Aeroplan to add Sobeys to rewards network; Q2 revenue rises 52 per cent
Published Thursday August 14th, 2008
MONTREAL - Canadian shoppers will soon be able to rack up reward miles after the loyalty card program operator Groupe Aeroplan Inc. (TSX:AER) Thursday announced a multi-year deal with supermarket giant Sobeys.
Details of the partnership weren't disclosed, except that it won't be available in all provinces. Sobeys operates the banner in all provinces except Quebec, where it has IGA stores.
"The Sobeys relationship expands Aeroplan's offering into grocery, the most important everyday spend category," Aeroplan president and CEO Rupert Duchesne said in a conference call to discuss second-quarter results.
Food accounts for 17 per cent of the Consumer Price Index as it is estimated to represent 10-to-15 per cent of disposable income.
"While this highly strategic relationship with Sobeys has the potential to be as significant as our other large retail partnerships, it is not expected to have a material financial impact during the ramp-up period."
In addition to 31 airline partners, Aeroplan is associated with numerous hotels, car rental companies along with Esso, Rogers Media and credit cards offered by CIBC and American Express.
Aeroplan has long wanted to enter the grocery market in Canada, which provides more stable spending to balance fluctuations in air travel and credit card use.
In Britain, its association with grocer Salisbury's contributes 17 per cent to overall gross billings.
The Sobeys deal won't be a short-term driver of results but could account for in excess of 10 per cent of billings in about three years, said Neil Linsdell of Versant Partners.
"I'm much more concerned with what's going to happen over the 12 or 18 months as far as how their business is going to be impacted by the slowdown in consumer spending and air travel and no matter what you do with Sobeys you're not going to get an immediate kick," he said in an interview.
Aeroplan recently announced a separate deal with travel company Expedia in the United Kingdom. The company has expanded beyond its Canadian base by purchasing Loyalty Management Group, which operates the Nectar rewards program in Britain.
In Aeroplan's first quarterly results since shedding its trust structure, the Montreal-based corporation reported lower profits in the second quarter, but a 52 per cent increase in revenues.
The company said net income fell to $31.4 million, or 16 cents per unit, from $49.4 million or 25 cents per unit a year earlier.
Adjusted earnings dropped to $60.8 million from $64.6 million.
But adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) increased 19 per cent to $77.3 million. Aeroplan said this is one of the key metrics for a business of Aeroplan's type in which there is a delay in the booking of revenues.
Groupe Aeroplan was previously known as the Aeroplan Income Fund until it reorganized itself into a dividend-paying public corporation in June. The firm was worried that it would lose its tax-free status by exceeding foreign ownership limits.
In the period, revenues rose to $336.7 million, up from $220.3 million a year earlier.
Gross billings from the sale of its miles and points climbed by nearly 50 per cent to $357.9 million from $238.9 million.
In Canada, gross billings increased 8.6 per cent to $258.8 million.
Aeroplan slightly lowered its guidance about Canadian billings, saying they should grow by eight to nine per cent in 2008 despite the economic slowdown that may limit consumer spending and capacity cuts at partner airline Air Canada (TSX:AC.B).
"Although air travel during the quarter did not weaken, we remain cautious given record fuel prices and the turbulence currently affecting the airline industry worldwide," Duchesne told analysts.
"There's been no significant impact on our profitability to date as a result of higher fuel costs and our partner airline's reactions to that."
Duchesne added Aeroplan expects little to no impact in 2008 and a small hit on gross billings at worst in 2009 if oil remains at current levels and the airline cuts capacity as planned.
In times of economic slowdown, companies use reward programs to stimulate demand and consumers use their hoarded miles, he said.
But Linsdell said he's more cautious about the impact of the economic slide on Aeroplan's growth given the hit being felt by Canadian retailers and Air Canada.
"People seem to have more confidence in Aeroplan than in the businesses that drive Aeroplan, for some reason," he said.
In May, ACE Aviation Holdings (TSX:ACE:A), Air Canada's parent company, sold its remaining 20 per cent interest in Aeroplan.
Shares in Aeroplan rose 10 cents to close at $13.30 in heavy trading of nearly 6.4 million shares on the Toronto Stock Exchange.
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