The tremendous popularity of credit card programs linked to frequent-flier miles has banks and airlines seeking ways to expand the programs and squeeze more revenue from them.

Some card issuers and airlines are adding ways to accumulate points, and some are loading on new types of rewards that customers can "buy" with their frequent-flier miles. But with many of the air-miles programs reaching a saturation point in the United States, companies are looking abroad for growth. Delta Airlines, for example, has an exclusive relationship with American Express Co. in the United States, but this year developed Visa-branded credit cards with banks in Japan and Chile. American Express has added eight airline carriers covering different geographic markets to its cobranding portfolio in the last two years.

On the flip side, British Airways, which linked up with American Express in January, has formed nine cobrand partnerships with banks and credit card companies in various markets.

The continuing success of cobranded airline cards in the United States has paved the way for these developments. Indeed, in this country, credit card purchases may soon outstrip flying as the No. 1 way to earn miles, according to Randy Petersen, editor of a magazine and Web site that track frequent-flier programs.

Mr. Petersen, who runs Inside Flyer magazine and Web Flyer, said that 57% of all frequent-flier miles are earned from transactions other than flying, and one-third of these nonflying miles come from credit card use.

"I believe that three years from now credit cards will probably be the No. 1 source of miles accumulation in the U.S.," Mr. Petersen said in a phone interview from his Colorado Springs office. Now that people collect air miles the way they once hoarded Green Stamps, they are particularly eager to charge large-ticket items on their cobranded airline cards.

This trend is beginning to carry over to international markets, where frequent-flier programs are far less mature. "Outside the States there isn't the same level of mileage fever yet," said Lisa Axel, vice president of international partnerships for American Express, based in London. "People expect miles for everything they do" in the United States, and "that's just starting here."

There are 223 types of cobranded airline cards being issued around the world, Mr. Petersen said, and 21 are in the United States. One major U.S. credit card company that does not have an airline cobrand program is Discover Financial Services, a Morgan Stanley Dean Witter & Co. unit that has only three cobranded cards in its portfolio. Discover has based its acquisition strategy on affinity cards, which focus on a niche group and often pay out a percentage of transaction funds to charities.

Airlines are considered prize cobranding partners by credit card companies because those who sign up for frequent-flier programs tend to be affluent people whom Mr. Petersen has labeled "frequent buyers." Chris Theoharides, president of Advantage Consulting Group Inc. of Jericho, N.Y., a management consultancy specializing in the payments industry, said that an average airline cardholder spends $20,000 annually using the card, often preferring the card to cash or checks in order to earn more miles. The average spent on a traditional credit card is $2,000 to $3,000.

Mr. Petersen said that in an American Express survey a few years ago, once consumers joined membership rewards programs their credit card expenditures tended to increase by as much as 37%. "I'd say that's a hell of a home run," he said.

"Our card brand holders spend three times more than the proprietary card of the issuing bank," said Mike Anslow, the head of cobranding at British Airways. "The chargeoff rates are a lot lower, the fraud rates are lower, and the cost to acquire the accounts is lower." Though airline cardholders are less likely to revolve their balances and are more likely, when they do revolve, to keep lower balances, the interchange earned from the high transaction volume makes the cards profitable for the issuing banks, he said.

"The consumer gets the free miles, the bank gets the spending on the card, and the airline gets a loyalty program," said Melissa Beidler, senior vice president of Visa U.S.A.

Some of the latest credit card rewards programs include Delta SkyMiles' new Always Double Miles, which Delta and American Express officials stressed is not a promotional program but will be continual. SkyMiles members can earn double miles with purchases at supermarkets, gas stations, drug stores, home improvement stores, the Postal Service, and on payments for wireless phone bills, Delta services, and Delta tickets.

Citibank's new cobranded World MasterCard gold card with American Airlines offers a $50 annual fee, no preset spending limit, and a $99 domestic companion certificate. Continental Airlines with Chase Manhattan Bank introduced in the past year the only cobranded debit card, which offers one mile per $2 spent. National City Bank in Cleveland recently started offering its Business FirstAir Visa platinum credit card, which lets small businesses earn free air miles on any airline while also establishing credit in the business' name.

According to Richard Cornelius, a partner in the Andersen Consulting financial service practice in Phoenix, competition in the United States is not so much in forming new partnerships but in luring customers from one program to another. Consequently, airlines constantly monitor competing programs.

The international market, though, remains largely up for grabs.

"Rather than steal a customer from someone else, it's easier to get a customer for the first time," Mr. Cornelius said.

Moreover, larger international carriers usually contract with different banks in different markets. Delta said it wants to cover all its bases by working with American Express in the United States and Visa abroad. "In evaluating our opportunities internationally, we determined that we could create the greatest value for our customers and for Delta" in partnership with Visa, said Rob Grady, Delta's general manager for credit card partners worldwide.

In the United States, British Airways has a cobranded Visa card with First USA Bank, the Bank One Corp. credit card subsidiary. But it recently contracted with American Express for customers in the United Kingdom, and it works with Citibank and Citi's Diners Club division in Switzerland. British Airways is developing cobranded cards for Canada, Japan, South America, Saudi Arabia, and the Middle East, according to Mr. Anslow.

He said British Airways considered sticking with one card issuer in all places but decided it would not be in the best interests of its "executive club" members to limit them to one product, one bank, and one card brand. "Whatever is the best product for our frequent fliers in that market is what we go with," he said.

Mr. Anslow said British Airways does extensive research before settling on a partner, and once a deal is struck, the airline does regular reviews of the program and sets stringent marketing targets. "It's in our interest to make sure the relationship works," he said. "If we swapped credit cards all the time, I don't think our executive members would be too happy."

Mr. Theoharides said the economics of cobranding relationships are favorable to both the bank and the airline. The card issuer usually buys miles from the airline at about a penny per mile, and the cost to the airline is 0.5 to 0.7 cents per mile, he said. The redemption rate of frequent-flier miles is only 60% to 70%, and the unredeemed mileage accrues to the airlines. Factoring that in, the airlines "have a healthy profit markup on the mileage sold to credit card issuers," Mr. Theoharides said.

Additionally, frequent-flier seats tend to stimulate "the purchase of a companion ticket as well, which may not have otherwise been purchased, which also creates another incremental revenue stream," he said.

Cobranding contracts tend to run from three to five years, and when the relationship works out, the deals are renewed, Mr. Theoharides said. But financial institutions do not take these contracts for granted.

"I would say our airlines partnerships are some of the most important businesses that we have," said Rosemary Cauchon, executive vice president in charge of partnership and business card marketing at First USA. Her company issues cobranded cards with United Airlines, Southwest Airlines, and British Airways' U.S. domestic flights.

American Airlines, which has the largest frequent-flier program in the world, has had a stable partnership with Citibank for more than 10 years. As Citi shifts its portfolio from Visa to MasterCard, the American Airlines cards are migrating in that direction as well.

Ms. Beidler of Visa said that 60% of the Citibank Aadvantage cards are still Visa-branded, but Mr. Petersen of Inside Flyer commented, "They used to have 100%, so they're down to 60%." As customer cards come up for renewal, they will be replaced with a cobranded MasterCard, he said. "It's a process. It doesn't happen overnight."

Ultimately, the reason these cobranded cards have enjoyed such success is the value they offer to consumers, who are willing to pay hefty annual fees. Most cobranded airline cards cost from $85 to $125 per year. "We're in a no-fee environment, but they can still command a fee," said Anita Boomstein, a partner in the New York law firm Hughes, Hubbard & Reed who has worked on cobranding deals. "It's the only card they're still willing to pay a fee for."

By contrast, the cobranding deals that card issuers had struck with regional telephone companies have largely died out, both because the companies involved could not find ways to make them work economically and because consumers did not find enough value in them. Cobranded telephone cards are helpful if a cardholder has a high phone bill, said Ms. Beidler of Visa, but for the average consumer "it's hard to really know if you are saving money."

The airline cards have had more success because consumers view miles as "quasi-currency," Mr. Cornelius said. "People know what these miles are worth. If I spend a dollar, it's worth a mile."

Cobranded airline cards "have stood the test of time," said Marc Sacher, managing associate for Auriemma Consulting Group Inc., a credit card consultancy in Westbury, N.Y. "They achieve more use than any cobrand type. The banks work very hard to retain the airlines as partners, and to date, most of the airlines have been quite satisfied."


From Our Archive:

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.