Why Air Canada’s Aeroplan doesn’t dabble in ‘carrier charges’

EXCLUSIVE | It’s becoming increasingly popular for frequent flyer programs to levy ‘carrier charges’ on reward bookings. Everybody expects to pay the genuine taxes and fees when redeeming points for a flight. But carrier charges sit on top and increase those co-payments. Air Canada’s Aeroplan program, however, is deliberately keeping carrier charges at bay.

Given the shape of the industry today, it could be described as an unusual approach. In Australia alone, Qantas and Virgin Australia both levy carrier charges on reward flights. You can also expect to pay a carrier charge when redeeming Velocity Points on the likes of Singapore Airlines and Etihad.

You can add into that mix airlines such as Air France, British Airways, Cathay Pacific, Japan Airlines, KLM, Qatar Airways, and Virgin Atlantic. We also can’t forget Emirates, which has among the highest carrier charges of any airline globally.

When it comes to Aeroplan, however, carrier charges simply don’t exist. In fact, one of Aeroplan’s greatest strengths is that you can redeem points on any partner airline and not be slugged a carrier charge. Notably, this includes Emirates – and that means a ~$3,500 cash saving every time you redeem for Sydney-Dubai-Paris return in First Class.

But why does Aeroplan take such a different approach? I sit down for an exclusive chat with Mark Nasr in Dubai, on the sidelines of the IATA AGM, to find out. He’s President of Aeroplan, along with being Air Canada’s Executive Vice President of Marking and Digital. If anybody can explain it, it’s him!

‘It’s supposed to be a free ticket’, says the Aeroplan boss

Nasr doesn’t mince his words. When I ask how critical it is for Aeroplan to avoid levying carrier charges, he explains it in two words: ‘extremely important’. He goes on to say, ‘people understand taxes,’ speaking of the genuine government and airport fees that travellers pay. But for Aeroplan customers, ‘surcharges don’t make sense.’

‘We did all the research when we prepared to redesign Aeroplan in 2017-2018. The message we got back very clearly was, this is supposed to be a free ticket. But surcharges came back as, no, this is supposed to be an award,’ and who asks somebody to pay for a prize of sorts?

‘Actually, at one point, we looked at having completely free awards. (That means) baking in the government taxes, and literally we had a goal of $0 awards as a standard award. And it was interesting, this is why research is so important. Customers were telling us if there aren’t taxes, what am I missing? There must be something hidden going on here. I’m not comfortable with it because taxes are taxes, everybody pays taxes. Especially from a Canadian perspective, that’s the acceptable thing.’

‘We used to have surcharges on several partners, including Air Canada,’ Nasr continues. ‘It was actually a really interesting situation with a former team there where Air Canada had surcharges, but for example, United Airlines redemptions from Aeroplan didn’t have surcharges. And clearly that makes no sense.’

Through the feedback and Aeroplan relaunch process, customers were saying of carrier charges, ‘I don’t like it, I don’t want to see it. And so we designed the program with that feedback in mind … building a program that we believe is fundamentally fair.’

Waiving carrier charges increases the value of Aeroplan points

It turns out, the lack of carrier charges on Aeroplan reward bookings isn’t just good for customers. It plays a part when Aeroplan goes to sell those points to partners – tying into the ways that customers earn rewards in the first place.

‘It’s certainly a part of the commercials behind the points when we’re working with banking partners,’ Nasr confirms. These commercials ‘inform the transfer ratios’ from other rewards programs, such as credit card partners, to Aeroplan.

‘Overall, we believe that we provide the right mix of value per point, numbers of partners, flexibility of the tickets, and then finally, the actual booking experience.’ Nasr acknowledges that ‘sometimes other programs are cheaper in points, with or without a surcharge. There are carriers that have combinations of partners that might be better, for example, from an Australian perspective. But when you bring those four elements together, we’re really easy to do business with.’

Among Aeroplan’s advantages, ‘all the partners (can) be booked online with instant confirmation,’ he shares. Aeroplan allows stopovers to be booked online … and even seat assignments on most of our partners (during) the booking flow, in the premium cabins. Every reward is refundable.’

‘The routing rules are very liberal,’ Nasr continues. ‘And then there’s very solid value between the pricing points and the lack of any carrier surcharges. So, the whole thing together, we believe, is a compelling value proposition and we’re proud of it.’

Instead of a carrier charge, Aeroplan has a simple CA$39 booking fee per person on itineraries that include a partner airline. That isn’t ideal on short, one-way, Economy Class reward bookings on partners. For instance, on Virgin Australia from Sydney to Melbourne. But if you’re using Aeroplan points for a long-haul flight, it’s barely noticeable.

Buying Aeroplan points to avoid carrier charges elsewhere

Opportunities to earn Aeroplan points in Australia are currently quite limited. In the credit card space, Aeroplan counts CommBank Awards as a transfer partner. But with a 4:1 conversion rate alongside relatively low earning rates on many CBA cards, it’s a niche offering generally better for smaller top-ups than larger transfers.

One alternative, particularly from American Express Membership Rewards, is to convert points to Marriott Bonvoy during a points transfer promotion. Then, converting those same points onwards from Bonvoy to Aeroplan – using the Marriott Bonvoy hotel program as something of a middleman.

Clearly, buying Aeroplan points outright is much more accessible. But are too many people buying points to try and save on high premium cabin airfares?

It turns out, this isn’t done ‘as much as people think. And I’d say in general, we’re very proud of our partnership portfolio. It’s a huge part of the overall value proposition and the flexibility. But you still have the super majority of points that are being redeemed on Air Canada and Air Canada family metal,’ says Nasr. ‘Even when you bake in credit card transfers, even when you bake in buying points.’

‘This is something that we often tell our partners,’ Nasr continues. ‘We’ve had some partners that look at our value proposition and want to have a reasonable discussion about it. And we say, look, the bread and butter of the program where the super majority of points get redeemed are on Air Canada flights.’

Beyond bookings on Air Canada metal alone, another popular choice is ‘Air Canada in combination maybe with a partner segment. A great example would be Vancouver to Adelaide or Melbourne and interline with Virgin Australia, but they’re taking AC33/34 across the Pacific. I think that those data (points) really help in some of these conversations.’

But what about Aeroplan’s variable reward pricing on Air Canada?

Aeroplan may have no carrier charges. But when it comes to Air Canada flights, the program no longer uses fixed reward rates (award charts). On the one hand, Air Canada flights are much more accessible. That’s because Aeroplan points can be used to book the very last available seat. But to offset that, reward costs sit within a range, not at a fixed price.

Speaking of this form of dynamic pricing, ‘I think people fundamentally vote with their wallets and their clicks,’ Nasr observes. ‘Customers are smart and they have a lot of choice, especially in our market.’ But ‘the level of redemption since we relaunched the program has doubled.’

‘What customers’ behaviour indicates very clearly is that the ability to get every seat, every single flight, no restrictions on Air Canada (is) highly valued. (As is) the ability to match any Air Canada seat with the partner inventory we have, which of course is more limited.’

‘There are customers that have given us feedback that says, I liked it before when there was a fixed grid. And that’s not been positive feedback. But there’s been many more customers that have both given us the feedback and availed themselves of those options.’ This suggests that engagement is still high when flight redemptions switch to variable pricing.

‘I think now when you look at the major tier one carriers … that don’t have that flexibility or do it at miles as a form of payment in cash at a kind of low-level valuation on a fixed basis, then actually generates more dissatisfaction than the notion of having a range, but having a solid value across every single seat.’

‘I won’t call out anyone in particular. But I’m thinking in your market of an example that comes to the top of my head.’ Ahem.

Also read: New Qantas Classic Plus Rewards set value per point at 1.0-1.5 cents

Imagery courtesy of Air Canada. Chris Chamberlin attended the IATA AGM in Dubai as a guest of IATA.