As domestic airlines suffer one of their worst periods in recent years, issuers of frequent-flier cards say they are relying on product innovation and on longstanding relationships and frequent communication with carriers to keep the programs healthy.
Such cards have been among the most profitable for issuers; they are among the few card types that still command annual fees. The popularity of air-mile rewards also means that use — and therefore interchange income — is high.
But observers say issuers can share the blame in the eyes of consumers who are unable to redeem their miles. And the potential for such cardholder frustration has risen in recent months as airlines have reacted to soaring oil prices by announcing mergers, grounding planes, and reducing domestic flights, all of which can reduce the number of seats available for redemption.
The constant stream of news stories about airlines filing for bankruptcy protection and cancelling thousands of flights also could discourage card use, observers said.
"If the consumer perceives more difficulty in redeeming rewards as a lesser value in the program, they may not use the card as often … which could lead to some renegotiations of agreements between the issuer and the airline," said Chris Theoharides, the president of Advantage Consulting Group Inc., which has advised most domestic airlines on their cobranded programs.
Tony Hayes, a partner in the financial services division of Marsh & McLennan Cos.' Oliver Wyman Group, said, "To the extent that the airlines become less attractive as a hook to get customers to select credit cards, there will be an impact there."
If customers perceive a reduced "ability to redeem those miles, airline cards become less attractive," he said.
David Rabkin, the vice president of Delta consumer cobrands for American Express Co., which issues SkyMiles cards for Delta Air Lines Inc., said, "We're both facing difficulties in the market, and we're both feeling pressure from all directions. … One thing that we try to do is have constant communication. I'm talking to my counterparts on a daily basis."
Likewise, Terry O'Neil, an executive vice president of Citigroup Inc.'s cards unit, which issues AMR Corp.'s American Airlines AAdvantage cards, said, "We spend a great deal of time with American Airlines to ensure that our strategies are aligned. They're fully informed of any development in our business models."
Both executives spoke in interviews last month — before Delta announced its deal to buy Northwest Airlines Corp. (See related
Citi's partnership with American Airlines, which began in 1987, is the oldest in the frequent-flier sector.
"The program is still doing very well, and the industry is cyclical," Mr. O'Neil said last month. "We've weathered a number of changes in the industry."
Citi AAdvantage, Mr. O'Neil said, "has experienced its most successful [customer] acquisition years from 2003 to 2007" and expects a continuation of the trend this year. Last week a spokesman for Citi said this expectation remains valid.
American Airlines would not respond to questions about its relationship with Citi. A spokeswoman for the airline said by email, "we certainly feel that the AAdvantage program — the world's largest travel awards program — offers numerous benefits that our 60 million-plus members enjoy."
Another dominant issuer in the field is JPMorgan Chase & Co, which runs rewards programs for UAL Corp.'s United Airlines, Continental Airlines Inc., and Southwest Airlines Co. The banking company declined to comment for this article.
Last month Amex unveiled the Delta Reserve card, whose $450 annual fee makes it the most expensive cobranded airline card.
In addition, Amex and Delta introduced the "pay with miles" program in February, just before the airline industry started announcing layoffs, route reductions, and mergers.
The program essentially gives Delta SkyMiles Gold and Platinum cardholders a more immediate return from the rewards program, by letting them pay for any Delta ticket with a combination of money and miles, without restricting them to the frequent-flyer seats available or requiring them to wait until they have accumulated enough points for a full ticket. (Northwest's PerkChoice and United's Choices programs offer similar options.)
"Creativity is definitely the solution to times like this," Amex's Mr. Rabkin said. "There are lean times, and you don't know how long a cycle's going to be."
"Newness is really good for a portfolio," he said, because "the market just does move so fast and flyers are just really, really demanding."
Mr. O'Neil said Citi's airline cobranding programs have served as a test kitchen for ideas that were later applied to its other cards. One example is "maintaining a dialogue with our card members and prospects" through media like blogs and Citi's Web site, he said.
In 2004, the company introduced the Private Pass program, which gives cardholders exclusive access to things like concerts and golf tee times, to a select group of customers. The program was made available to Citi AAdvantage cardholders in 2006 before being expanded across Citi's portfolio.
Doug Miller, a senior analyst at the New York market research and consulting firm Corporate Insight Inc., said cobranded airline cards are profitable for issuers in and of themselves, without taking into account any additional banking business the issuers might get from the airlines.
In addition to being "the most expensive mainstream nonpremium cards," he said, airline cards encourage big spending by affluent customers.
Mr. Theoharides, the consultant, said the cards give issuers a "stronger response rate, stronger sales, and a lower attrition rate" than other reward cards.
If seat availability "changes dramatically, it will absolutely put pressure on the relationship, but these cobranded airline programs have been very effective for all parties," he said.
The exclusive nature of such relationships is also a powerful marketing tool for issuers, observers said.
"Many credit cards now offer points, many credit cards now offer cash rewards," said Oliver Wyman's Mr. Hayes. But if a consumer wants, for example, a Delta air miles card, "there is one place to go" — Amex.
Randy Petersen, the publisher of InsideFlyer.com, which tracks frequent-flier programs, said developments like the new baggage fees — which do not apply to customers who have attained elite frequent-flier status — could actually spur use of airline-cobranded cards, as people try to qualify faster for premium perks.
"If you're not an elite these days, the news is pretty grim," he said. "I think there are some solutions, and credit cards have really positioned themselves to take advantage of these situations."
However, Ron Shevlin, a senior analyst at the Boston market research firm Aite Group LLC who covers loyalty and rewards programs, said that, given the terrible business climates for both airlines and banking companies, "you've got to think that there will be some big changes up ahead. Despite being important to many consumers," the structure of some frequent-flier programs is "just not tenable anymore," he said. "The inability for the consumer to redeem those points is a huge problem."
Citi's Mr. O'Neil acknowledged last month that the basic availability of travel rewards remains important. "Consumers have to be able to redeem their frequent-flier miles," he said.
US Airways Group Inc. caused the last significant shakeup in frequent-flier cobranded programs when it merged with America West Airlines in 2005; Barclays PLC's card division won the contract away from Bank of America Corp. (B of A sued US Airways for breach of contract and settled last May. A February filing by US Airways with the Securities and Exchange Commission said B of A's right to issue the airline's cards was extended through March 2009.)
Mr. Petersen said B of A is now "kind of a lame-duck partner" for the airline.
It is "difficult to spend money when you're going to lose the portfolio," he said.
B of A would not discuss the matter. In a statement to American Banker, Barclays said it is "pleased with the contribution the program has made to the growth of Barclays to date and to support US Airways. Our projections call for the program to continue to perform very well."
Issuing banks are vital partners for airlines, especially when carriers falter, Mr. Petersen said.
For example, in 2004, the year before Delta filed for bankruptcy protection, Amex gave its partner a cash infusion by prepurchasing $500 million worth of miles to help the struggling airline regain its footing.
In 2005, as United prepared to emerge from bankruptcy protection, JPMorgan Chase and Citi supplied $3 billion in financing, and JPMorgan Chase also made a "substantial advance purchase of miles" from United.
"If it wasn't for those banks I can pretty much say there's a few airlines that wouldn't be around," Mr. Petersen said. The issuers of cobranded cards "are responsible for 60% of the revenue stream of an airline's frequent-flier program," he said. "The banks kind of 'wag the dog.' "
Before the Delta-Northwest deal was announced, Jeff Robertson, the managing director at Delta in charge of the SkyMiles program, said his airline's relationship with Amex is "the best it's ever been." Despite "some of the financial difficulties in the airline industry, American Express has been there," he said.
"It's one of the most profitable entities for Delta Air Lines, the cobrand business, and I think it's one of the most profitable cards at American Express," Mr. Robertson said.
"We need them as much as they need us — that's the kind of relationship you want to have."
Mr. Hayes at Oliver Wyman suggested that the airlines, and issuing relationships, that survive the current turmoil could benefit.
"As with the mergers, the resulting entity could become larger and have more scale — so the surviving cards will be going against a larger card base overall."
