Troubles for Cobranded Cards

  As certain partners, especially airlines, falter, cobranded card issuers are taking steps to diversify while bolstering some of their most prized card programs. Will the cobranded tree lose many leaves?
  Partnership problems? Join the crowd. A roundup of recent news from a growing list of financially troubled companies with millions of customers raises some worrisome questions for issuers regarding the future of their prized cobranded card programs. Most involve airline cobranded programs, but cobrands in other industries are not exempt. Consider:
  * American Express Co. announced in October that it would provide $600 million in financing to Delta Air Lines, the nation's third-largest airline and sponsor of the American Express/Delta SkyMiles card, AmEx's premier cobranded card program. Delta acknowledged in 2004 that it might seek bankruptcy protection to get its revenues and expenses in line.
  * In a similar, earlier deal, Bank One Corp., now J. P. Morgan Chase & Co., provided $600 million to bankrupt United Airlines, the nation's second-largest carrier. Bank One/Chase issues United's MileagePlus Visa card.
  * U.S. Bancorp launched a cobranded card for ATA less than two months before that low-cost airline filed for bankruptcy in late October.
  * In September, U.S. Airways, the nation's seventh-largest airline, filed for bankruptcy protection for the second time in two years. Bank of America Corp. issues U.S. Airways' Dividend Miles Visa cards.
  * Last summer, a much-downsized AT&T Corp. said it would no longer seek new residential telephone customers, though the former Ma Bell would continue to service the ones it has. The AT&T Universal Card portfolio had 19.7 million accounts and $15.3 billion in receivables just before AT&T sold it to Citigroup Inc.'s Citibank in early 1998.
  * Trump Hotels & Casino Resorts Inc., headed by real-estate tycoon Donald J. Trump, filed for bankruptcy in mid-November. Bank One launched a cobranded card last March for customers of that company's hotel and casino properties, including three in Atlantic City, N.J.
  Are cobranded cards sponsored by financially troubled partners headed for trouble themselves?
  "There has to be some concern on the part of issuers on how many dollars they're going to invest on marketing a program and building a portfolio while its partner is financially troubled," says industry consultant Chris N. Theoharides, president of Advantage Consulting Group Inc., Massapequa, N.Y.
  Others question whether the relationship between cobranded partners has crossed the line as issuers loan hundreds of millions of dollars to a failing partner. They wonder whether issuers are just an easy source of cash for strapped partners.
  Issuers generally say they're sticking by their brands. After all, they have too much invested to throw away hard-earned consumer loyalty and well-performing portfolios, especially in an environment of improving credit quality. Cobranded cardholders, especially holders of frequent-flier cards, tend to spend much more than the average cardholders and to have better-than-average creditworthiness.
  Just after Trump Hotels & Casino Resorts filed for bankruptcy, a Bank One/Chase spokesperson, referring to its cobranded card with the well-known and perpetually publicized Donald Trump, said: "Trump is a strong brand. We are not changing the card and we will continue to market the card."
  Indeed, issuers are retooling their marketing programs to keep their cherished cobranded card programs alive, and in some cases placing more marketing muscle behind them.
  Cobrand marketing remains crucial for another, and perhaps more compelling, reason. Increased competition now comes from cards that offer similar rewards as the big cobrands without tying the user to one particular product or service. These flexible offers are popular with consumers, especially those who struggle to redeem their airline miles within the constraints of blackout dates and a stingy supply of seats for rewards customers ("A Pointed Exchange About Point Exchanges," September, 2004).
  As an alternative, some issuers also are seeking affiliations with new and supposedly more stable partners.
  "We look at the total picture and the multiple ways that we can approach the consumer," says Robert A. Morris, senior vice president at Minneapolis-based U.S. Bancorp. The bank has cobranded cards with Northwest Airlines and ATA.
  Morris won't comment on the status of the ATA card, citing the recent bankruptcy proceedings. But he's quick to emphasize the bank does seek new partnerships. In 2002, for example, the bank added a cobranded card with Korean Airlines, a card Morris says is a strong performer in certain regions of the country and is among the bank's fastest growing loyalty brands. (Morris declined to provide numbers.)
  "We are looking to extend beyond the airline industry," he adds. U.S. Bancorp, for example, has cobranded cards with Harley Davidson motorcycles and the Gymboree children's clothing retailer.
  Citibank, meanwhile, continues to promote its AT&T Universal Card despite AT&T's pullback from the residential phone market, according to a Citi spokesperson. For instance, recent AT&T phone bills have included promotions for the card. AT&T would not comment for this story.
  The big worries in the cobranded world stem from the troubled airline industry, still playing catch-up in the aftermath of 9/11, and now facing high fuel prices and fierce price wars. With the notable exception of Southwest Airlines, most of the major U.S.-based carriers have been reporting quarter after quarter of losses. Issuers have huge portfolios of cobranded airline cards with millions of users. And two issuers have now loaned or agreed to loan hundreds of millions of dollars to airline partners to help keep them aloft.
  "These bank issuers have a lot at stake," says Randy Petersen, editor and publisher of InsideFlyer, a magazine in Colorado Springs, Colo., that tracks travel rewards and promotions. "These portfolios are 13% to 30% of the loyalty card market and would not be easy to replace in a very competitive market."
  If a partner were to cease operation, issuers would have to find a new portfolio in which to place those cardholders. The question, at that point, would be how many accounts would be lost.
  A Question of Confidence
  Worst-case scenarios aside, no one expects frequent-flier cards to disappear. "American Express doesn't loan Delta $600 million on a marginal product," notes Petersen.
  The real risk, at least with the airline cards, Petersen says, is faltering consumer confidence. Though a situation has yet to occur where consumers have lost their earned airline mileage, they worry it could happen. And every media story about new airline troubles, such as a recent threat by flight attendants to strike this month, brings renewed consumer angst about their cards and their miles.
  Bank One/Chase's United Mileage Plus card suffered a 40% drop in consumer interest as measured by hits to its Web site from August 2002 through March of 2003, according to Compete Inc., a Boston-based consulting firm that tracks Internet usage. At the time, United's financial problems were a major business story. United's parent company, UAL Corp., filed for bankruptcy protection in December 2002 and still hasn't emerged from it. Online applications for the card also dropped by half during the period, the study found.
  Arlington, Va.-based U.S. Airways has noted declines in Dividend Miles card applications when negative stories appear about the airline's finances. "News has an impact," says a spokesperson.
  The spokesperson wouldn't give specific numbers, but says card applications tend to bounce back after the bad news dies down. But overall, he says, new card applications are flat. A Bank of America spokesperson would not comment in detail about the program, but says applications are still being taken for the card and the bank will inform customers about any changes. BofA also issues frequent-flier cards for Alaska Air, America West, Asiana Airlines and Hawaiian Airlines.
  U.S. Airways Federal Credit Union, previously affiliated with U.S. Airways, changed its name in September to Clearview Federal Credit Union in order to distance itself from the troubled carrier. The credit union has about 80,000 members, but less than half are employees of U.S. Airways.
  "The airline is struggling and the opportunities for growth were not there," says Ralph Canterbury, vice president of marketing and technology at the Moon Township, Pa.-based credit union. The name change came about with the approval of a new community charter that allows the organization to diversify even more. The credit union's credit card has since been redesigned and a photo of a U.S. Airways plane has been removed. The card does not, and never did, offer airline mileage.
  Atlanta-based Delta hasn't seen a change in its card program, either on the spending or acquisition side, since its troubles became a major business story, according to D. Jeff Sullivan, general manager of partnership marketing, credit card programs. The airline, however, has been careful to communicate the situation to customers and continue its promotions, he says.
  Industry insiders say that after more than 15 years of dominating the cobranded sector, the airline frequent-flier cards are now experiencing slow growth because of the recent rise of new rewards cards. Still, most airline cobranded cards seem to be performing well-a big reason why issuers are eager to protect their turf. A November 2004 report, "The U.S. Market for Co-Branded and Affinity Cards" from Packaged Facts, a publishing division of MarketResearch.com in Rockville, Md., says the airline-industry upheaval has not translated into a crisis for the airline cards. The report says card profits have not been affected and airline cobrands are still "huge money makers" for issuers.
  Issuers won't say how many cardholders they have in their programs, or exactly how much of their profit comes from these cobranded products. The United Mileage Plus program has 45 million members. It's been reported that about 10% of those hold the Visa card. Bank One/Chase also issues cobranded cards with Southwest Airlines, British Airways and Continental Airlines.
  Evidence suggests cobranded cards of all types remain strong performers.
  At Bank One, for example, the ratio of sales volume to outstandings per cobranded account is about five times that of bank-brand cards, and more than three times that of affinity cards, according to the Packaged Facts report, which takes its numbers from a June 2003 Bank One Card Services investor presentation. The report also states that the cobranded accounts are twice as profitable as bank-brand accounts and 20% more profitable than affinity accounts.
  Cobranded cardholders, especially those in the airline category, are a desirable demographic for issuers. The Packaged Facts report, citing statistics from Simmons Market Research Bureau, New York, said those with an income above $250,000 were slightly more than four times likely to carry an airline/hotel cobranded Visa card than the market average.
  "Cobranded airline programs produce higher sales than any cobranded card in the market," says consultant Theoharides.
  He pegs the average spend per card at $20,000 a year. Added to that, chargeoff rates on the accounts are low, activation rates are high and the cards are still among the few to charge an annual fee. "The revenue dynamic for issuers is strong," he says.
  Thus, it's no surprise that issuers are working to keep their cards attractive to consumers. They are offering add-ons and promotions to please their prized customers.
  "We have not pulled back our support of the (Delta SkyMiles) card in any way," says a spokesperson at American Express. "We believe the Delta cobrand card portfolio represents an attractive growth opportunity. We continue to advertise and market the cobrand with direct TV spots, newspaper, magazine and Internet advertising."
  The Delta SkyMiles program offered a double miles promotion from Oct. 15 to Nov. 15. This month, the card is offering its holders a 20.05% (a reference to the new year) airline mileage bonus.
  Delta's Sullivan says the card program's marketing budget hasn't been increased, but it hasn't been cut either. "We are targeting customers with promotions," he says.
  In a recent back-to-school promotion, United Mileage Plus Visa cardholders could earn double miles, after reaching a $1,000 threshold, for every dollar spent for tuition, books and other education-related expenses through Dec. 31. Cardholders also could earn double miles for every dollar spent by using their card to pay their property taxes or quarterly estimated taxes through Jan. 15.
  Under Pressure
  But cobrands face an ever-widening array of competitors. A Nov. 27 full-page ad in the Chicago Tribune by Morgan Stanley's Discover card takes a direct shot at the airline cobrands, asking readers how much they're paying for free credit card miles. Discover has a cash-back bonus, the ad says, that can be used to buy anything, including airline tickets.
  Former card marketing executive James L. Accomando, president of Accomando Consulting Inc. in Fairfield, Conn., agrees the airline cards are still the most successful cobranded products out there, but they're definitely under pressure.
  Competition from other travel-oriented programs, especially those not tied to a particular airline, offers consumers more flexibility. Capital One Financial Corp.'s no-annual-fee Go Miles card is an example.
  But the big issuers are fighting back with similar programs of their own, Accomando notes. Citi's new PremierPass card and the Chase Travel Rewards Platinum MasterCard offer rewards at almost every airline.
  Another problem for the big cobrands, Accomando says, is that consumers have built up large reserves of unredeemed miles because, in many cases, the redemption process is difficult and tickets to desired locations during prime travel periods can be hard to come by. Consumers today also are more likely to buy airline tickets on the Internet, surfing to find the best deals, Accomando says.
  "At some point, people are going to decide whether to stay with the programs and if those unspent miles are worth it," he says.
  But Advantage Consulting's Theoharides thinks the airlines are doing a fair job of using the Internet to snag those customers. Some programs integrate enhanced bonuses for using the Internet to book tickets. "A lot of airlines programs earn double points for buying a ticket on the Internet with the card," he says.
  Theoharides admits, though, that competition is building from new travel cards not tied to a particular airline. "A portion of every cobranded portfolio includes consumers who are not as loyal to that carrier, and issuers are at risk of losing those customers," he says.
  Theoharides believes the growth of generic airline programs has resulted because the major carriers have been picked off already. Also, issuers are eager for new partnerships. But regarding the future of the big airline cobrands, he says: "Issuers have been very accommodating to ride the storm with the airlines. We'll have to wait and see how it goes."