Executives at small airlines complained to regulators Thursday that airline rewards credit cards — issued by big banks on behalf of large airlines — limit competition by making it harder for smaller carriers to appeal to consumers.
Eight panelists, including executives at Allegiant Air, Breeze Airways and Spirit Airlines, testified at a two-hour hearing in Washington held by the Consumer Financial Protection Bureau and the Department of Transportation. The witnesses delved into other thorny topics such as whether airlines are delivering on promised rewards, why flight attendants have to supplement their income by selling credit cards and if consumers are taking on more debt just to accrue miles and points.
Yet competition among airlines — and whether the money generated from rewards and loyalty programs has made it difficult for small entrants to compete — captured much of the attention.
"One of our concerns, of course, is what role that these programs may play in affecting the ability of other players, smaller players or newer players to compete," said Secretary of Transportation Pete Buttigieg, who co-chaired the hearing. He noted that when the Airline Deregulation Act was enacted in 1978, "it was confidently predicted that there would be at least 100 major competitive airlines by the turn of the century. Obviously things didn't work [out] that way."
The Transportation Department regulates airlines and monitors potential unfair and deceptive practices. The CFPB has the authority to take action against credit card issuers for engaging in unfair, deceptive or abusive acts or practices related to rewards programs.
The airline and travel industries as well as credit card issuers are vigorously defending the use of credit card rewards, which are used by roughly 80% of Americans. Rewards programs generate nearly $68 billion in annual consumer spending, according to the American Economic Liberties Project.
CFPB Director Rohit Chopra — who also co-chaired the hearing — said that officials of the largest banks and credit card issuers "did not want to appear in public." The event featured mostly smaller players as well as consumer advocates, but didn't include representatives of large airlines or credit card issuers. How credit card rewards programs are marketed to consumers is under scrutiny.
"What are the ways that consumers can have some reasonable assurance that what they've earned is going to actually be able to be used?" Chopra asked. "I really do worry about some of the marketing claims where someone can say even if it's not 'you will' but 'you could' earn something, or get some sort of free round trips, but in reality almost nobody is getting that. That really is at odds with our truth in advertising laws."
Matthew Klein, executive vice president and chief commercial officer at Spirit Airlines, said rewards programs are harming competition. Smaller airlines offer their own co-branded cards with perks such as priority check-in and free drinks, but they say the bigger airlines can afford to fund much more lucrative perks.
"The larger airlines here in America now make it extremely difficult for low-fare airlines like Spirit to enter new markets, sustain long-term success when competing to and from the largest airports in this country, and provide better value to customers seeking alternative or lower-cost options," Klein said. "Airline reward programs certainly have an important place in providing value to customers when not used coercively. Unfortunately, with some of the larger carriers, there is a shroud over the trade-off consumers are making from the rewards programs and the amount of cross subsidy that takes place within those programs."
Lukas Johnson, chief commercial officer at Breeze Airways, which serves small and midsize airports, said rewards programs are "a huge revenue source for the large airlines."
The airline executives described how customers are trapped traveling to cities dominated by the largest airlines due to the lure of points, upgrades, reward status and lounge access.
"That's really where the crux of some of this is, is these competition issues," said Klein. "It starts with the axis of the airports, falls into the loyalty programs, and then it becomes very hard for [smaller] airlines to really get in there and have long-term sustainability. I think that's an important part here that we shouldn't be missing along the way with competition and how it all plays together."
Sara Nelson, international president of the Association of Flight Attendants, which represents 100,000 flight attendants or half of the industry, said during the panel discussion that Delta Air Lines generates over 1% of GDP through its Delta SkyMiles personal credit card from American Express.
"When you have that much money that's involved in the programs that you're running, your whole calculation changes, [and] you actually can't afford to retain all of those rewards," Nelson said. "When we also pair that with the reduction in seat capacity that we've seen in the airlines over time, [they] don't have space to redeem a lot of these rewards [and] then it puts a lot of these bigger players in the position to devalue the rewards that consumers have earned."
Many flight attendants rely on rewards programs, which roughly 80% of them advertise through loudspeakers on flights, to subsidize their income. Airlines will pay $5 for handing out a credit card application and between $50 and $100 when an account is activated, Nelson said. But she also described how flight attendants face a backlash from the public.
"This is a big deal to the traveling public," Nelson said. "The problem is that when these programs are devalued, or they don't deliver on what has been promised, it is often flight attendants that are on the front lines or are receiving the anger from the public and in some cases it adds to problems that we've seen on board [flights] with the violence."
Money generated for airlines and credit card issuers from interchange fees, which merchants pay on credit and debit card purchases, also was a topic raised at the hearing. Some panelists suggested that small airlines can't compete or gain market share because of the massive volume in interchange fees.
Separately, the banking industry has fiercely opposed a controversial banking bill,
At the hearing, Erin Witte — director of consumer protection at the Consumer Federation of America — raised concerns about ''bait-and-switch" practices in which airlines often change the terms and conditions of rewards agreements, or devalue points, but they do so by merely providing consumers with a disclosure.
"For many years the conversation around this issue has been about how much notice should we give people before we do this. But frankly, I think that's the wrong way to think about this," said Witte. "What's unfair, deceptive and potentially even anticompetitive is that this happens at all, not how much notice is given consumers before they're harmed. A really difficult piece of this puzzle is ascertaining the value of a point, a mile or some other rewards currency."
Consumer advocates also claim that rewards programs have become a wealth transfer from low- and moderate-income consumers to the wealthy. Consumers who rely on cash and debit payments end up paying prices that are set by the cost to process payments for high-cost rewards cards, said John Breyault, vice president of public policy, telecommunications and fraud at the National Consumer League.
"Income generated by rewards programs is not considered taxable income, though consumers are spending it just as they would if they were using dollars," Breyault said in an interview. "What is the impact on the government's balance sheet in this tax treatment of rewards?"
Chopra also said that consumers look at their rewards accounts in the same way they view their checking accounts, yet oftentimes the rewards are devalued or not redeemable.
At the hearing, Breyault urged the CFPB and DOT to investigate not just the competitive effects that rewards programs have on banks and airlines, but also on other travel methods like cruise lines and hotels that he said "are also strongly invested in the rewards ecosystem and also similarly concentrated industries."
Richard Hunt, executive chairman of the Electronic Payments Coalition and a former president and CEO of the Consumer Bankers Association, pushed back in a press release in response to the hearing. Low- and moderate-income Americans rely on credit card rewards to make ends meet and manage their family finances, he said.
"Saying credit card reward programs only help the rich or are just about getting lounge access at the airport is nothing more than willingly ignoring the full picture," Hunt said in the release.
For the largest airlines and credit card issuers, rewards and loyalty programs have evolved into an important revenue source even as "the quality and value of the programs has steadily declined, a trend we often see in consolidated industries lacking meaningful competition," said Morgan Harper, director of policy and advocacy at the American Economic Liberties Project.
Witte at the Consumer Federation of America said that reward programs incentivize a lot of credit card spending and may drive more people into debt.
"People like earning rewards, but what we've seen is that their efforts to earn them are no guarantee that they're going to keep them or that they can use them in the way that was originally promised to them," Witte said.
