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The People vs. Air Miles: What You Didn’t See On CBC Marketplace

On last night’s edition of CBC Marketplace – The People vs. Air Miles – I tried to help Air Miles collectors fight back against the loyalty company and redeem their reward miles before they expired at the end of the year.

We filmed the episode in Toronto four weeks earlier, but the day before it was scheduled to broadcast Air Miles threw a wrench into the plans when it announced an end to its expiry policy. CBC producers scrambled to alter the ending to reflect the latest developments, but that meant leaving a few items on the cutting room floor.

Here’s the full episode, in case you missed it last night:

Marketplace viewers got a glimpse into how Air Miles mishandled this entire situation; from the announcement made back in 2011 that was buried in a footnote of a completely separate press release, to its quietly moving gift cards for groceries, gas, travel, and entertainment from Dream Miles into Cash Miles, to disguising a high percentage of airline base fare as fees & taxes. The list goes on.

What didn’t make the show, but was discussed at length during filming, was just how much Air Miles’ management was involved in preventing collectors from redeeming their miles.

To better understand how this puzzle works, note that Air Miles is owned and operated by LoyaltyOne, which in turn answers to parent-company Alliance Data out of Texas. Alliance Data is a publicly traded company and regularly files earnings reports and transcripts from its earnings calls with analysts and shareholders.

As expected, there were some interesting tidbits gleaned from these reports. Here are some excerpts from Alliance Data’s Q4 2011 earnings call (note the timing as this was when Air Miles first announced its expiry policy:

On Breakage and Profitability

LoyaltyOne came in consistent with our expectations for the quarter as we had anticipated an unfavorable exchange rate environment and lower collector redemptions as a result of active program management.

For the quarter, revenue was down $10 million or 4% due to $2 million negative impact from exchange rates and a $9 million decrease in redemption revenue. The decrease in redemption revenue was due to a conscious effort by management to pull back the burn rate compared to the fourth quarter of 2010.

Pull back the burn rate? How can Air Miles’ management affect how its collectors choose to redeem their miles?

The People vs. Air Miles: What you didn't see on CBC Marketplace

“As we’ve talked about in the past, management routinely pulls levers to keep the AIR MILES program tracking to a 72% ultimate redemption rate. As you can see on the chart, aside from 2010 which was somewhat of an anomaly, our burn rate has been below or at the ultimate redemption rate. As of December 31, 2011, 59.9% of all miles issued since inception of the program have been redeemed.”

So fewer than six in 10 reward miles earned by collectors have ever been redeemed. The difference, which Air Miles calls “breakage”, makes up a good portion of the company’s profitability. But what “levers” are they talking about?

“We try to keep the existing program with the burn rate of somewhere around 69% to 73%. That’s the range we’ll like to see it operate. Last year and fourth quarter of ’10, it was little bit rich. So, what we do is we actively controlled the program via the options that you can redeem or the pricing of the option to try to keep it in the band as we move up toward that ultimate redemption rate of 72%.”

On Cash Miles vs. Dream Miles

“During the fourth quarter we announced a program enhancement for AIR MILES, the addition of an instant rewards option. Collectors in the AIR MILES program, beginning in the first quarter of 2012 will have the ability to allocate some or all of their AIR MILES collected into this option. It will provide collectors with an instant liquidity at the point of sale with participating sponsors. Both the sponsors and collectors have been asking for this enhancement and we delivered.”

This is when the program was essentially divided in two: one system for collectors looking for instant redemptions, and the traditional “Dream Rewards” where collectors save their reward miles for years before redeeming for a big trip or high-end merchandise.

“We anticipate that AIR MILES earned under (the Cash Miles) option will have a shorter life, perhaps as short as 12 months, with only a nominal number going unredeemed. Profitability to LoyaltyOne for this option will be from the pricing of the redemptions or gross margins rather than the more traditional breakage. We estimate right now that the instant reward option will play about 12-month life versus our existing program, which has a 42-month life.”

The company is admitting here that its profitability on Cash Miles will not come from breakage, but from devaluing the reward miles in this category from 13-15 cents down to 10.5 cents. Interesting to note that Dream Miles have a 42-month life, which is shorter than the proposed 5-year expiry window.

“At the same time we announced that all existing and future AIR MILES reward miles will have a date stamp of five years. This is a common industry practice. The implementation has no immediate accounting impact to LoyaltyOne, rather it just expires miles already considered dead for accounting purposes. All this does is crystallize the breakage rate over the next several years.”

Air Miles has said that some of its collectors have earned reward miles since 1992 and never redeemed them. The company, probably correctly, believes those miles will never be redeemed and wants to get them off the books by officially expiring old miles.

The following year, Alliance Data reported a profitable year for its LoyaltyOne division after it had a lower-than-anticipated burn rate. Shocking! Outside of the very few collectors who keep up on the news, most collectors knew nothing about the expiry policy and just kept earning miles as they normally would. From the Q4 2012 earnings call:

“Our guidance for Q4 was approximately 65% burn rate, whereas actual was about 60%. Redemption activities steadily moderated as 2012 progressed. This unusual trend, which we now believe is behind us, was prompted by the announcement of a 5-year expiry program at the end of 2011. This triggered what we call a run on the bank in the first half of 2012, as certain collectors accelerated redemption activity into the first half the year, which normally would have occurred somewhat steadily during the year. The fall off of redemptions in the back half of 2012 was expected.”

Pulling Levers

What was widely rumoured, but not proven at the time of filming, was that Air Miles’ management was pulling additional levers beyond simply adjusting prices and the number of miles needed for rewards.

Indeed, that included deliberately hiding rewards from certain collectors under the disguise of “personalizing the rewards experience”. It was also suggested that Air Miles intentionally made its website slow and difficult to navigate by removing the search bar and disabling features such as A-Z categorization of merchandise and rewards, among other things.

Given their mandate to keep redemptions within a certain band to maintain profitability during the “run on the bank”, it makes you wonder whether something more deceptive and sinister was going on behind the scenes to create frustration for collectors. Think of the number of hours and days spent on hold with the Air Miles call centre or spent trying to navigate the website to find something useful on which to spend your reward miles. Incredible!

What happens next?

Obviously the proposed ban on expiring rewards points in Ontario had a wide-reaching effect and forced Air Miles to cancel its expiry policy. Alliance Data issued a statement on December 1st that offers a look at what might happen next, saying that LoyaltyOne will incur a one-time charge as a result of the cancellation of the expiry policy, which is anticipated to be between USD $180 million and $250 million.

“Going forward, LoyaltyOne will adjust the value proposition to collectors to offset the lost economics resulting from a reduction in the breakage rate estimate and to maintain, as closely as possible, the economics of the AIR MILES reward program prior to cancellation of the expiry policy.”

That echoes what the company said in an earnings call five years ago:

“You have to basically raise the number of miles constantly that people have to accumulate if they want to redeem instantly because it seems like if the sponsor is not paying more, the consumer has to.”

Interesting to note that Air Miles does not believe the proposed ban on expiring rewards points will impact LoyaltyOne’s practice of terminating a collector’s account and cancelling their Air Miles reward miles after two years of inactivity. That means collectors need to earn or redeem at least one reward mile within a two-year period or face losing their miles forever.

Final thoughts

As The Globe and Mail’s Rob Carrick noted here, Air Miles has demonstrated some of the clumsiest brand management ever seen in this country. He’s right, this is no victory for Air Miles collectors. Expect more devaluing of miles in the near future.

As for the Air Miles loyalty company, it’s going to be a tough slog to try and repair its reputation after six months of brutal publicity, not to mention all of the collectors who wasted time rushing to redeem their miles for junk they didn’t want or need.

17 Comments

  1. Connie on December 3, 2016 at 1:25 pm

    I WILL Avoid Any Businesses who Support the AirMiles Program from now On!!!!! LCBO should be ashamed to be in Business with A USA Company makes NO Sense!!!! The Price of the Program is also reflected in the Liquor Prices so I will shop at Local Wineries from now on! I Hate Greedy Corporations and so Do many Canadians!!!! Privatize LCBO is our Next Request they have been gauging us for years with Incentive of Air Miles instead of Instant Savings!



    • Ian on December 3, 2016 at 1:47 pm

      I absolutely agree!!

      The only incentive program to belong to is a no-fee or low fee credit card that rebates cash to your account on a regular basis. Tangerine MC is best by far for domestic purchases and Amazon.ca VISA for foreign currency purchases. Both no fee and monthly cash rebates.

      Airmiles and Aeroplan are useless as the “merchandise, airfares, vacation packages” can all be bought online for far less points and money.



      • TrueNorth on December 4, 2016 at 7:08 am

        Ian, I fully agree with you, both AirMiles and Aeroplan stinks, you get better prices buying directly. All reward plan should be banned from expiring points. What I find is that executives managing these reward points are skimming cream for their bonuses, and collecters are left holding useless points. It is a shame that LCBO and other retailers are supporting these plans.



  2. Bob on December 3, 2016 at 3:03 pm

    What this shows is what wimps Canada’s major corporate leaders really are. Bank of Montreal, in particular, has let a bunch of Trumpists take their money without providing good value to the bank’s customers. The same goes for Sobey’s, which, as a recent joiner, should have driven a harder bargain on behalf of its customers. It never made sense for the LCBO to offer Air Miles because it is a monopoly — except that LCBO realizes that Air Miles offer a way to discount and promote its products cheaply. Most consumers think that Air Miles are worth more than they really are — at least until the current blowup exposed the overly-aggressive Texan tactics.



  3. JA on December 3, 2016 at 3:25 pm

    @Bob, I agree about the LCBO. Why does it participate in Air Miles? It has no competition. How much does it cost per year?



    • Andrew Tan on December 5, 2016 at 3:19 pm

      Yes, I could never understand why LCBO got into bed with Air Miles. Was it necessary? Who is the LCBO competing against for customers? Tim Hortons? And who is REALLY paying for for the program?



  4. Gregg on December 3, 2016 at 4:34 pm

    I think the private member’s bill should proceed to provide the future protection the companies won’t. As well, why not freeze the value of past miles/points awarded? Inflation happens? Well we’ve had them defer the redemption for years. Insurance companies make money on the timing between premiums and payouts. I’m sure these guys do too, so don’t look for sympathy from me.
    I agree the cash back cards win my preference every time – clear detail on what you get and when.



  5. Ed on December 3, 2016 at 4:46 pm

    I have been a collector since Air Miles started. At the beginning my miles were worth 20 cents. Then they went down to 15 cents and that decline continued until Dec. 1st, 2016.

    I never bought anything just to get free miles.

    I am happy we won the battle but you can be sure we will loose the war.



  6. Nancy on December 3, 2016 at 6:55 pm

    Air Miles has devalued their air miles three tims that I know of. At one point if you saved 10,000 a.m.’s you would receive $75 towards a trip or car rental. Then it went down to $50. When they lowered it to $25 I stopped saving the damned things.



  7. Vito on December 4, 2016 at 2:48 pm

    I signed your petition and sure enough, I just redeemed merchandise a couple weeks ago to use up my points I’ve collected for over 10 years because I didn’t want to lose them and now this…and Airmiles is saying they won’t take any returns, Airmiles really has definitely lost loyal customers. I’m with Ian on this one…money back with Tangerine is next on my list, was debating about getting their card, looking more like I will get rid of my Amex Airmiles card now…too bad.



  8. bylo on December 4, 2016 at 3:18 pm

    Rob, excellent article. The material you’ve quoted from Alliance’s reports provides evidence to incriminate themselves.

    On another tack, consider that LO’s real customers aren’t us, but rather the merchants who offer AMs as an incentive. Have you contacted any of the larger ones like Shell, Rexall, Staples, etc. to ask them how they feel about the damage that LO has done to their collective reputation over the past few months? I’d imagine these merchants must be livid about what LO has done to antagonize their customers. I wonder if these merchants would be willing to share with you what impact LO’s actions have had on their businesses.



  9. Ron on December 4, 2016 at 3:29 pm

    The underhanded, deceitful and immoral actions of Air Miles are finally coming to light. I was in line to lose almost 6,000 Air Miles.

    At one time a couple of years ago I tried to redeem some of my Air Miles for a flight to the Asia some 10 months in advance only to be told that there were no flights available, no matter what dates I entered. Not to mention having to enter one date combination at a time without any indication of what flight dates were available.

    The additional fees when booking are unbelievable. I tried to book a flight (low season) to Sault Ste Marie (1,200 points + ~$160 surcharge) only to find that for an additional $40 I could book a discounted flight on the Porter airline website without the need to surrender any points! I have given up all hope of being able to book any flight by redeeming a reasonable number of air miles and for a reasonable surcharge.

    All I would like to do now is convert my Air Mile Rewards to Air Miles Cash Rewards, which of course is not allowed. Even at today’s low redemption credits I would at least be able to buy over $600 worth of groceries and get the hell out of the program.

    I don’t want to give up. Perhaps if Loyalty One won’t listen, the businesses that support them might. I would be in favour of making a pledge and supporting a petition that could be presented to the supporting businesses stating that until we are allowed to transfer our Air Miles Rewards to Air Mile Cash Rewards we will no longer do business with them.

    Anybody interested in joining me?



    • Judy on December 5, 2016 at 12:19 am

      I would sign your petition!



      • Shawn on December 5, 2016 at 11:01 am

        I will sign the petition too. I lost more than 10,000 air miles just to buy the merchandise that I could have lived without. Even, buying an airline ticket did not seem worth its value.



  10. Perry on December 4, 2016 at 4:52 pm

    A full on boycott of Shell, and Safeway would definitely change life for them and Loyalty One!!! Shell and Safeway should be held accountable for who they decide to “get in bed ” with.



  11. Andrew Tan on December 5, 2016 at 7:31 am

    The entire concept of a loyalty program ultimately financed by consumers through higher retail prices is wrong. As I’ve complained many times, my grandmother who collects no loyalty points is subsidizing the program whenever she shops.

    We must legislate against this kind of “ponzi-like” schemes. Consumers should not be tricked into this kind modern business wizardry. No new goods are manufactured by these kinds of enterprises. They are merely moving money around, from grandmother to other consumers, and in the process keeping a portion for themselves. It adds to the cost of doing business.



  12. michael Boudreau on February 15, 2017 at 6:34 pm

    Air miles has removed my5,357 dream miles from their books and 130 cash miles. When I try to find out what happened,they say{oops an error has happened}. when i try callling they do not answer, This has been going on for at least 3 months.Once i waited for at least 3 hours ,without a response.
    I complained to Metro stores and the managers are saying they will consider renewing their contract with AIR MILES.
    LCBO should withdraw from this corrupt organization, I realize we are forced to use LCBO,since there is no alternative.



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