06/27/2013 03:50 EDT | Updated 08/27/2013 01:12 EDT

Aeroplan Ready To Bail On CIBC, Switch To TD Bank

Aeroplan, which began as Air Canada's loyalty program, could soon have a new partner in TD Bank. (THE CANADIAN PRESS IMAGES/Bayne Stanley)
Aeroplan, which began as Air Canada's loyalty program, could soon have a new partner in TD Bank. (THE CANADIAN PRESS IMAGES/Bayne Stanley)

MONTREAL - The company that runs the Aeroplan customer loyalty program wants to make its travel rewards easier to redeem and is prepared to replace CIBC as its bank credit card partner.

Aimia Inc. (TSX:AIM) said Thursday that it's ready to partner with TD Bank (TSX:TD) in 2014 and drop CIBC (TSX:CM) at the end of this year unless CIBC matches contractual terms offered by TD.

Aimia chief executive Rupert Duchesne said Aeroplan is still tops in Canada but competition from RBC's Visa Avion credit card and from TD's Travel Visa card has been a factor.

"I want to see Aeroplan become the undisputable No. 1 again and to do that we need to grow and we'll only grow if we have a better proposition for Aeroplan members," Duchesne said in an interview.

That means making it easier for consumers who want to use their points for travel. Duchesne noted that it can take more time and points for holders of the Aeroplan Classic Visa, one of the cards offered by CIBC, to redeem travel points.

Under the terms negotiated with TD, "they will be able to get a seat much more frequently when they want it, (and) at a price they're willing to pay and particularly in some high demand periods where historically the prices have been very expensive," he said, adding that includes the Christmas period and March break.

"So instead of saving for three years to take a couple of people to visit granny in Vancouver, they will be able to do that in roughly half of the time."

Aimia said CIBC has until Aug. 9 to exercise its contractual right to match the deal it has arranged with TD. If CIBC does so, Aimia has agreed to pay TD an $80-million break fee in 2013.

However, CIBC said in a statement that "upon legal review" of the proposed terms of the new contract "we have concluded that the notice and document provided by Aimia to CIBC appears to have been intentionally structured in a way that attempts to nullify CIBC's right of first refusal and any ability to match."

"Given the structuring of the document and our contractual rights, we are exploring our options, " it said without elaborating further.

CIBC has said previously that it was investing millions of dollars this year to explore the potential for setting up its own loyalty credit card program.

A shift to TD would mark the end of a two-decade relationship with CIBC. Aeroplan, which originated as Air Canada's frequent flyer program, is now part of a broader loyalty system operated by Aimia.

It has been known for some time that Toronto-based CIBC and Montreal-based Aimia were in for some hard bargaining as they approached the end of their current 10-year agreement.

Duchesne said the changes can be made whether the company partners with CIBC or TD Bank, but he said there might be more benefits partnering with TD.

"Clearly, TD is a stronger retail bank than CIBC. So you would expect, perhaps, that there would be more growth in the long term with TD."

Aimia said that TD would make a $100-million upfront payment in 2014 to help fund program enhancements if it becomes the new bank to offer a co-branded Aeroplan credit card under a 10-year deal starting Jan. 1, 2014.

Desjardins analyst Michael Goldberg said the potential partnership provides better Aeroplan rewards but higher costs for either TD Bank or CIBC.

"Aimia's new Aeroplan program provides improved rewards to Aeroplan members, such as greater seat availability, fewer miles required for redemption and the cancellation of the seven-year redemption policy," Goldberg said in a research note.

"However, under this proposed agreement, TD would be paying more than 15 per cent more per mile than CIBC is paying under its current agreement. If CIBC chooses to match the agreement with TD, it will also be paying the increased cost. However, the incremental cost for CIBC is unknown at this time."

American Express also welcomed Aimia's announcement and its opportunity to win new customers as a result with its own Aeroplan credit cards.

"We are excited at the tremendous opportunity this creates for American Express, particularly as CIBC customers weigh their options," said David Barnes, vice-president of advertising and communications at Amex Canada.

"We believe the strength of these products represent a great opportunity for American Express to win new customers and dramatically grow its business in Canada," Barnes said in a statement.

Aimia also announced the launch of Distinction — a new program that rewards top accumulating members with exclusive privileges.

Meanwhile, Aimia said it will also be purchasing more seats from Air Canada, Duchesne said.

"Every flight that leaves an Air Canada gate has got a least 10 per cent of Aeroplan members on it. We are by far their biggest customer and we're a very, very reliable source of demand."

Craig Landry, Air Canada's vice-president of marketing, said the airline welcomes the "significant program improvements" announced by Aeroplan.

"Enjoying travel is the most popular use for Aeroplan miles and these enhancements will benefit all members by making redemptions more attractive while recognizing our shared best customers," Landry said.

Shares in Aimia closed up $$1.48 or 10.63 per cent at $15.40 Thursday on the Toronto Stock Exchange, while TD was up 48 cents at $83.90 and CIBC rose 28 cents to $76.31.