AIM.TO - Aimia

[Picasso]

I hate this stock so much. 

 

He ignores the preferred in his debt calculation that's sitting ahead of him and trading at half of par (for a reason).  It's disingenuous to say this is a 'net cash' business.

 

I think that if you look at the history of any loyalty program that goes kaput, first some small number redeems right away.  But most consumers are halfway through their next hurdle rate to get the actual reward (in this case flight) that they want to earn before the program goes away.  So they keep spending for a bit before switching cards.  I don't see how looking at the recent quarterly results and saying this thing is going back to up $19 makes any sense.  The outcome here is not linear in that way at all.  Redemption's will accelerate before the deadline if they can't strike a deal on par with the Air Canada.  I could go on about this for hours but I'd rather not pop a blood vessel before the weekend.

[Cigarbutt]

There is enough to hate in this world.

A stock does not know if you own it or not.

Anyways, if markets are efficient, the value in preferreds should eventually be recognized. ;)

But this is puzzling.

Maybe not related but, in the noise, some say that Aimia will integrate blockchain opportunities.

Exciting?

 

[bizaro86]

I only get excited if they are doing marijuana and blockchain and lithium mining.

 

 

[NewbieD]

Seems likely that a virtuous circle will develop...Something like

 

Higher stock price -> higher likelihood of passing capital impairment test -> expectation of preferred dividends -> higher preferred and common stock price -> pass capital impairment test -> preferred dividends -> perceived financial health -> higher stock price

 

Agree with Picasso redemption development is not likely to be linear. But I also Believe a decent portion are not that into the program and will never redeem. Anyhow, I think such a development would be >1 year from now, giving the above development some time to play out.

 

 

[writser]

I hate this stock so much. 

 

He ignores the preferred in his debt calculation that's sitting ahead of him and trading at half of par (for a reason).  It's disingenuous to say this is a 'net cash' business.

 

I think that if you look at the history of any loyalty program that goes kaput, first some small number redeems right away.  But most consumers are halfway through their next hurdle rate to get the actual reward (in this case flight) that they want to earn before the program goes away.  So they keep spending for a bit before switching cards.  I don't see how looking at the recent quarterly results and saying this thing is going back to up $19 makes any sense.  The outcome here is not linear in that way at all.  Redemption's will accelerate before the deadline if they can't strike a deal on par with the Air Canada.  I could go on about this for hours but I'd rather not pop a blood vessel before the weekend.

 

Well said. That blogpost is either intentionally misleading or extremely sloppy. Don’t get suckered into something complicated just because you fear you might be missing the next 10-bagger “cheapest no-brainer stock pick in the universe”.

[elc13]

Picasso (and any others) -- do you have any historical examples of loyalty programs going kaput as you described? Came across this company recently and doing preliminary research. Thanks to all for the informative discussion so far!

[Homestead31]

I no longer have any position in this but do have an update for those who do. 

 

This past week TD Bank has started their own rewards program.  I have a 'normal' TD credit card. 

 

They have enrolled my card automatically in their rewards program.  I already have 92 points.  Not sure what I can do with them yet. 

 

Just an FYI.

 

Uccmal - would you mind clarifying this for me?  If i am understanding correctly, your experience did not touch on Aeroplan at all?  In other words, you did not have a TD Aeroplan card that got switched to the TD rewards program, correct? 

 

I am assuming that the banks can't just pull people out of the Aeroplan program and into another program whenever they feel like.  seems like that would be a bit crazy for consumers.

 

thanks for clarifying.

[clutch]

Slightly related to above...

 

I have Amex Gold, which I was mainly using it to collect Aeroplan points (by converting them from Amex points) and redeem for flights. This used to be a very good value, as for certain purchases I was getting at least 4% back - 2 Amex points (and hence 2 Aeroplan points) for each $1 purchase, and assuming $0.02 / miles for redeeming long-haul flights within North America.

 

Now I'm going to cancel it, because without Aeroplan's deal with Air Canada, I cannot get that much value neither through Amex rewards program nor other redemption purchases on Aeroplan. And I'm going to tell Amex the reason for cancelling is exactly because of Aeroplan's fallout with Air Canada.

 

I don't know how many people like me out there but it can't be good for Aimia when they are negotiating deals with credit card providers.

[StubbleJumper]

Yep, in 2015 and 2016, TD, CIBC and AMEX were falling all over themselves to offer potential new customers the best introductory offer for Aeroplan credit cards (or membership rewards cards for which points tend to be converted into Aeroplan miles), even resorting to the use of expensive TV commercials.  Since last summer's announcement, I have not seen any major promotion from any of those banks to issue new Aeroplan rewards cards.

 

Even if TD and CIBC don't start converting people's cards away from Aeroplan, the absence of card promotions must at least hurt somewhat.  Those banks had to buy $400 or $500 worth of miles from AIM every time they issued a new CC with a 25,000 mile introductory offer.

 

 

SJ

[Homestead31]

Slightly related to above...

 

I have Amex Gold, which I was mainly using it to collect Aeroplan points (by converting them from Amex points) and redeem for flights. This used to be a very good value, as for certain purchases I was getting at least 4% back - 2 Amex points (and hence 2 Aeroplan points) for each $1 purchase, and assuming $0.02 / miles for redeeming long-haul flights within North America.

 

Now I'm going to cancel it, because without Aeroplan's deal with Air Canada, I cannot get that much value neither through Amex rewards program nor other redemption purchases on Aeroplan. And I'm going to tell Amex the reason for cancelling is exactly because of Aeroplan's fallout with Air Canada.

 

I don't know how many people like me out there but it can't be good for Aimia when they are negotiating deals with credit card providers.

 

clutch - are you saying that you have already noticed a decline in value?  the existing deal is in place through 2020, and Aeroplan will still work with Air Canada after that point - just not on classic fares.  My understanding is that post 2020 Aeroplan will be on the same terms with Air Canada as any other point system, with the exception of Air Canada's internal system.

 

could you clarify?  thanks

[clutch]

Slightly related to above...

 

I have Amex Gold, which I was mainly using it to collect Aeroplan points (by converting them from Amex points) and redeem for flights. This used to be a very good value, as for certain purchases I was getting at least 4% back - 2 Amex points (and hence 2 Aeroplan points) for each $1 purchase, and assuming $0.02 / miles for redeeming long-haul flights within North America.

 

Now I'm going to cancel it, because without Aeroplan's deal with Air Canada, I cannot get that much value neither through Amex rewards program nor other redemption purchases on Aeroplan. And I'm going to tell Amex the reason for cancelling is exactly because of Aeroplan's fallout with Air Canada.

 

I don't know how many people like me out there but it can't be good for Aimia when they are negotiating deals with credit card providers.

 

clutch - are you saying that you have already noticed a decline in value?  the existing deal is in place through 2020, and Aeroplan will still work with Air Canada after that point - just not on classic fares.  My understanding is that post 2020 Aeroplan will be on the same terms with Air Canada as any other point system, with the exception of Air Canada's internal system.

 

could you clarify?  thanks

 

Classic fares are where the values of Aeroplan points can be maximized. Market fares are usually horrible value.

 

No change in the values of classic fares right now, but without them after 2020, I don't see much point in collecting Aeroplan points for flight reception.

[bizaro86]

Anyone using market fares would be objectively better off getting a cash back credit card. Classic fares also have the aspirational yet achievable business class awards, which probably drive business.

[clutch]

Anyone using market fares would be objectively better off getting a cash back credit card. Classic fares also have the aspirational yet achievable business class awards, which probably drive business.

 

Yes, I preferred to redeem for business class whenever possible.

[petec]

Has anyone seen evidence that Aeroplan has changed redemption terms subtly to disincentivise redemptions?

[StubbleJumper]

Has anyone seen evidence that Aeroplan has changed redemption terms subtly to disincentivise redemptions?

 

 

 

Haven't seen it yet, but I would certainly advise the company to take measures to reduce its reward liability and to do it soon.  AIM needs to crank up the number of miles required for a reward flight by perhaps 30-35%  if they want to have any equity remaining in 2021.  IMO, the easiest way to do this is change the rules of the program by bumping up the mileage requirements by 10-15% on two or three occasions over the next couple of years.

 

I cannot discern what the company's strategy is to manage the loss of AC and the considerable reduction in revenues that this will represent.  As a former pref-holder and an Aeroplan program participant, the lack of direction is frustrating.  I sold my prefs and I'm taking three vacations to Europe in less than a year to burn my miles...

 

 

SJ

[petec]

Thanks.

 

The deferred revenue on the BS is $3.2bn but a) that includes international coalitions and b) that's the deferred revenue rather than the actual cost of redemptions. Does anyone have a decent estimate of the cash cost if all Aeroplan points were redeemed tomorrow?

 

EDIT: my best guess is that 79% of the deferred revenue belongs to Americas Coalitions (equal to the 9M17 revenue split), and that 70% of that is cash cost of redemptions (equal to cost of redemptions/revenues from loyalty units for Americas Coalitions). $3,200 x 79% x 70% suggests that if all points were redeemed on normal terms the cash outflow would be c. $1760m. Does that make sense?

 

My back of the envelope SOTP is as follows:

$675m cash and bonds +

$400m PLM stake  +

$300m other bits based on c10x adjusted ebitda for international coalitions +

$300m in FCF to 2020 =

$1.7bn gross asset value -

$550m Pension+debt -

$325m prefs at par =

$800m to cover redemptions

 

If that's correct then there's about $1bn of uncovered redemption liability from the perspective of a pref holder in a windup. Basically even the gross asset value doesn't quite cover the cost of a full run in the bank because these morons have paid out their float as dividend.

 

What am I missing?

[StubbleJumper]

Thanks.

 

The deferred revenue on the BS is $3.2bn but a) that includes international coalitions and b) that's the deferred revenue rather than the actual cost of redemptions. Does anyone have a decent estimate of the cash cost if all Aeroplan points were redeemed tomorrow?

 

EDIT: my best guess is that 79% of the deferred revenue belongs to Americas Coalitions (equal to the 9M17 revenue split), and that 70% of that is cash cost of redemptions (equal to cost of redemptions/revenues from loyalty units for Americas Coalitions). $3,200 x 79% x 70% suggests that if all points were redeemed on normal terms the cash outflow would be c. $1760m. Does that make sense?

 

 

I haven't done the math because I sold ~6 months ago.  But, my fuzzy recollection is that AIM's deal with AC includes the right to purchase a certain number of AC seats per year at a ~8% discount.  So, it would be a mistake to assume that the redemption cost will not go higher, because if everyone rushes to the exit before June 2020, it would likely exceed AIM's maximum number of seats that qualify for a discount, and for those who redeem after June 2020 there presumably will be no discount at all.  So, perhaps add another $100m to your estimate for conservatism?

 

On a cash-in, cash-out basis, this one will be pretty scary if people rush for the exit.

 

 

EDIT:

 

Not sure whether they have exactly $700m for redemptions, or whether it's a shade better.  Cash from ops has run at ~$300m/year for the past few years, but has been disappointing for the first three quarters of 2017.  You've pencilled in a total of $300m of FCF until 2020, so is that optimistic, pessimistic, or realistic (I can't really say).  Certainly an argument could be made in favour of another couple hundred million of cash from ops over that period.  But, counterbalancing that, you have to figure that their revolving credit line will not be renewed, which will chew up ~$200m.

 

So, yes, they have a hell of a mess on their hands.  If they de-value the miles (I have suggested a ~30% devaluation), then there's no problem remaining solvent, but I'm not sure that there's much equity left for shareholders (even the prefs could end up being a zero).

 

 

 

SJ

[petec]

Cash from ops has run at ~$300m/year for the past few years, but has been disappointing for the first three quarters of 2017.  You've pencilled in a total of $300m of FCF until 2020, so is that optimistic, pessimistic, or realistic (I can't really say).  Certainly an argument could be made in favour of another couple hundred million of cash from ops over that period. 

 

 

Yes, agreed. My thinking is that $300m total is actually an aggressive estimate if there is a run on the bank, because in that scenario you can assume that gross billings will slow. I was trying to be kind, believe it or not!

 

Some time ago I estimated the prefs had a decent chance of being money good even if AC cancelled. I can't find the maths for that but I don't think I captured the destructive power of a potential run. It seems to me that the potential replacement for AC has every incentive to delay signing unless it looks like there is a queue of interested parties, which I doubt there is. So I can easily imagine this going to the wire, which materially increases the odds of a run.

 

Also, I believe 76% of points come from 20% of customers although I have lost the source for that stat. In a best case scenario these customers accrue points because they are heavy spenders on credit cards, and don't care who they fly with. But if they are AC frequent flyers - which they probably are on the basis that to accrue that many points you need to spend a lot on cards AND pay for flights often - then Aeroplan will have a tough time preventing them from migrating to AC's internal programme. That possibility seriously dents the attractiveness of Aeroplan to a new partner. The new partner would have to have a network & offering very similar to AC's in order to have a hope in hell of retaining those customers. I don't know enough about AC to know who that would be.

 

EDIT: one positive is that AC might offer to buy points from Aimia to avoid having to explain to their most-valued customers, who will have accrued a lot of points, why those points are now worthless. Probably a pipe dream but it could be a major reputational issue for AC.

[bizaro86]

I bet more than 79% of deferred revenue is Aeroplan, simply because it is the oldest, so I don't think current run rate is the right number. Might not matter anyway.

 

I actually think if they could credibly tell AC that they are burning the program down unless they buy some points over (maybe for elites?) that threat might work, especially  if they do it soon. They still have dibs on AC frequent flier program for a couple more years, and AC won't want to be giving out worthless points during that time because it will hurt their main business.

[StubbleJumper]

I bet more than 79% of deferred revenue is Aeroplan, simply because it is the oldest, so I don't think current run rate is the right number. Might not matter anyway.

 

I actually think if they could credibly tell AC that they are burning the program down unless they buy some points over (maybe for elites?) that threat might work, especially  if they do it soon. They still have dibs on AC frequent flier program for a couple more years, and AC won't want to be giving out worthless points during that time because it will hurt their main business.

 

 

Well, that's something that I've never quite understood.  Irrespective of what AC does at this point, it is virtually certain that AC will totally piss off a great many of their customers by starting a new frequent flier program.  IMO, most Canadians are currently blissfully unaware that Aeroplan will be toast in 2.5 years, but in late 2019 or early 2020 it will become abundantly clear that their miles will be drastically devalued.  People will be furious with AC.

 

I understand that AC probably wanted to get a large slice of the considerable credit card pie and that AIM probably told them to take a long walk off a short dock.  But what I don't quite get is why AC appears to be of the view that the start-up costs for a new program and the bevy of pissed off customers is less important than scooping a couple hundred million bucks per year.  I confess that I am completely baffled about how it has come to this.  AIM has committed suicide and AC has "won" by alienating millions of their customers.

 

Personally, I lost a few thousand bucks by taking a small position in the prefs because I was convinced that a deal was in everybody's interest and that neither party would be stupid enough to go nuclear.

 

 

SJ

[Uccmal]

SJ,

 

I dont know about people being blissfully unaware.  I was sitting in Starbucks and overheard a conversation between two guys about the pointlessness (no pun intended) of using aeroplan anymore.

 

Just some scuttlebut.  IMO, word has spread and the run on the bank has started. 

 

Now this could just be selective hearing on my part as I lost a little money on this deal and its human nature to want confirmation that the loss was the right thing to do.  So take it for what its worth... just Scuttlebut. 

[doc75]

For what it's worth, I've mentioned what's happening to a number of friends and others (essentially whenever someone happens to mention using their points).  In most cases, the reaction is along the lines "yeah, I heard they changed the program somehow".  Either that or total surprise.  Nobody I've spoken with has known what's really going on.

 

 

[Cigarbutt]

On the value of scuttlebutt.

Often wondered about the value of this, especially the way Peter Lynch described it (more anecdotal).

Maybe better when done in a systematic way the way Philip Fisher described it?

 

When I built a position in MegaBrands some time ago, I used to visit stores and check the toy alleys. Not sure it added anything.

It may be helpful to try to obtain the opinion of competitors?

 

Anyways, for Aimia, I remember seeing posters (elsewhere) commenting on the volume of internet activity for certain sites that could potentially give an idea about the volume of redemptions. Useful?

Aimia is in the business of loyalty and reflecting on what happened to market share of US car manufacturers, the value of loyalty may be over-estimated. Easy to lose and hard to recover.

The "stickiness" of consumers is related to decision simplicity and trends.

It seems to me that players in the loyalty business should anticipate and react quickly to consumer preferences and business risks with key partners.

Of course, with Aimia, the trend can change but, in my opinion, what happened in the last year is not promising.

 

Like SJ, I'm "baffled" at how this was handled but when two people pull in two different directions, it is hard to see who will collect the prize. Not elegant.

 

 

 

[zhengmit]

Talked to a few people, and the risk of losing Sainsbury is real given the development.  Also people talked about discount and gating to protect Aimia.  Talked to some people and it seems the clause in the contract with credit card companies will prevent them doing this on a large scale.

 

Cigarbutt: what do you own these days and what do you like most?

[petec]

Irrespective of what AC does at this point, it is virtually certain that AC will totally piss off a great many of their customers by starting a new frequent flier program. 

 

They're not really starting a new one - they already have Altitude so what they are doing is preventing Altitude miles from going to Aeroplan, and allowing them to be redeemed in-house. They gave people 3.5 years to run down their points so they don't NEED to lose value - especially if AC offer to buy the few Aeroplan points remaining in 2020. And even if customers are pissed off, it may well be that they don't have much option other than to fly AC on many key routes.

 

Against that, these are incredible -ve WC businesses that require no capital and generate more cash the faster they grow. Bringing the NPV in-house is a smart move.

 

Just playing devil's advocate.