2016 | 2017 | ||||||
Price: | 11.14 | EPS | 0 | 0 | |||
Shares Out. (in M): | 3 | P/E | 0 | 0 | |||
Market Cap (in $M): | 165 | P/FCF | 0 | 0 | |||
Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
TEV (in $M): | 0 | TEV/EBIT | 0 | 0 |
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Worst case scenario, this is a ~10% yield that should be covered nearly 4X over. There’s a double discount here: Canadian preferred shares have been dumped en masse, and investors are overly concerned about the renewal of Aimia’s contract with Air Canada in mid-2020. So you get paid handsomely to wait for these shares to once again trade near par - roughly a double from here. There’s a good chance the contract gets renewed early - perhaps in the next year or so – which would be a great catalyst.
(all amounts in C$ unless noted)
A word on liquidity: the series 1-3 preferred shares together have $165M in market value and trade about $150K per day. I own the Series 2 exclusively, since it has the widest discount to par and it pays a floating interest rate (and since I had to enter a share price, shares out, and symbol, I entered the Series 2 data. But they’re all cheap. If I were more constrained by liquidity, I’d be happy owning all three.
Rate reset preferreds such as Aimia’s Series 1 & 3 began appearing in 2008, when interest rates were falling and everyone thought they’d rebound sooner rather than later. Sold largely to yield-seeking retail investors, they now account for ~60% of the almost $67B Canadian preferred share market. Floating rate preferreds – such as Aimia’s Series 2 – aren’t as common, but obviously offered another way to play this seemingly-inevitable rebound. And of course, rates went on to sink even lower, especially around early 2015 when the retail investors started throwing in the towel. This probably explains the initial swan-dive in the Series 1-3.
But it’s company-specific fear that probably explains why there’s been hardly any rebound. The market is worried about what happens to Aimia when its contract with Air Canada (AC) expires in mid-2020. Aimia grew out of Aeroplan – originally AC’s frequent flyer program – which was spun off from AC in 2005. Today, Aeroplan is a full-blown loyalty “coalition” – in which lots of consumer-focused companies buy points (fka “miles”) to reward their customers. Last year, just over 20% of points were purchased by AC to reward their frequent fliers. 70% were purchased by credit card issuers (CIBC, TD Bank, and Amex), and other ~10% by a hodgepodge of supermarkets, gas stations, etc. But AC still remains hugely important to Aeroplan, since when these customers redeem their points, they spend 80% of them on airfare. AC, along with its low-cost carrier Rouge, provides perhaps 86% of that 80%, while the other Star Alliance airlines provide the rest.
It might seem strange that anyone is freaking out about a contract that doesn’t run out for another 3.7 years, particularly when there’s never been any friction (in public, anyway) between the two sides. And it is strange. But it’s not totally crazy. The CEO of AC has been flagging the upcoming renegotiation as a source of future cost savings[1]. The original contract was signed under some fairly unusual circumstances. BMO’s analyst – perhaps the most bearish guy on Aimia – has gone so far as to say that “there is longer-term existential uncertainty around the Air Canada contract expiry in 2020.”
If you really think the contract won’t be renewed, this idea just isn’t for you. Aimia might survive such an event,[2] but it’s hard to say how the cash flows would change. At best you’d be in for a white-knuckle ride.
But it’s extremely unlikely that AC and Aeroplan part ways. Yes, the new terms won’t be as good (but they’ll be good enough). To understand why, one needs to know some history. The current contract was probably not the product of an arms-length negotiation. I doubt there was a negotiation at all. Instead, this was the result of why I’d call “valuation-multiple arbitrage.” Cerberus – which came to control ACE Aviation Holdings[3] through its 2003 bankruptcy - was looking for ways to pay down some debt at ACE and maximize the value of ACE equity. To do so, they carved out some of AC’s higher quality income streams, including its frequent flyer program[4]. Thus, AC agreed to set aside 8% of its capacity for sale to Aeroplan at cost[5]. These flights were dubbed “ClassicFares” and in the early years they represented nearly all the flight rewards that Aeroplan offered.
It’s all about ClassicFares…
In addition to Aeroplan, Aimia today has lots of other loyalty-marketing operations around the globe. But these cats & dogs basically just about offset corporate overhead, and thus Aeroplan remains the key to the fate of these preferreds.
So we need to estimate much a renewal could ding Aeroplan’s roughly $200M of annual free cash flow. Let’s try to get a sense for how much room there is to renegotiate.. Looking at AC’s financials, it seems likely that variable costs are at least 75% of revenues. See for yourself:
https://1drv.ms/x/s!Aqrw-OOY6WUhgP5PphXArKZqyAApwA
The exact amount looks a bit more like 80% to me, but to avoid quibbling and to be conservative let’s use 75% instead.
So if Aeroplan buys ClassicFares at cost, and cost is at least 75% of market prices, then we know that Aeroplan’s cost for ClassicFares is probably not more than 25% under-market[6][7]. Since the worst that AC would demand under a new contract is full market prices, the maximum increase over current prices would be 33% (=100%/75%-1).
We can also estimate how much Aeroplan is currently paying. Consolidated “cost of rewards and direct costs” were 1,601.9 in 2015. Star Alliance airlines were 43% of this number, and Aeroplan is the only Aimia coalition affiliated with Star Alliance.
So, 1,601.9 * 43.0% = 688.8 total spent by Aeroplan on flight rewards (all from Star Alliance)
688.8 * ~86% = 592.7 spent on Air Canada/Rouge vs other Star Alliance airlines
592.7 - $180 cost of MarketFare revenue (more on this in a moment) = 412.7 spent on ClassicFares
33% max increase * 412.7 = $137.6M worst-case hit to Aimia’s FCF (approximately)
Which means…
200 of current annual FCF[8] – 137.6 = 62.4 FCF still available to pay preferred dividends
62.4 / 16.9 of preferred dividends = 3.7x worst-case coverage
But this is very much a hypothetical exercise. There’s no way Aimia is going to pay even close to full retail prices for these seats. Aeroplan’s MarketFare program proves that it can negotiate a discount to market rates for bringing AC a large volume of business. Adding the ClassicFare flights to the mix, that volume of negotiated-rate business will more than triple.
Since the supply of ClassicFares is limited, Aeroplan has long offered flight rewards to members who can’t get a ClassicFare on the flight they want. The first iteration of this was the Avenue program, followed by ClassicPlus in 2006, and finally by MarketFare in 2014. These were a small part of the mix at first, but they’re ~30% of Aeroplan flight rewards today and total ~$180M in annual revenue to AC. While the prices on these are closer to market rates, they’re still at a significant discount, particularly for members who earn lots of points on a regular basis.
Finally, keep in mind that AC doesn’t hold all the cards. One big reason is that the revenue that AC gets from MarketFare flights comes with attractive margins. MarketFare rates were negotiated just a few years ago, when neither party was in any sort of weak bargaining position, thus AC is likely still happy with these prices. It would be hard for AC to replace all of this lost revenue – creating a new coalition requires signing a major credit card issuer, and it’s not clear who that would be. Canada’s top 4 issuers (RBC, CIBC, TD, BMO) have something like 72% of Canada’s general purpose credit card purchase volume (5th place has ~6%), and they’re all pretty tied up as far in terms of loyalty coalitions.
Another big reason is that Aeroplan has developed close relationships with essentially all of AC’s best customers in the process of managing AC’s frequent flyer program. If AC were to take its program back in-house, one can imagine all sort of ways these customers could get upset and take their business to WestJet, Porter, American, et al.
By the way, Aeroplan’s earnings come from more than just the gross profit on ClassicFares: In 2015, It might[9] make some money on MarketFares too, albeit a smaller margin. It definitely makes money on non-airfare rewards, which now attract ~20% of all points spent, and carry gross margins much higher than the margins on airfare overall. It probably makes some money on various travel-related fees (e.g. flight change fees), as well as a tiny profit for managing AC’s frequent flyer program. Last and certainly not least, Aeroplan makes money on the points that members never use, which in theory would be 100% gross margin revenue.
Catalyst – early renewal
Aeroplan has a 6/28/2019 deadline by which it must notify AC if it intends to not renew the CPSA on 6/28/2020. But Aimia has a debt maturity on 5/17/2019, and AC has a veritable “wall” of debt maturing in 2019, so one would expect the renewal discussion to get underway in 2018. From there, it’s not a stretch to think that Aimia might be able to push for a deal in advance of its 1/22/2018 debt maturity[10], which would allow it to refi at a decent rate and free up cash for its hefty dividends and buybacks. (Aimia’s capital allocation certainly doesn’t suggest any nervousness about Air Canada.)
Starting negotiations early won’t put Aimia in a bad negotiating position, for the simple reason that generates nearly enough free cash flow to pay down all three pieces of debt as they come due. In fact, Aimia is prepared to do just that for the upcoming January 2017 maturity. The CFO will give an update on this issue during the 3Q16 call in November. In addition, there’s also:
excess cash of $130M[11]
a $300m revolver which is nearly untapped
Cardlytics biz is on the block - worth maybe $70m. A sale should be neutral or better to FCF.
48.9% stake in PLM – a Mexican loyalty coalition built around the frequent flyer program of AeroMexico. This business is a gem – grows quickly while throwing of lots of FCF. PLM has been rumored to be worth US$1B[12], which would put Aimia’s stake at C$650M (note that a sale would reduce FCF by ~$15M - the dividends Aimia receives from PLM). It’s highly likely that PLM will be IPO’d eventually.
But what if Air Canada goes bankrupt again?
AC has been doing well for a while now. Last I checked, adjusted[13] net debt to EBITDAR was below 2.5X. Interest expense + aircraft rental was ~1/3 of EBITDAR. But of course, there could still be trouble if demand drops severely enough. The question is, what then would happen to the current contract?
Thankfully, we can look to history as a guide. In 2009 AC went through an out-of-court restructuring and the contract remained intact. If AC were to actually file, the contract would probably still survive. Management addressed the reasons why at their Analyst Day on 10/1/13 and I’ve pasted their words below. But if you’re short on time, it boils down to:
Canadian bankruptcy law forces debtors to abrogate contracts completely or not at all (unlike Chapter 11 in the U.S., where they can tinker with individual terms).
This contract brings in a critical amount of FCF for AC which it couldn’t fully replace, or at least not quickly. Therefore, it’s unlikely that any judge would allow them to abrogate the contract.
Since AC is the national flag carrier, the government would probably come to the rescue, as they did in 2009.
CEO Rupert Duchesne – “Luckily or unluckily in 2009, we had a chance to put it to the test when Air Canada did get close to filing for bankruptcy. We did an out-of-court refinancing of the airline. We participated. We lent them $150 million at 12.75% coupon, which was I think fair with the risk, if anything. But I think that's very illustrative of the -- at the point that it really gets serious, we are a critical source of cash flow for the airline and being able to make up in a very short period of time for the loss of that would be almost impossible. And therefore, there wasn't the even any discussion at that time of what we going to do and see if we can find somebody else to do this for you. ... Also in a bankruptcy filing there's a whole lot of sort of legal and accounting issues that make it extremely hard for them sort of day off to do without, and we don't book.
The advice we received is that we don't think any bankruptcy judge in Canada would allow the airline to abrogate the contracts in such a way that gave cash flow risk to the airline. Frankly, if it did happen, our view is that we've actually got a fairly strong argument for the airline not to do anything. Because if we were to take that customer base and that revenue flow and provide it immediately to their competitors, WestJet, OneWorld Alliance, et cetera, et cetera, it will be a crippling blow to them. So I think what you'll see happen is have a fairly logical argument with them about is the price we're paying for Classic seats compensating you fairly for the opportunity cost of those seats? And we've done that work fairly regularly and the answer to that is yes. Are we paying you a fair price for the MarketFare rewards? And we've just done that deal so you could argue that in a moderate time, like we're in today, the answer to that obviously is yes at this point. And therefore, is there any incentive for anybody really to do anything? I think the answer is no. There are much more important things to worry about in the restructuring than a contract that is net cash flow positive to you in a much higher degree than if you did it yourself, which is what this is.
So we were lucky to be able to prove that in 2009, and our position now having done – just done this new deal with the card partners is much stronger than it was even in 2009 because the total revenue pile coming from these because of the breakage reduction we're talking about a moment ago and the increased price being paid by the bank means that the net cash flow in favor of the airline is even higher than it was in 2009 and will continue to grow as we get closer to the renewal of that relationship and the increased price being paid by the bank means that the net cash flow in favor of the airline is even higher than it was in 2009 and will continue to grow as we get closer to the renewal of that relationship.”
Former CFO David Adams – “Yes, just 2 other data points to that: one is Air Canada is a little bit different than many other airlines because it is a national flag carrier. And when it was put to the test in 2009, the Canadian government through EDC came to -- participated in the out-of-court refinancing and bridge loan. So the international gates are viewed as a national asset. And so notwithstanding WestJet's growth in the Canadian marketplace, I still believe that when push comes to shove, the Canadian government will be there with the financial support. So in a disaster scenario, we shouldn't be thinking about would the airline evaporate because there's a very, very low probability to that outcome. And for those of you, because we're here in London, just a finer point of Canadian bankruptcy law, we're not Chapter 11, right? So don't think of us that we are U.S. Chapter 11. And the difference is, is that in the U.S. you can actually cherry-pick contracts, I mean you get a judge to abrogate certain terms or conditions. In Canada, you have to abrogate the agreement in total. So it's either you keep the agreement out or you have to abrogate it completely. So when you talk about the risk of renegotiation, risk of cash flows, it's much higher in that circumstance than it would be under Chapter 11.”
By the way, Aimia’s equity was previously written up on VIC by castor13 in 2011 (under the old name of “Groupe Aeroplan”) as well as by Ragnar0307 in 2013. I’m not sure if the equity is cheap today, but in any case, I think the preferred shares offer at least as much upside with less risk.
Also, note that Aimia is one of those rare small-caps where IR (Karen Keyes) can answer most if not all of your questions. Not that you shouldn’t talk to the CEO/CFO, but you might want to try her first.
[1] AC CEO Calin Rovinescu at a conference on 12/2/15 - “10 years ago, Air Canada spun out its loyalty program to create shareholder value at that point in time. With that came a fairly expensive commercial contract. And we will be restructuring that contract in 2020 with Aeroplan, and that will create value at that point in time.” At AC’s 2Q16 call on 6/29/16 - “there's no question the expectation will be that, anything that is a below market, the term will be brought to market [upon renewal of the CPSA]”
[2] CEO Rupert Duchesne on the 6/27/13 analyst call – “So in the worst-case outcome where we wouldn't reach agreement with Air Canada in 2020, which is I said, I think it's extremely unlikely, we would have a hugely successful and economically viable program even without them. And frankly, it would be a program that would have been -- would be a great interest to other participants in the travel business.”
[3] ACE was the holdco which owned AC at the time.
[4] There is some evidence that AC had thought about eventually spinning-off Aeroplan prior to the 2003 bankruptcy, but in any event, I think it’s obvious that AC never would have agreed to these terms in an arms-length deal.
[5] CEO Rupert Duchesne at Analyst Day on 10/1/13 - “when we did the spinoff, we very carefully analyzed the real cost of the airline of providing those 8% of seats and we pay that pretty precisely. "
[6] Technically, there’s some circularity here, as ClassicFares are a component of AC’s revenue. But we can overlook this since they’re probably not much over 3% of the total, and since our final estimate of the worst case scenario suggests a big margins of safety.
[7] For what it’s worth, Aeroplan’s own margins on ClassicFare seats seem to be close to 20%. Since 2004, the program has offered seats at prices closer to market levels for those times when ClassicFare flights aren’t available. In recent years, these have grown to ~30% of flights, but in the early years of 2002-2007 these were likely just a small portion of total flights, meaning that the Aeroplan’s gross margin on ClassicFare flights was probably close to its overall gross margin on airfare. The latter margin never went much higher than 20%. But it’s possible that Aeroplan was passing some of its savings on to coalition partners (e.g. CIBC) during that time, so this number might understate the true gap between ClassicFare and market prices.
[8] After interest expense but before preferred and common dividends
[9] This depends on the price that coalition partners pay for points, which could be less than the market value of the airfare it can buy
[10] CEO Rupert Duchesne at CIBC conference on 9/21/16 – “we would hope that we would get an Air Canada deal done long before we get to the end maturity on any of this debt.”
[11] CEO Rupert Duchesne at CIBC conference on 9/21/16
[13] Adjusted for aircraft leases
Good chance they renew the contract with Air Canada in 2017.
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101 | |||||||||||||||||||||||||
I think this is the ultimate outcome but they probably have to wait a few quarters or risk shareholder lawsuits. I also wonder why PE doesn't take them out. You can effectively take them out at $5, get a good chunk of your capital back by selling PLM and international and then sell Aeroplan behind closed doors without shareholder lawsuits. It seems like a pretty attractive ROA for a PE fund with a 2 year window here. Other option is to have an activist come in who the leaves PLM as a stand-alone public company and force the sale of the other assets. Shareholders with a cost basis of $10 will be irate, but an activist with a cost basis at $2 will create a lot of value. For all you know, the market values PLM at a stupid multiple on EBITDA due to its growth rate. I value it at 10x. What if it the market says 30x is the right number? It is a pretty good business with negative working capital during the growth phase and Mexico is clearly in the early innings of a secular growth trend in air travel. I could see some silly scenarios on values of the components. They also have globs of customer data that can be monetized better. | |||||||||||||||||||||||||
100 | |||||||||||||||||||||||||
hkup, i think i may have asked this earlier but i can't recall the answer - why doesn't AC just buy them now? surely they haven't done anything illegal (simply announced they will not renew the contract when it expires in 2020), the market has decided that kills AIM so why can't they just step in and clean it up. maybe they could take out AIM at $5 today meaning much cheaper cost of acquisition than building their own loyalty program from scratch (as you and others have commented on this thread). All they have to do is just say they will rebrand the AC program once its part of AC, into a better loyalty plan for everyone - plus you get the PLM stake and other bits of the business as a sweetener. i am genuinely intrigued why bankers havent pitched this to them (or maybe they are). thanks | |||||||||||||||||||||||||
99 | |||||||||||||||||||||||||
There was question on call from Stephanie Price where Tor referenced prior AC loss impact guidance - did anyone catch that earlier guidance?
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98 | |||||||||||||||||||||||||
Thanks. I guess I was wondering if there will be more than 10% in spend decline as AC flights are more than that in terms of redemptions. Won't other programs see declines on the front end? All in, I agree the demise here is way overdiscounted. And I appreciate your experience with loyalty programs. | |||||||||||||||||||||||||
96 | |||||||||||||||||||||||||
Hkup881, I appreciate your viewpoint on this one. I am so tempted by the common equity but am struggling with the mechanics. If you were to handicap the eventual full liability associated with AC redemption (as of the last balance sheet entry), the all-in cash need, what would it be? And what level of revenue would you assume, ex-AC, once they are gone and no longer a redemption option? | |||||||||||||||||||||||||
94 | |||||||||||||||||||||||||
Legally, they can devalue. Their only restrictions are with their credit card partners. They are likely allowed to outright devalue or do a stealth devalue to shift redemption to other products. xds68-I'm not arguing that losing 13% of revs is a non-event. I'm just saying that it is more than priced in at this point. | |||||||||||||||||||||||||
93 | |||||||||||||||||||||||||
Sorry, you more or less answered your view on costs in your prior post - there was a question earlier in this thread which I'm not sure ever went answered - can Aimia arbitrarily change redemption terms? So if currently its a $1/1 mil ratio, or whatever, can they in real time change that to $1/0.5 miles? If they can, it makes the redemption liability even more of an accounting fiction, no? | |||||||||||||||||||||||||
92 | |||||||||||||||||||||||||
It's actually up to 13% 2q but agree that shouldn't be lights out, although it does have an impact given some fixed cost leverage - it's more than 50 mil of gross profit annual assuming the ac gross profit was similar to rest of sales my concern is they don't seem to be growing rev in a way that would allow them to offset that - actually it's the reverse so you have the higher cost and lower rev - I guess your argument is end of day costs won't be that much higher? Can they grow or at least stabilize rev given the noise around AC? | |||||||||||||||||||||||||
90 | |||||||||||||||||||||||||
still trying to understand the basics here, so sorry if this is a naive question, but as I understand it AC provides Aimia with both customers on the front end and flight options for redemption? Just glancing through the 10k shows AC as 11% accumulation partner - so I guess that is the expected loss on the front end? Thanks! | |||||||||||||||||||||||||
89 | |||||||||||||||||||||||||
think you're right about no put in a change of control. It would be bonkers to lever this company up until they sign some decent airline (etc.) partnerships. Once that happens I think the preferreds trade up and you sell. I'd also agree that asset stripping probably can't happen while 2019s and credit facility are out there, but let me just say that all the debt-related docs are clear as mud. I can't find anything that seems to protect prefs from Aimia spinning-off assets to the common. Absent a change of control, it's hard for me to imagine such a scenario. Maybe if Aeroplan were somehow doomed and an acquirer bought Aimia for the other assets (PLM etc.) they could somehow spinoff the other assets to the parentco, terminate Aeroplan (thereby pissing off tons of wealthy Canadians ... this might have to be a foreign acquirer), and then leave the preferreds stranded in the Aimia subsidiary. Just thinking out loud. Anyway, I never heard back from the company when I attempted to get the answers to the same questions that you're now posing. But that was back during post-AC bombshell crisis-mode. Maybe now things have calmed down at HQ. | |||||||||||||||||||||||||
88 | |||||||||||||||||||||||||
I'm just diving in here, but I flipped through the AR and the preferred prospectus and it doesn't give a great summary of protections for the prefs. Does anyone have any thoughts on protections / scenarios for the following
I have a few other questions on the business and post 2020 roadmap, but those were the quick Qs that jumped out at me and it struck me as odd that the protections weren't clearly listed in either the propsectus or the AR. | |||||||||||||||||||||||||
86 | |||||||||||||||||||||||||
as an aside - and echoing hkup's comments re the cheapness of the whole cap structure - how are the 2019 senior notes not miles the wrong price? 9% yield for <2yr paper, no post-AC business risk at all, and multiple times covered by either operating assets or investments. I get that absolute upside not large and all that but that may be the biggest mispricing of them all, in terms of pure risk reward. if i didnt already own the prefs and think the upside outweighed the perp nature of the security and other elements discussed on this thread, i would be plowing into these bad boys | |||||||||||||||||||||||||
84 | |||||||||||||||||||||||||
I highly doubt the prefs will be stranded. All the publicly traded loyalty programs have been big dividend payers, and I think the argument for dividends is even stronger given that Aimia has had a hard time showing overall growth from the earnings which have been reinvested (clearly PLM is the big success story, but there have been duds as well). Prefs are cumulative so no dividends to common until prefs are caught up.
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81 | |||||||||||||||||||||||||
thanks hkup. do you have any knowledge/view on when the pref divs can be turned back on? agree with your general thoughts on the equity but to me the prefs seem an insane risk/reward here. sounds like mgmt will prioritize debt repayment, which they can easily do out of FCF pre the AC contract ends. That means you're basically covered by the PLM stake alone on the pref par value meaning I don't see how those securities arent' covered in any way...seems a very enticing risk/reward in these markets post this result | |||||||||||||||||||||||||
77 | |||||||||||||||||||||||||
thanks for the intellectual honesty. | |||||||||||||||||||||||||
76 | |||||||||||||||||||||||||
Reasons I'm closing this rec have more to do with what's going on in my head than any incremental news. Since this site only requires two ideas per year, any rec ought to be a fat pitch (i.e. have a wide margin of safety), and this hasn't been that since Air Canada decided not to renew the contract. Total return in CAD = -13.6% (-14.1% in USD). I came to this conclusion using the "fresh eyes test" - that is, asking, "if I saw this idea for the first time today, would I buy it?". The answer is "no." The price is not radically different but the risks are significantly higher. At the same time, I still think the preferred dividends are safe under anything aside from a run-on-the-bank + Aeroplan hesitates to change the rules for way too long scenario. But i'm not confident in that statement for me to continue to recommend this. As far as incremental data goes, there is the resignation by the CFO, coupled with the fact that management said on the last call that the pricing they currently pay on Classic Fares reflect the fact that some of these seats are "distressed inventory." Previously I figured that if one is going to set a price on 8% of a large airline's capacity, that price ought to reflect fully-loaded costs. (AC has said that the price of CF seats = cost to deliver ... see writeup for reference.) But the phrase "distressed inventory" seems like it assumes that said seats are highly unlikely to be purchased at all but for the sale of a Classic Fare ticket. In which case, one might argue that cost to deliver roughly equals the cost of adding one more person to a flight that's going to take off anyway. So that's it ... I think that pride got in the way of rationality when I didn't close the rec earlier. I'm trying to be better about these emotional mistakes, as I've made some in the past and I sense the pattern repeating here. M
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72 | |||||||||||||||||||||||||
Hi mpk, Thanks for your reply and thanks for sharing your model with us. Regarding the $185M on slide 15 of q4 16 presentation, in the slide it is labeled ‘incremental’ and ‘relative to FY2013’ (see footnote). Such brevity in their explanation introduces some ambiguity. We see how you are interpreting it. We tried another interpretation, namely that as in 2016, payment from Aeroplan to Air Canada increased by $185M than the payment in 2013. This increase of $185M is most likely related to the higher cost of Market Fare compared to Classic Fare - FY2013 was used for comparison since Market Fare was introduced in 2014. But not necessarily the actual cost of Market Fare in 2016. Without knowing the actual total cost for Market Fare, we combined the market fare and other Star Alliance redemptions. The average cost per flight is $479 for both, and the Classic Fares would be priced at a discount closer to 50% relative to Market Fares. With this assumption, if Aimia paid Market Fare rates across the board, that would mean an extra $228M = $445M - $227M.
You're clearly much more in tune with the multitude of pieces in this puzzle, does this seem right to you?
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This situation largely boils down to "can Aeroplan line up decent new partnerships with airlines (and maybe other travel options as well), and can they do it before members start to really hit the brakes on accumulating more points/miles?" If they can, then I suspect all parts of the cap structure will do well from today's prices. If they can't, then we have to look to cash & equivalents + non-Aeroplan assets to gauge the downside. By the way, hkup881 is right - the bonds are covenant-lite and Aimia is nowhere close to a covenant-breach/ event of default. Fenkell's point on bill 47 is a good one, but I don't think there's anything stopping Aimia from simply terminating Aeroplan alltogether in an emergency scenario. Even if I'm wrong, they could just fiddle with pricing to acheive roughly the same result. Still, Aimia isn't likely to do the above (and kill the Aeroplan brand) or file BK at the first sign of higher redemptions and or lower gross billings. They'd likely see FCF come down from 2016 levels ($220m) for some time. If things dragged on for years then maybe they'd burn through that cash, and perhaps even some of the current excess cash (~$50m) and redemption reserve ($300m) ... and somewhere around that time Aimia would likely trip a covenant which could lead to BK. But even then, I'd say the debt is covered under any likely scenario. Int'l coalitions + pro-rata share of PLM = $88m in 2016 segment-level EBITDA, which is growing due to the PLM part. Plus there are businesses not generating a profit today which likely still have some value. Add that to whatever cash remains and you can easily cover the $450m debt. At current prices the preferreds have a $99m market cap. I think that's likely covered as well. But would the entire $322 par value be covered? I don't know. Finally, in this dire scenario, I'd say the equity is a zero. But what are the odds of this happening? I'd say small. I don't see why Aeroplan couldn't just goes back to AC and buys all of its flights at Market Fare rates. | |||||||||||||||||||||||||
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upon further reading, I think the CBCA rule issue might actually be legit. I'm not sure if this rule has any implications for buybacks of the prefs. Other than that, I see nothing stopping them. I know a guy who asked the CFO about that recently and the CFO remarked that the low liquidity would make it tough, but I think the solution there is to just do a tender. as for AC buying Aimia - to paraphrase one commentator, they'd likely get their asses sued into another dimension if they tried that. i.e. aimia shareholders would claim AC intentionally killed Aimia's market cap in order to buy it on the cheap. | |||||||||||||||||||||||||
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i'm sure this has been addressed earlier, but why can't aimia completely gate/do whatever they want with the redemption activity? are they obligated to provide specific value for points? i had assumed that the points were like a fiat currency and that the liability was only a number based on historic costs, rather than an actual future obligation. i had heard air miles is a little different because there you could redeem for cash. my understanding is that there is no cash redemption opption in aeroplan. | |||||||||||||||||||||||||
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at what point does it make more sense for AC just to buy aimia, than try to go it alone and create 2bn of NPV value as they claim? entire EV is now, what, ~500mm CAD (at market) and you get AIM's equity investments in addition to that number...surely it is going through their minds (or others). say what you want about the equity value but in any liquidation scenario the prefs (and senior) look priced well beyond the actual distress in the business at this point (i think they are easily covered free and clear of what happens with Air Canada wind-down, as posited originally by mpk). mpk - is there anything stopping AIM from buying back some of the prefs? (maybe not now but after a couple of quarters have passed to see what the cash hit from increased points redemption/etc has been)? also - if the CBCA rule is really not nonsense, under what conditions would they be able to pay divs (on the prefs) again? once the book impairment has been taken formally? | |||||||||||||||||||||||||
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no. if that were the real reason, I doubt they would have thrown in the other reasons as well. | |||||||||||||||||||||||||
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I think that's just a bunch of nonsense thrown in so that people don't get the impression that this decision was forced upon them by negative trends in gross billings or redemptions. by the way, I certainly could have picked a better subject heading for my post yesterday | |||||||||||||||||||||||||
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Aimia suspended dividends on the common and preferreds (the latter are cumulative). entire cap structure is taking a hit. I'm not totally surprised that the common and prefs are down, as there are likely some yield-hogs bailing and maybe some funds that can't own names that are no longer throwing off income. as for the bonds, which dropped ~2 pts to 92.50, I suppose some holders think this move suggests financial distress. As I and others have said, it just makes sense to limit your cash outflows at a time like this. The optics might look bad since Aimia had declared a dividend at the earnings release that came right after AC's announcement. But that decision had been made prior to receiving formal notice from AC, and mgmt gave many clues on the call to suggest they thought - at the time - that negotiations might continue. I think the decision to pay that dividend was made for the sake of posturing in their talks with AC. | |||||||||||||||||||||||||
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... on the redemption front. The following apps don't seem to suggest any rush to cash in Aeroplan miles, but frankly I'm no expert when it comes to analyzing web traffic and maybe someone who is can offer their advice. https://www.semrush.com/info/aeroplan.com https://www.similarweb.com/website/aeroplan.com https://trends.google.com/trends/explore?q=%2Fm%2F04q46m
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Here's an interesting tidbit from Aimia's CEO in the Saturday's Globe and Mail (emphasis mine): | |||||||||||||||||||||||||
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this might all boil down to Westjet's announcement on May 2nd that it has ordered 10 Boeing 787s, with an option to buy 10 more. Westjet was launched in 1996 with a Southwest-style strategy of only flying 737s and offering only one class of seats. though they introduced "Plus" seats with a bit more legroom in 2013, these weren't a big change (extra cost of only $45). This formula allowed them to be profitable on a fairly consistent basis for 20 years - no small feat for an airline - I never expected them to change it. So until now, AC has been the only game in town for business class travel on a Canadian airline. The 787 changes all that as it allows for full lie-flat seats - nice enough to allow Westjet to charge full business-class rates for the first time (and also to greatly expand it int'l routes). Business class travelers are where the big bucks are for traditional airlines like AC. Meanwhile, AC's current arrangement with Aeroplan doesn't (I'm guessing) give them enough flexibility to prioritize their FFs when it comes to flight availability (vs all the other Aeroplan members). With their main rival now going after their golden goose, AC probably decided to greatly up its demands in talks with Aimia, and Aimia balked. Perhaps this would explain why AC never once publicly mentioned the possibility of not renewing the Aeroplan contract all the way up thru mid-march - then ~3 weeks later suddenly announce that a break with Aeroplan will add $2 billion of NPV to their company's value. AC's market cap was ~$3.6 billion prior to this announcement, so that would be an increase north of 50%.
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agree with Fenkell ... populist legislation is a risk, but Aeroplan has a lot of levers to pull. The flight rewards "grid" ( http://bit.ly/2rQGzfu ) is pretty complex, so too are fees and surcharges, retrictions on frequency of redemption, etc. Someone introduced a bill in Quebec (bill 791) that included a provision prohibiting changes to the value of loyalty program points but program sponsors called legislators and threatened to pull out of Quebec. The bill got nowhere and is no longer under consideration. Consumers seem to agree it would have gone too far: see http://blog.rewardscanada.ca/2017/05/great-news-quebec-drops-milepoint-value.html and http://bit.ly/2rexbpM As far as legal liability goes, I'm not too concerned. See items 1,5,6 https://www5.aeroplan.com/terms_and_conditions.do There have been class action suits filed against loyalty programs in Canada, but I can't find one that ever got anywhere.
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speaking of social media, just saw this: https://seekingalpha.com/user/48413647/comments note the time stamp. one might imagine a few Aimia execs are up late at night these days | |||||||||||||||||||||||||
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I'd argue there's more upside in the prefs, but a 20% YTM on that bond is pretty interesting either way, given that Aeroplan can alter the rules for redemption at will and Aimia has numerous assets aside from Aeroplan. is this the tweet you're referring to? https://twitter.com/WestJet/status/862737700645777413 I emailed the westjet CFO as to whether the deal with RBC is exclusive or not. I would have expected to see a big upfront payment from RBC to westjet back in 2009-2010 if it were, but I can't find anything like that. also would have expected RBC to say the deal was exclusive. |
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