ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for analysis available only to subscribers.
Loyalty management company Aimia Inc. has laid out a solid strategy to revitalize its Aeroplan rewards program. Aimia's plan would see it part ways with long-time credit card partner Canadian Imperial Bank of Commerce in favour of Toronto Dominion Bank, enhance its rewards offerings to members, drop a controversial points expiry scheme – and take a massive financial hit. Aimia may be heading for short-term turbulence, but the trade-off is a better long-term flight plan.
As for CIBC, which still has the right to match TD's terms, you have to wonder what the weakest of the big five banks has been thinking playing hardball in negotiations with Aimia to extend their 22-year relationship beyond the Dec. 31 expiry date. The CIBC Aeroplan card is believed to generate between five and 10 per cent of the bank's earnings, and if it drops the Aerogold Visa program in favour of its own travel rewards card, CIBC will also say goodbye to many customers who are more loyal to Aeroplan than to the bank. Either option will cost CIBC – but the cost of starting its own points program could be more than three times what a new deal with Aimia will cost next year – 15 cents per share in profit – says National Bank Financial analyst Peter Routledge. "We don't find any strategic argument to support going out on their own," he said.
Aimia's shift is an acknowledgement the former Air Canada unit had to up its game in an increasingly competitive market for travel rewards programs. The problem for Aimia has been that CIBC has been paying an estimated 1.2 cents per reward point for years as the market rate moved up to 1.5 cents. RBC's Avion-branded Visa and other rewards cards muscled in – including cash-rewards cards, which some argue offer similar or better returns than redeemable reward points – constraining Aimia's ability to keep up.
The equation for Aimia now works like this: by increasing the amount it can charge a financial partner for points earned by members, it can increase the amount it spends for rewards – namely more and better seats on Air Canada flights. That would address the perceived lack of flight options (a chronic customer complaint) and make the program more compelling, prompting members to increase their use of Aeroplan credit cards and redemptions.
The irony is that higher redemptions hurt Aimia financially: it recognizes revenue for points it estimates will never be redeemed – about 18 per cent of them – and that flows directly to the bottom line.
It would be easy for management to be cynical and remain addicted to this free profit, but that isn't how to build your business longer-term. So Aimia is aiming to reduce its unused points, or "breakage rate," to 11 per cent as it gets its customers more actively engaged in earning and redeeming their miles. That will cut Aimia's revenue this year by $700-million and result in a $520-million after-tax hit to profits. Meanwhile, Aimia expects up to 30 per cent of CIBC Aerogold card holders may not move over to TD's card.
However, Aimia does have a sturdy balance sheet, an upfront $100-million payment by TD, and a powerful theory: that within a couple of years, growth will accelerate as customers become more active. That would lead to more demand for flights, laying the groundwork for amenable negotiations leading up to the expiry of Aimia's all-important contract with Air Canada in 2020.
The most compelling thing about Aimia's announcement is that customers are at the centre of its decision making: by doing whatever is necessary to make them happier, management believes everything else will follow. If CIBC finds itself building a new rewards card from scratch come 2014, it would be well advised to remember that.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights , and follow Sean on Twitter at @seansilcoff .
The Globe has launched a Streetwise and ROB Insight newsletter, with content available exclusively to Globe Unlimited subscribers. Get the best of our exclusive insight and analysis delivered straight to your inbox in a daily e-mail curated by our editors. Sign up for it and other newsletters on our newsletters and alerts page .