines.

 

Cardboard

 

At least we dont have to worry about another AC bankruptcy. 

 

A funny comment from someone on the Financial Post site:  "what does air canada know about loyalty programs.  They haven't got the people moving part down yet". 

[SafetyinNumbers]

Is there anything that would prevent Aeroplan/Aimia to allow its members to exchange their points for flights at other airlines? I would really love being able to use mine on Delta for example.

 

 

I don't think there can be.  Points are a currency earned and owned by the members.  And most aren't earned at AC but at via credit card use.  I doubt AC can ban members from spending currency earned on cards at another airline if Aimia does a deal.  One of the Brazilian loyalty schemes has commented that they would be able to transfer to another airline if something similar happened to them.  But the devil will be in the contract detail.

 

There is nothing that would keep points from being used for other airlines. In fact, half of points are spent now on Star Alliance members or on market fares (effectively cash value). The additional value for points to customers was on the lower priced fixed inventory that AC sold Aeroplan.

 

I spoke with the CFO for a bit at the AGM today. I suggested strongly that they should kill the dividend on the common and buyback preferred. He suggested there wasn't enough volume in the pref to do that and I clarified I was talking about a substantial issuer bid and not an NCIB. At the very least they should pay off all the fixed debt as soon as possible versus paying dividends on the common.

 

Perhaps since their attempt to keep the common stock afloat by not cutting the dividend didn't work, they will consider making the right long term decisions!

 

[petec]

 

There is nothing that would keep points from being used for other airlines.

 

 

Well there clearly is - you can't use your points at Delta, can you?  You can use them with Star Alliance partners because that is explicitly permitted in the AC contract.  What we (I) don't know is what the AC contract says about spending points at non-partner airlines after the contract has expired.  I'm about 80% sure it is unrestricted, but not 100% sure.

 

Possibly more importantly, how are Aimia communicating this to members?  Because if members THINK their points will be useless for air travel, they may stop collecting and go on a redemption binge.  Which would be VERY bad for cash.

[clutch]

Got this email from them today:

 

Air Canada announced today that they intend to launch an in‑house Frequent Flyer program. I wanted to personally provide some additional information.

 

First and foremost, through June 2020, Air Canada and Aeroplan are committed to business as usual. You can continue to earn and redeem Aeroplan Miles for Aeroplan flight rewards, including flights with Air Canada and Star Alliance member airlines — just as you do today.

 

In addition to the miles you earn on Air Canada eligible flights, you will continue to collect miles from our network of over 75 world‑class partners, representing more than 150 partner brands in the financial, retail, and travel sectors.

 

With more than 5 million members, Aeroplan is Canada's premier coalition loyalty program, and there is strength in our numbers. Last year, Aeroplan members redeemed for 1.9 million flight rewards, enough to fill 11 Boeing 777s (the biggest plane in Air Canada's fleet) every single day of the year.

 

We know how much you care about this program, and we're working to secure great new redemption options for you after June 2020.

 

We are committed to providing the best value for our members. We'll post the most up‑to‑date information and FAQ's on aeroplan.com.

 

And finally, I'd like to thank you for your continued passion for the Aeroplan program.

 

 

Sincerely,

Vince Timpano

President, Americas Coalitions, Aimia

[SafetyinNumbers]

 

There is nothing that would keep points from being used for other airlines.

 

 

Well there clearly is - you can't use your points at Delta, can you?  You can use them with Star Alliance partners because that is explicitly permitted in the AC contract.  What we (I) don't know is what the AC contract says about spending points at non-partner airlines after the contract has expired.  I'm about 80% sure it is unrestricted, but not 100% sure.

 

Possibly more importantly, how are Aimia communicating this to members?  Because if members THINK their points will be useless for air travel, they may stop collecting and go on a redemption binge.  Which would be VERY bad for cash.

 

From my conversation with the CFO, my understanding was that there is no restriction post 2020. I'm sure some interesting conversations will start with WestJet who might benefit from having a large customer that knows almost everything about the buying patterns of its biggest competitor's clients.