Air Canada is selling a 25% stake in Aeroplan to a consortium led by private equity giant Blackstone and Canadian pension fund La Caisse, valuing its loyalty program at a staggering C$10 billion. While I don’t expect Aeroplan to suddenly implode, I also don’t view another powerful financial investor taking a seat at the table as particularly good news for consumers.

Blackstone Takes A Stake In Aeroplan: What Does It Mean For Members?

We learned yesterday that Air Canada was close to selling a minority stake in Aeroplan. That deal has now been announced.

A consortium led by Blackstone and La Caisse will acquire 25% of Aeroplan for nearly US$2 billion, valuing the loyalty program at C$10 billion. PSP Investments and British Columbia Investment Management Corporation are also participating in the consortium.

Air Canada will retain operational control of Aeroplan: Blackstone is not taking over the program and will not suddenly be deciding how many Aeroplan points a Lufthansa First Class ticket should cost (not that we can even book those right now).

Air Canada, meanwhile, gets a lot of cash. The airline says proceeds will be used to reduce debt, including an upcoming bond maturity, as it works toward an investment-grade credit rating. Air Canada also has many new jets on order that it has to pay for.

Once again we are reminded just how valuable airline loyalty programs have become.

Who Is Blackstone?

Blackstone is the world’s largest “alternative asset” manager, with more than $1.3 trillion in assets under management. Put simply, Blackstone takes money from institutional and individual investors and deploys it across private equity, real estate, credit, infrastructure, and other investments with one overriding objective: earn a strong return.

That’s not a criticism. That’s what an investment firm is supposed to do.

Blackstone has owned or invested in some very recognizable companies over the years. It famously acquired Hilton Hotels in 2007 in a roughly $26 billion transaction, later taking the company public again. It has also become increasingly active in aviation, although not primarily by buying airlines.

Earlier this year, Blackstone partnered with Dubai Aerospace Enterprise on an aircraft leasing investment program targeting approximately US$1.6 billion in deployment each year. It also formed a partnership with Willis Lease Finance targeting more than US$1 billion in aircraft engines and select aircraft.

So Blackstone clearly likes aviation assets.

But Aeroplan may be even more attractive than an airplane.

An airplane is expensive to buy, expensive to maintain, depreciates over time, and occasionally needs a new engine that costs millions of dollars.

A loyalty program sells a proprietary currency that it creates itself, which conceptually is a great business.

Credit card companies and other partners buy billions of points from airlines, consumers spend heavily to earn them, and the loyalty program controls the terms under which those points can eventually be redeemed.

There is a reason loyalty programs became some of the most valuable assets airlines possessed during the pandemic. American, Delta, and United collectively raised tens of billions of dollars using their loyalty programs as collateral.

Should Aeroplan Members Be Worried?

I don’t expect this transaction itself to trigger some sudden massive devaluation.

First, Air Canada retains control of Aeroplan. Second, there is an interesting historical irony here: Aeroplan was once completely separate from Air Canada.

Air Canada spun the program off after its 2003 restructuring, and it eventually became part of publicly traded Aimia. Air Canada later decided to build a new loyalty program rather than renew its agreement with Aeroplan, before ultimately buying Aeroplan back in 2019.

Those of us who have playing the miles and points games for years know that Aeroplan was often extremely lucrative for savvy consumers even when it was not wholly owned by Air Canada. Thus, outside ownership does not automatically equal a bad loyalty program.

But the trajectory of Aeroplan (and frankly almost every major airline loyalty program) worries me far more than this particarul transaction.

Aeroplan was once arguably the single best airline loyalty currency in the world. The partner network was extraordinary. Singapore Airlines longhaul business class could be booked. EVA Air business class seats were reasonably obtainable. Turkish Airlines space was plentiful. Lufthansa First Class could often be booked close to departure…SWISS First too. Etihad, Oman Air, and other non-Star Alliance partners opened up even more possibilities.

Much of that has disappeared.

Aeroplan has also expanded variable pricing to additional partners, further eroding the simple proposition that partner awards represented a predictable sweet spot when Air Canada’s own flights were pricing astronomically high.

But I want to be fair to Air Canada here because not all of this is Aeroplan’s fault. The entire loyalty landscape has changed.

Airlines increasingly restrict their best premium cabin award inventory to members of their own loyalty programs. A seat that might appear to a United MileagePlus member may not appear through Aeroplan. Lufthansa may release something to Miles & More without releasing it broadly to Star Alliance partners. Singapore Airlines has long favored its own KrisFlyer members for certain premium awards.

That trend undermines one of the greatest historical strengths of transferable points and alliance programs: the ability to accumulate one useful currency and use it across a huge network of airlines. Increasingly, the best award space is becoming proprietary. And when airlines do make seats available to partners, programs are discovering they don’t necessarily have to offer them at fixed, attractive prices.

None of that started with Blackstone.

But I also cannot imagine Blackstone representatives sitting in an Aeroplan strategy meeting and arguing that redemption margins are too high and members should receive more value for their points.

That’s not why they invested and with Anko van der Werff arriving to reign in costs, Aeroplan won’t get better…that I’m confident in saying.

Is The Future Of Airline Loyalty Bright?

For airlines? Absolutely.

For us? I’m far less optimistic.

Airline loyalty has gradually evolved from rewarding people for flying into a highly sophisticated financial business built around selling points.

And airlines have discovered an extraordinarily attractive formula, which includes:

Selling more points
Making them easier to earn through credit cards
Offering huge welcome bonuses
Building partnerships so consumers can earn points everywhere
Then carefully controlling the supply and price of the most desirable redemptions.

That’s why I think the glory days of loyalty programs are behind us, even though the game is not over.

In fact, there’s a very important reason airlines cannot destroy their programs too quickly: these programs are worth so much precisely because consumers still believe the points have value.

If Aeroplan points become worthless, consumers stop caring about earning them. If consumers stop caring, credit card companies have less reason to buy billions of them. And if banks stop buying points, the enormously profitable loyalty machine cannot sustain itself.

Airlines want to extract as much value as possible from loyalty members, but they cannot extract all of it. There always has to be enough value left on the table to keep us playing. And there will still be great redemptions, partner sweet spots, and opportunities created by transfer bonuses and new partnerships. They will simply become harder to find…

CONCLUSION

Blackstone and its partners are investing nearly US$2 billion for a 25% stake in Aeroplan, valuing the program at C$10 billion.

I don’t think Aeroplan members should panic. Air Canada retains operational control, and the degradation we have already seen in Aeroplan reflects broader changes in airline loyalty as much as any specific corporate decision on the part of Air Canada.

But Blackstone’s investment underscores where this business is heading. Loyalty programs are no longer simply marketing programs designed to reward frequent flyers. They are financial juggernauts, in some cases worth almost as much as the airlines themselves.

For those of us trying to redeem points for premium cabin travel, I suspect the coming years will require more flexibility, more currencies, and more patience.

The good news is that airlines cannot squeeze too hard, too fast. To put in terms my 6-year-old daughter would understand, the golden goose only keeps laying eggs as long as we still want the eggs…

image: Air Canada