Citigroup Inc.’s lucrative partnership with American Airlines is widely expected to weather the carrier’s bankruptcy process.
But in the long term, the airline may be forced to dilute the attractiveness of the frequent-flier rewards points Citi offers to some of its most valued credit card customers, industry experts warn.
Citi and its rival credit card issuers cherish their airline-rewards partnerships. Frequent-flier credit cards attract wealthy and high-spending customers willing to pay annual fees and use their credit cards heavily in exchange for miles.
Though still popular, many of those rewards programs have become somewhat less rewarding in recent years. Airlines going through bankruptcy or mergers over the past decade have started issuing more rewards points to entice customers. But eventually they also raise the number of points required to redeem rewards, which devalues the value of each frequent-flier mile.
“The long-run trend is to raise the price of rewards because you effectively have private currencies with no currency board or independent bank,” says Gary Leff, a co-founder of frequent-flier site MilePoint.com. “What will happen later [is that], with the large number of miles they have printed, they will increase reward prices.”
For example, across most of the major airlines customers generally have to redeem about 100,000 frequent-flier rewards points for an airline ticket to Europe. But in the future, that same trip could cost at least 120,000 frequent-flier miles, says Brian Kelly, a blogger who tracks airline rewards programs on his blog, ThePointsGuy.com.
This process risks alienating issuers’ most valuable credit card customers. If customers see the value of their frequent-flier rewards points decline noticeably, they could decide to switch to a different type of rewards card and a different credit card issuer.
American Airlines largely has been able to stave off the inflation of its miles, even as other major airlines already have started devaluing their programs, Leff and Kelly say. But now that parent AMR Corp. has filed for bankruptcy protection, it will start issuing more miles and contribute to the dilution of its rewards program, experts predict.
“I don’t think it will be a huge change right away. I do think over time that something has to give,” Kelly says.
Kelly is not worried about “an overall huge devaluation,” but he predicts American Airlines and its competitors will ramp up their offerings of new–and less lucrative–ways for customers to redeem rewards points.
“I think we are going to see more and more [offers] that say ‘use your points for gift cards,’ which are a terrible value,” he says, noting a mile is worth about a cent.
Last week, AMR said that it had filed for bankruptcy in New York in a process that will allow the carrier to continue with normal business operations (
In 2004, when Delta Air Lines Inc. restructured its balance sheet, American Express Co. lent the airline money that was backed by future purchases of rewards miles.
“American Express pretty much bailed them out of bankruptcy,” says Kelly. “In turn we have seen Amex and Delta print SkyMiles [Delta frequent-flier rewards points] like they were going out of style.”
He says he would be surprised if Citigroup did not do the same for American.
If American gets a "huge cash infusion for future mileage purchases” and the market is then flooded with miles, the airline eventually will “come up with new ways to get them off their books," says Kelly.
Citigroup said last week in a statement that the bank’s “"longstanding relationship with American Airlines has generated tremendous loyalty and continues uninterrupted." A spokesperson declined to comment for this story.
Representatives for American Airlines did not respond to requests for comment.
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