AIMCO CASE. A Description of AIMCO Case. Case Study (Case Study Sample)

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Uncertainty in AIMCO from lower interchange fees and smaller-than-expected international earnings – Is AIMCO taking off?
The share price of the Canadian loyalty program company, AIMCO, an initial public offering (IPO) last year, has taken a nosedive from C$17 to C$10 per share due to not meeting analysts’ earnings expectation. During IPO last year, AIMCO had completed a transaction with a major credit card company to offer air miles to the credit card company’s existing customers. At that time, AIMCO greatly enhanced the benefits to its air mile members by negotiating an increase in available seats with a major commercial airline company. However, the increased availability has put upward pressure on costs for AIMCO. At the same time, AIMCO was only able to secure a marginal increase in price per mile paid by the credit card company.
There is a timing issue associated with the new deal. As air miles members can now as a whole use many more miles that they earn due to the increased availability, this put significant pressure on AMICO’s earnings. AIMCO must now spend an increasing amount to satisfy redemptions even as it may be selling fewer miles to the credit-card issuers. This is expressed as a “burn-to-earn” ratio. This ratio is now working against AIMCO.
During the past year, competitions have been fierce as other credit card companies started their own self-insured programs which added the flexibility of reimbursing their members with the costs of any air travel seats. As competitions intensified, the interchange fee, which are the fees that help card issuers cover the various costs including the costs of loyalty programs, has decreased from 2% to 1.5% for the next five years. AIMCO and the analysts expect card issuers to absorb the blow by cutting the amount they will pay for the air miles. This decrease in interchange fees has called into question AIMCO’s estimates of free cash flow as the AIMCO’s agreement with the credit card company allows AIMCO to “share the pain” of an interchange cut. AIMCO estimates about C$100 million of gross billing may be at risk if 100% of the cut in interchange fees are passed through to AIMCO. With a 50% share, the target estimate will result in C$50 million of lost free cash flow.
In addition, the currency exchange may also present an issue for AIMCO which operates internationally. The recent decline in Canadian dollar puts huge cost pressure on AIMCO’s US operation which locked in their pricing exchange rate last year without hedging their pricing exchange rate.
All of the above factors have resulted in the earnings estimate to drop from the C$17 to C$10 target, with a negative outlook if existing competitions and drop in Canadian currency exchange rate continue to persist. Investors should expect AIMCO to sit on the runway for some time before any potential takeoff.