Should Co-Branded Airline Cards Fly Off into the Sunset?

  Television viewers have been bombarded by a series of commercials recently from Capital One Corp., the McLean, Va.-based credit card issuer. The ads feature hapless, all-American families whose vacation plans go horribly awry when the frequent-flyer miles they painstakingly built up with their credit cards expire.
  Cap One pointedly compares its offerings to reward cards co-sponsored by such airlines as American Airlines, United Airlines and US Airways. The ads also stress that, unlike Cap One, the issuers of co-branded airline cards usually charge cardholders annual fees. Moreover, the airlines typically will not allow customers to use frequent-flyer miles for certain flights, and they restrict what airlines they can take.
  Cap One promises cardholders they can redeem miles for any flight on any airline. The ads tout Cap One's No Hassle Miles rewards cards and end by asking, "What's In Your Wallet?"
  The message behind the ads suggests a potential dilemma among issuers of co-branded airline cards: Why would a consumer want a card that limits access to a single airline?
  Some issuers have followed Cap One's lead in offering rewards good for multiple airlines, yet some also contend a viable market remains for single-airline initiatives.
  Many of the nation's largest issuers consider co-branded airline cards critical parts of their portfolios, experts say. "They have the highest sales [volumes] of any co-branded products," says Chris Theoharides, president of Massapequa, N.Y.-based Advantage Consulting Group, which helps airlines and banks design co-branded partnerships. Airline-branded cards appeal to frequent flyers, a very high-spending demographic, he says, adding that airline cardholders often spend $20,000 per year, while other cardholders spend only about $5,000.
  And the prospect of free air travel gives cobranded airline cards greater perceived value than, say, a card branded by a chain of gasoline stations, Theoharides says. Unlike discounts on gasoline or merchandise, vacations hold out the possibility of creating lifelong memories. This provides airline cards with what he calls "a halo effect."
  But the airlines have been hit hard in recent years by intense competition, the terrorist attacks of 2001, and high fuel prices. Moreover, several, including United Airlines, fell into bankruptcy, leading some consumers to fear they could lose their frequent-flyer miles.
  A few years ago, when Cap One first brought out rewards cards that offered miles on multiple airlines, the promotions seemed like a huge threat to single-airline products, says Randy Petersen, the publisher of Inside Flyer, a monthly magazine on frequent-flyer programs.
  Although issuers traditionally withhold, for competitive purposes, their numbers of cardholders, Petersen estimates that Cap One has signed up 1 million customers.
  Other large issuers with co-branding deals with airlines include Citibank, with more than 4 million co-branded airline cards, largely with American Airlines' AAdvantage program; American Express Co., which has roughly more than 3 million customers in its Delta Airlines SkyMiles program; and JPMorgan Chase & Co., which also has more than 3 million cardholders in its partnership with United Airlines, Petersen estimates.
  SHOWDOWN COMING?
  Virtually all card issuers lacking a cobranding agreement with an airline still offer some travel-related benefits, including free airline tickets. However, Petersen credits Cap One with popularizing the idea among issuers that lack relationships with single airlines.
  Even though airlines have expanded the benefits attached to their credit cards in recent years, experts and officials from both airlines and card issuers say it is uncertain whether this was caused by competition from generic cards such as Capital One's or competition between the airlines.
  Many suspect, for example, that a big showdown between Cap One and the airlines will never happen. So far, generic programs have attracted different customers than the airline-sponsored cards.
  "To some degree they compete against one another, but [airline cards] attract [frequent flyers] who are loyal to one specific airline," says Theoharides. Cap One, he says, attracts consumers who travel only occasionally and often merely want cards that have little or no fee.
  Many issuers that already have a long-standing relationship with an airline have taken advantage of this perceived lack of competition by introducing products similar to Cap One's.
  In 2004, Citibank issued its own travel-related cards not tied to an airline, the CitiPremierPass card series. Although customers pay a $75 annual fee, they can use any earned points within Citibank's ThankYou Network, a collection of stores and online merchants, in addition to getting free airline tickets for amassing 25,000 points.
  On its Web site, Citibank promises to "eliminate hassles" by getting customers on any flight they wish, without restrictions. Other issuers, such as Chase, Discover and American Express, also have introduced independent travel cards.
  Terry O'Neil, Citibank executive vice president, says the bank is not worried that its generic travel cards will steal business from its AAdvantage MasterCard. "The two products do not compete at all," he says, adding he believes they attract largely different travelers.
  And card issuers say the airlines' financial troubles have not affected consumer confidence in airline co-branded cards. "We grew the program even when United was in bankruptcy," says Charles Schwarz, first vice president at Chase, which issues Visa cards attached to United Airlines' loyalty program. United emerged from bankruptcy protection this year.
  "I have to say we had concerns about the [bankruptcy's] impact," Schwarz adds. But since both sales and the number of accounts grew, he now believes the frequent-flyer "mindset is one that is unfazed by it."
  Airline-sponsored credit cards grew out of the frequent-flyer programs airlines began creating nearly 25 years ago, airline and bank officials say.
  Originally, travelers could only build up points by flying. But with a card co-sponsored by an airline, customers now get points for any purchase. The cards become accelerators to existing rewards programs, and customers interested in travel not only are driven to use them more often, but they cement their loyalty to one particular airline, the officials say.
  CEMENTING LOYALTY
  Dallas-based Southwest Airlines, for example, started a frequent-flyer program nearly 20 years ago. In 1996, Southwest partnered with Chase Card Services to produce the Rapid Rewards Visa Signature card. Customers get one credit per $1,200 they spend with the card, and 16 credits earn a free flight, says Debra Benton, Southwest's director of loyalty marketing.
  In December, Southwest began to offer reward credits equal to two points per dollar spent either on a Southwest flight or at one of the airline's travel-industry partners, which include hotel chains and car-rental agencies. Many of the low-cost airline's customers need to hold down costs, Benton says, and the promised benefits from the card keep many from driving to their destination instead. "It's a very natural extension of the loyalty program," she says.
  Cap One seems to crow loudest about its ability to provide free airline tickets on any airline with no blackout dates. Other card issuers admit that their airline partners prefer to have paying customers.
  Whenever a cardholder wants to claim a free flight, the airline has to "balance the availability of seats for reward customers with their ability, candidly, to sell the seat for full fare," says Schwarz. However, Schwarz points out, in recent years most airlines have formed what they call "code-share" agreements in which they honor tickets purchased from many of their competitors. And most have extended those agreements to include frequent-flyer miles from different airlines' reward programs.
  United Airlines, for example, is part of the Star Alliance, a code-share agreement with dozens of other airlines including Air Canada, US Airways and Lufthansa, says Schwarz. Therefore, although United might not have an available seat to Hawaii at a peak time, perhaps one of its partners does, he says.
  However, code-share agreements cannot always solve the problem, Theoharides says. "It's fair to say that an airline's partners might have the same restrictions" on the most popular flights.
  Card issuers have partly responded to the Cap One challenge by bolstering a wide array of benefits, attempting to appeal to as many potential customers as possible. The Mileage Plus Signature Visa, for example, Chase's most popular offering co-branded with United, gives users 20,000 bonus miles with their first purchase. Since United gives one free round-trip flight once a cardholder reaches 25,000 miles, "with just the first use, you're very close to your first flight," says Schwarz.
  NO RESTRICTIONS
  Chase and United also unveiled a new program last January that Schwarz hopes will "further differentiate ourselves against the generic programs like Capital One."
  Called Mileage Plus Choices, cardholders can go online, purchase tickets without the normal restrictions and still get discounts based on the number of miles they have earned. A cardholder with 25,000 miles earned, for example, could get a $250 discount on a United Airlines purchase, Schwarz says. In addition, holders can use their miles to pay annual fees applied to the card, which can go as high as $140, or pay for rooms at hotels allied with United.
  "We're always keeping an eye on the competition, and this is one more way to create a competitive advantage," Schwarz says.
  Cap One also has set out to entice new customers with more than just clever commercials. It also offers first-time customers 10,000 bonus miles.
  Any comparisons between Cap One's card program and those involving airline co-sponsors present difficulties, Petersen says.
  While Cap One's Ultra MasterCard rewards cardholders with 1.25 miles for every dollar purchased, many airlines give customers two miles per dollar spent for some purchases, especially those spent with the airline itself. But Capital One customers' miles do not expire, and airlines' reward points usually expire after a year or two.
  Therefore, even though "the miles do not have the same value," Petersen says, an infrequent flyer might still find Capital One more suitable.
  Cap One officials could not be reached for comment.
  Benton cautions anyone who assumes that airlines have introduced new card products and benefits because of competition from Capital One. Southwest Airlines inked a code-share agreement with Indianapolis-based ATA Airlines, for example, simply because customers "have been asking for more dreamy destinations," she says.
  When airlines make decisions about new benefits or rewards, they typically look at what other co-branded airline cards offer, Benton adds.
  Schwarz agrees that whatever competition exists between generic and co-branded airline cards, it is not his chief concern. The two card types appeal to entirely different sets of customers, he explains. "Generic products are more geared to the leisure traveler," while co-brands target the frequent flyer.
  He points out that since Cap One arrived on the scene with its no-annual-fee card, most issuers with airline co-branding agreements have not responded by cutting their own fees. Instead of imitating Cap One, the airlines have introduced new cards designed to appeal to a wider array of frequent travelers.
  Chase recently brought out a cobranded United Airlines Visa Platinum card that, while it costs users $140 per year-more than double the fee for the Signature card-it provides two miles of credit for each dollar spent. "We've found that our customers are willing to pay if [a card has] value," Schwarz says.
  FEES FALLING?
  Still, an increasing number of credit cards do not charge annual fees, Theoharides says. And no matter how much value airline cards may have, their issuers seem "mindful of what's happening in the marketplace, and the fees have edged down somewhat."
  As part of American Airlines' AAdvantage program, for example, Citibank has issued a MasterCard Bronze card that imposes no annual fee. And customers earn only one mile for every two dollars spent, says O'Neil.
  But the new card was not issued in response to competitive pressure from generic issuers, O'Neil insists. Bronze cardholders might be cost-conscious, but Citibank's research shows they still fly more frequently than someone with a generic card. "It appeals to an entirely different type of consumer," O'Neil says.
  Though Cap One is using marketing muscle to promote generic airline rewards, airlines and their bank partners continue to devise new deals. It appears both are content with the idea that their messages are designed for entirely different consumers.
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