August 14, 2008 / 12:14 PM / 10 years ago

Aeroplan profit falls as reward costs rise

TORONTO (Reuters) - Second-quarter profit at Groupe Aeroplan Inc fell 36 percent as its cost of rewards and other expenses rose, the consumer loyalty program operator said on Thursday.

Aeroplan, best known as Air Canada’s frequent flier program operator, earned C$31.5 million ($29.7 million), or 16 Canadian cents a share, down from year-earlier C$49.5 million, or 25 Canadian cents a share.

Despite the drop in earnings, shares of the Montreal-based company rose 10 Canadian cents to C$13.30, on volume of 6.4 million shares, making it the third most heavily traded issue on the Toronto Stock Exchange.

Neil Linsdell, analyst at Versant Partners, attributed the gain to optimism over Aeroplan’s new partnerships.

Aeroplan said it has signed up supermarket chain Sobeys, a unit of Empire Co Ltd, as a reward partner, allowing customers to earn Aeroplan miles on their grocery purchases.

And, earlier this month, it joined Expedia in Britain, to allow some members to earn points when booking flights, hotels, car rentals and full travel packages.

However, Aeroplan won’t likely see the benefits of the partnerships in the next 18 to 24 months, said Linsdell.

Aeroplan’s results were in line with expectations, but the short-term outlook may be affected by a sluggish Canadian economy, which can hit consumer spending and airline travel, said Linsdell.

“There’s high leverage to both airlines and consumer spending, both of which aren’t doing too well right now,” he said. “So I think that’s going to lead to some pressure on their growth rates.”

Linsdell has a “hold” recommendation and a price target of C$15 for the next 12 months, but expects the company to revise its forecasts downward.

Aeroplan Chief Executive Rupert Duchesne said air travel didn’t weaken in the quarter, but the company is cautious given record fuel prices and the turbulence affecting the airline industry worldwide.

“We’re impacted only to the extent that the demand for travel is affected by fuel inflation or to the extent that capacity is reduced on popular redemption routes,” Duchesne said in a conference call.

In June, Air Canada said it plans to cut its capacity by 7 percent this autumn, with the largest reductions hitting U.S. flights.

Revenues rose 53 percent to C$336.7 million from C$220.3 million, the company said. Gross billings from the sale of its miles and points rose to C$357.9 million from C$238.9 million.

Reward costs climbed 49 percent to C$192.6 million from C$128.5 million in the same period last year.

In May, ACE Aviation Holdings, Air Canada’s parent company, sold its remaining 20 percent interest in Aeroplan, which subsequently abandoned its structure as an income trust and converted into a corporation.

It has expanded beyond its Canadian home base with the acquisition of Loyalty Management Group, which runs the Nectar rewards program in Britain.

$1=$1.06 Canadian

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