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Airlines, as any regular traveler knows, are reducing passenger services and perks to survive the bumpy economic skies they must navigate these days. Free drinks are disappearing. Fees are assessed for pillows and blankets. Routes are being reduced, leaving some towns without commercial air service. More-stringent rules are making it tougher to earn free flights through loyalty programs.
But one item the airlines have no intention of eliminating is the cobranded credit card they offer with banks and other issuers.
"They're still making a lot of money," Roger Williams, managing partner of Airline Information, says of the cobranded airline cards. "Everyone makes money." Miami-based Airline Information offers management consultation, publications and conferences to the airline industry.
Airlines are making money because the issuers are paying them "at a very good rate" for every mile cardholders earn, Williams says.
Airlines can get from issuers 0.3% to 0.8% back for every dollar spent with a cobranded card, says Ralph Bejar, CEO of Airsavings SA, a France-based consultancy, noting issuers may gain access to airlines' databases for marketing purposes. The cards also build up and strengthen customer loyalty for both the airline and the card issuer, he says.
For some airlines, 1% to 2% of their overall annual sales come from cobranded card revenues, according to Bejar. "Obviously, a cobranded card is bringing them a lot of ancillary revenue," he says.
That is true, acknowledges Mark Sullivan, managing director of loyalty marketing at Continental Airlines, which partners with JPMorgan Chase & Co. on cobranded cards. "We get double-digit growth every year. All the airlines, I'm sure, enjoy good, profitable credit card portfolios," Sullivan says.
This summer, Continental and Chase renewed their card-cobranding agreement. The airline offers different cards with Chase to different sets of customers, from the high-end Presidential Plus, which includes "elite access" to the airport and first seating on flights, to a lower-end card with a lower customer fee.
Yet despite the huge revenue potential and boost in customer loyalty, all is not smooth-flying in the cobranded card domain for the airlines.
Some airline card-program executives see tough competition from companies such Capital One Financial Corp., which offers cards with perks that enable users to get discounts or rewards on all airlines. Other credit card providers have cobranded card arrangements with more than one airline or offer rewards for flights even when not in a cobrand relationship. At the same time, some airlines are unhappy having to pay providers typical merchant fees on their own cobranded cards, and they are beginning to look at alternative payment methods, including debit cards, automated clearinghouse transactions and services such as PayPal.
Cobranded airline cards generally charge consumers annual fees, something most other credit cards have dropped. Of 38 cobranded airline cards issued by such companies as American Express Co., Bank of America Corp., Barclays PLC, Chase and Citigroup Inc., 53% assess a fee of at least $55, according to a recent study conducted by U.S.-based Corporate Insight. The highest annual fee for a cobranded card is a top-of-the line one Delta Airlines and AmEx offer for $450.
As some airlines diminish the value of their loyalty programs, usually by hiking the number of miles needed to receive free flights or by charging a redemption fee, they risk antagonizing loyal customers and sending them to companies such as Cap One for their credit cards, observers say. Cap One's card not only offers rewards on different airlines, but it also waives the foreign-currency transaction fee that most issuers charge cardholders when making a purchase involving a currency other than U.S. dollars.
Meanwhile, as airlines collapse or merge with others, consumers might become wary about entering or remaining in mileage programs that no longer can deliver on the promised rewards, devaluing the cobranded portfolio for the issuers, according to Seth Kaplan, managing partner of Airline Weekly, a U.S.-based publication on the airline industry.
So far, however, any impact of consumer disaffection has yet to materialize, experts say.
Such major carriers as American, Delta and US Airways recently added redemption fees to their loyalty programs, and virtually every major airline has shortened the expiration period during which miles must be redeemed. Moreover, some airlines have stopped awarding miles for short flights.
Yet the airlines continue to enjoy success with their cobranded cards because of the tens of millions of consumers who have them and the effort issuers and airlines have put into promoting the cards.
Also, both the airlines and the card issuers like that the typical cobranded cardholder is far more affluent and has a better credit rating than the average American consumer. Sullivan says the annual spend on cobranded cards is four to five times that on typical credit cards.
"That's why the banks like the portfolio," he explains.
Revenue In 'Billions'
Sullivan and other airline officials rarely discuss publicly the amount of money they reap from cobranded cards, but the numbers are significant. "It's billions collectively for the industry," says Kaplan of Airline Weekly.
Typically, card issuers pay the airlines for reward miles customers earn, but no set industry rate exists for how much issuers pay airlines per mile, notes Greg Kelly, principal with Deloitte Consulting's payments team.
"It depends on how aggressive and how big a portfolio these issuers have," he explains. Larger airlines with huge numbers of customers and transactions get lower rates than second-tier airlines, Kelly says.
By selling the miles to their cobrand partners, the airlines typically get back more than the miles are actually worth to them, which is one reason cobranded cards resonate so strongly with them, Kaplan says.
Issuers also receive acquirer-paid interchange revenue from the card transactions, and acquirers typically pass that expense on to their airline customers. And airlines are not always pleased that they must pay the banks a fee on transactions made with their own, cobranded cards to buy flights, according to Williams.
Airlines collectively pay issuers $1.5 billion in such transaction fees, according to a recent survey Edgar, Dunn and Co. and the Airlines Reporting Corp. conducted.
Credit card fees are nudging some airline executives to consider promoting debit cards as a payment option because they cost less to accept than credit cards, Williams says. Moreover, airline managers who handle their companies' electronic and online payments transactions also are looking at ACH payments and such other alternatives as Bill Me Later and PayPal to avoid having to pay higher transaction fees to credit card issuers.
Bejar says 60% to 80% of airline ticket sales are made from Web sites. The airlines are leveraging the Internet link with their passengers, and converting their loyalty programs, which had been used solely to develop business, from cost centers into profit centers, says Bejar.
Alternative Payments
How well these alternatives will fare in a credit card-obsessed U.S. consumer market is difficult to assess. "It's all well and good to have these alternative sources, but psychologically people still want to use their credit cards," says Williams. "The alternative payment is not taking off the way they thought it would."
Moreover, if airlines move to alternative payments, they might be winning the battle against the card issuers but losing the war because cobranded cards, despite the fees they pay, do make big bucks for them.
With air traffic becoming more expensive and routes disappearing, some airlines are exploring ways to broaden their card rewards beyond the lure of free tickets on their planes. They also are looking at offering discounts or free vouchers for hotel rooms, merchandise and entertainment tickets to keep customers who might be growing disenchanted with flying.
"That's always something we're considering," relates Continental's Sullivan, who says the U.S.-based airline is considering offering tickets to big-league baseball games, theater tickets and merchandise during the holiday season as alternatives to free sky miles.
The changes airlines are implementing to make it more difficult for customers to redeem miles for flights might have some influence on the way banks regard their participation as partners. Yet it probably is too early to say how that concern might play out, according to Kaplan.
"Once benefits are less attractive, it changes the equation," he says. "And credit card companies want the programs to be as good as possible. It's too early to say what the impact will be."
For the time being, both the card issuers and the airlines are pleased with the revenues they reap from their cobrand relationships. Yet the changing economics of the airline market, the allure of alternative methods of payment, and the different priorities the card issuers and airlines bring to their relationship might make the future ride a little more turbulent. CP
