TD Bank shells out $1-billion to be lead partner in Air Canada’s takeover of Aeroplan

Toronto-Dominion Bank is betting heavily on the success of Air Canada’s takeover of the Aeroplan loyalty program, committing to $1-billion worth of upfront payments and future expenses as the lead financial partner.

The final takeover terms, announced Monday, illustrate TD’s expensive investment in the program. As part of the buyout, the bank has come to a new 10-year contract with Air Canada that will see it become the lead Aeroplan partner through to 2030. Air Canada will take control of the loyalty program in 2020.

In total, TD has committed to spending $1.03-billion. The bank will pay $622-million plus any sale taxes to Air Canada, and it will also prepay $308-million for the future purchase of loyalty points over the ten-year contract. As well, TD will spend approximately $100-million to help “build the functionality required to facilitate the new program,” according to a statement.

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Canadian Imperial Bank of Commerce will take a backseat in the new contract. Although the bank was originally named as a prominent player in Air Canada’s takeover consortium, the final terms reveal that it will be a second-tier player, relative to TD.

CIBC will pay $200-million to Air Canada as part of the takeover, and the bank will also make a payment of $92-million to Air Canada as a prepayment for future Aeroplan miles – a cost it would typically in the normal course of business as its cardholders redeem their Aeroplan miles. Recently, CIBC has been heavily marketing its Aventura travel rewards credit card, which allows its holders to redeem their points for travel on any airline.

The new TD contract comes in the aftermath of Air Canada’s unexpected takeover of Aeroplan.

The battle for control of the loyalty rewards program, which has five million members, dates back to May, 2017, when Air Canada abruptly announced it would let its current contract with Aeroplan expire in 2020. The airline also unveiled plans to launch an in-house loyalty program when the Aeroplan contract expired.

The news had major implications for both Toronto-Dominion Bank and Canadian Imperial Bank of Commerce, because they are currently Aeroplan’s top credit card partners. TD, however, was the most impacted because the bank became the program’s lead financial partner in 2014, after former lead partner CIBC disclosed that it was mulling whether to let its Aeroplan contract expire.

Air Canada’s decision to let the Aeroplan contract expire not only dimmed TD’s expected profits from the partnership, but the bank had also sunk large sums of money into the deal. As part of TD’s contract signed in 2014, the bank agreed to a 10-year deal and paid Aimia $100-million up front − plus 15 per cent more per travel-reward point than CIBC paid under its old contract.

TD also paid CIBC $275-million over three years, yet CIBC was able to keep roughly half of the portfolio – but only those cards for which there was an accompanying CIBC banking product, such as a chequing account.

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The entire situation changed this past summer when Air Canada teamed up with TD, CIBC and Visa Canada Corp. on an unsolicited bid to acquire Aeroplan. The move represented a total change of heart for Air Canada, and it ignited a tense battle between the airline and Aimia, the owner of the loyalty rewards program.

Initially, Air Canada’s consortium offered to pay $250-million in cash, and later raised the bid to $325-million, but it was rebuffed. Shortly after, TD and CIBC adopted usually aggressive tones in their communications with Aeroplan cardholders, with TD Bank warning its Aeroplan cardholders that their points could be in jeopardy if a takeover isn’t completed.

“We have sought, but not received, assurances from Aimia that the Aeroplan program will deliver the value that we and you, as a TD Aeroplan credit-card holder, would expect from Aimia in the long term,” the bank wrote in its notice to cardholders, which was also posted on its website.

During the takeover battle, Air Canada and its bidding partners argued that Aeroplan was in deep trouble without the airline as its major partner. Aeroplan was initially developed in-house at Air Canada in the 1980s, and was eventually spun out as its own company starting in 2005. Because of the historical relationship, Air Canada and Aeroplan’s contract had advantageous terms for the loyalty program.

Aeroplan’s average cost per mile is estimated to be 1.04 cents, 20 per cent to 30 per cent below market prices, and the airline also sets aside 8 per cent of seats on every Air Canada route each month.

Because Air Canada had announced a divorce from Aeroplan, investors dumped shares of Aimia, under the assumption that Aimia was in serious trouble without the airline’s preferential deal. Air Canada represented roughly 80 per cent of the earnings Aimia typically reports.

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When TD issued its statement to cardholders, Aimia was in the midst of revamping Aerolan into a loyalty program that would allow members to use their redeem their miles to fly on any airline. While such a strategy is used by a number of leading travel rewards cards – chiefly, Royal Bank of Canada’s Avion credit card – there were some worries that battling for customers once Air Canada launched its own program would be an expensive game. There were also questions about Aeroplan members needing to redeem more points per flight, because the preferential terms with Air Canada would no longer apply.

Seizing on these fears, TD bank warned that its Aeroplan cardholders’ points could be in jeopardy if a takeover isn’t completed, and also suggested Aeroplan’s value will deteriorate if the program is left as part of a stand-alone company – that is, without the Air Canada contract.

Ultimately, the consortium reached a deal with Aimia for Aeroplan in late August, a month after its bid was first announced. Air Canada and its partners sweetened their cash bid to $450-million.

However, it was not made clear how much each partner would contribute, or what the terms of the new credit card deals with Air Canada would cost the banks. At the time, National Bank Financial analyst Gabriel Dechaine estimated the program delivered $400-million in profit to TD and CIBC combined.

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