Weathering Severe Turbulence

  Airlines are in trouble and their cobranded card partners are nervous. To get Americans back in the air, some issuers are offering greater rewards and bulking up promotional programs.
  Companies in the card industry last year suffered record-setting consumer bankruptcies, exploding chargeoffs, hard-eyed regulatory scrutiny, and withering investor enmity. But things could be worse. You could be an airline.
  Many have used the phrase "perfect storm" to describe airlines' troubles. Whatever could go wrong has, from terrorist attacks to a lingering business downturn. Rising fuel prices have hurt all airlines and high labor costs, for some, have made it hard to make any money.
  New taxes and fees have been tacked onto ticket prices to pay for added security. But steep discounting has led to occasional improvements in the widely watched revenue passenger miles gauge.
  The beginning of the war in Iraq in March put the reverse thrusters on Americans returning to the skies. Passenger traffic was down from 15% to 20% in the weeks surrounding the war's start.
  The Air Transport Association, an airline trade group, estimated that the major airlines could lose from $10.7 billion to $13 billion in 2003 depending on the length of the war. That's after losing a total of nearly $18 billion in 2001 and 2002. Adding to the woes is a new disease, Severe Acute Respiratory Syndrome (SARS), the fear of which is ravaging travel to the Far East.
  Though times are tough, cards and airlines have a strong bond that could help both survive. Cobranded airline reward cards spur consumer travel, card use and generate extraordinary loyalty to airlines and issuers, according to experts.
  "They are still king of the cobrand world," says Pierce Sioussat, managing associate at Auriemma Consulting Group Inc. in Westbury, N.Y.
  Air miles equal travel and travel offers a unique experience that may be remembered by the consumer for his entire life, he says. Earning and using travel miles are aspirational rewards that can't be duplicated by other reward programs.
  "Despite turmoil in the (airline) industry these programs are the mainstay of the (card) business," says Sioussat.
  Indeed, the frequent-flier reward concept is "the glue that keeps fliers stuck to airlines," says Randy Petersen, editor and publisher of InsideFlyer, a monthly magazine that covers the programs.
  The airlines view their card rewards programs as possibly their best tool for getting passengers into seats, especially during difficult times.
  Delta Air Lines executive Jeff Sullivan is focused on one type of consumer. "We target the segment of individuals that want the fastest opportunity to get a seat," says Sullivan, general manager, partnership marketing. "If that's what motivates them, this is the card they want. Some individuals may want points for golf clubs. We target vacation people."
  And even with a downturn in travel, many consumers will hold their miles for a trip when times are better and peace returns. "Maybe you won't travel overseas now, but in three, four years you could want to take that trip to Italy. Why not get the miles now? They never expire," says Sullivan.
  That no-expiration-date aspect on the Delta SkyMiles card from American Express Co. helps to bridge slow times and supports the relationship with the cardholder. "The card helps us maintain that connection, even if they are not flying as much," says Sullivan.
  For issuers, the cards add to the bottom line with transaction income and an annual fee, unusual these days.
  Strong Attributes
  And the loyalty that these cards build shouldn't be discounted. Cardholders enrolled in loyalty programs provide issuers with 54% lower attrition, a 50% lower credit-loss rate, and generate profits five times those of non-enrolled cardholders, according to a study from American Express.
  In the highly competitive cobranded airline card space, it is difficult to get precise numbers on the number of active cardholders, or the amount of miles earned or redeemed in any given year. Typically, cardholders earn one mile for every dollar spent.
  Concerns about the viability of cobranded airline programs arose after UAL Corp., parent company of United Airlines, filed for bankruptcy protection in December in Chicago. United is the second-largest airline with revenues of $13.5 billion last year. It claims its United Mileage Plus program has about 40 million enrolled members. According to Petersen, the United Mileage Plus Visa card program has more than five million active cardholders.
  United is bleeding red ink, losing about $382 million in January alone, and there is speculation it will be forced into liquidation. If that happens, card issuer Bank One will offer Mileage Plus cardholders an alternative card, according to a spokesperson. The big question is if reward miles would be transferred to another Bank One card program or if another airline would honor the miles.
  History suggests no, says Petersen, who notes that another airline has never honored the frequent-flier miles of an airline that has been liquidated through Chapter 7 bankruptcy.
  Double Miles
  However, Petersen doesn't believe that holders of United miles are in danger of losing their miles due to failure. In addition, he believes that US Airways Group should be good for its miles as well. US Airways emerged from bankruptcy in late March. Bank of America issues US Airways' Dividend Miles Visa card.
  In April, United and US Airways began a reciprocal redemption deal where members could redeem their miles on either carrier. The two airlines, now joined by the indignity of bankruptcy, once almost combined. In 2000, United announced it would take over US Airways but federal regulators were concerned over antitrust issues. In July 2001 United backed off.
  Petersen's view on airline viability can be influential because he also runs PrivilegeFlyer Online, a kind of insurance program for holders of frequent-flier miles. Members pay an annual fee and are guaranteed a flight home if their miles- or points-provider airline goes out of business while the traveler is away from home.
  While more fliers have joined PrivilegeFlyer recently, there hasn't been a stampede, Petersen says.
  Meanwhile, United and Bank One have been fighting the decline in fliers with several aggressive double-mile deals on Mileage Plus. Interestingly, most other airlines, even those in deep trouble, aren't matching United's efforts. If anything they have made it a little more difficult to redeem miles or get an upgrade, says Petersen. "They are seen as not member-friendly," he says.
  Bank One clearly has a vested interest in United. The Mileage Plus program is the foundation of Bank One's card business, accounting for as much 10% of its $74 billion in receivables in 2002. It issues five cards, with the usual gold and platinum gradations, a college card to bring in young people, and a business card.
  To the Rescue
  After United filed for bankruptcy, Bank One came to its rescue, making $600 million in financing available. In its 2002 annual report, Bank One President and Chief Executive Jamie Dimon writes, "Reward programs are extremely important for the future of the credit card business and this particular program would be very hard to replace. It is in our interest that United return to health."
  Dimon says that even if United were to be liquidated, Bank One will break even on its loans to the carrier. That's because they are secured by hardware like planes, along with control of lucrative routes and landing slots at airports.
  But if Mileage Plus were to disappear, Bank One would write off "several hundred million (dollars) not related to the (financing) due to costs associated with discontinuing (the cards) and in attempting to replace the program," Dimon said.
  To help avoid that, Bank One announced a year-long, double-miles program at select retailers. In January and February, purchases at restaurants and home-improvement stores won the awards. Around tax time, rewards could be earned for paying federal taxes with the card. Other retailers will be added as the year goes on, according to the Bank One spokesperson.
  Last October, the bank began a test in the Denver area by offering Mileage Plus to its debit card holders for a $25 annual fee. In total, Bank One has about 4.5 million debit card holders.
  Bank One and its problems with United may be the worst-case scenario, but many issuers have their work cut out for them in trying to keep mileage programs alive. And there may be nothing they can do about it. That's because the airline industry faces fundamental challenges that only the carriers themselves can fix.
  Consumer behavior has changed. The Internet allows for easy comparison-shopping, causing price wars among carriers. Attitudes have changed too. Previously, many companies were willing to pay for that expensive last-minute flight or for an upgrade. Now the cost cutters hold sway and business fliers seek the cheapest fare.
  "Anytime you go on a trip, businessmen compare fares. Status goes to those that got the cheapest seat," says Michael J. Riley, United's former chief financial officer and head of Riley Associates LLC.
  Business fliers are switching to no-frills carriers like Southwest Airlines, hurting carriers like United because one business person paying full fare can be worth more than six vacation travelers, says Riley.
  And the mileage programs can be so chock-a-block with rules and restrictions that it's not worth the trouble of enrolling, says Riley.
  Fortunately, Bank One also has the mileage program from Southwest, one of the few carriers that remains profitable. Southwest has an unusual program that is true to its roots as a low-cost carrier. The cobranded card's annual fee is $59, cheaper than much of the competition. A cardholder earns a credit for spending $1,200, and receives an award ticket for 16 credits, or $19,200.
  Bank One also has successfully aligned with other major cobranded partners. A March agreement with Walt Disney Co. should lead to travel tie-ins. And the much-anticipated Starbucks Corp. combination card with a loyalty aspect is planned for an autumn launch.
  Other major issuers are watching their airline cobranded programs closely.
  Citibank's cobranded air program is the Citi AAdvantage MasterCard card with the top carrier, American Airlines. The program has an estimated 11 million to 13 million active cardholders, according to Petersen.
  American had been teetering on the edge of bankruptcy early this year, after losing $3.5 billion in 2002. For a time there was talk of Citi stepping up with as much as $1 billion in loans to American in a deal similar to the agreement between Bank One and United. That idea faded in late March after the carrier reached a cost-saving agreement with its unions designed to reduce expenses by $1.8 billion. That may have saved American from filing, but the company announced the situation was still precarious.
  In the first quarter, Citi didn't add any major incentives to the AAdvantage program though card applicants could earn a 7,500-mile signing bonus. A promotion that allowed members to transfer miles into another member's account was extended through May 31. One interesting cross-promotion on the card was a direct-mail campaign to cardholders of the AT&T Universal Card, another Citi product.
  "The major banks want to do a better job of cross selling within their organization. They are looking for customers at risk for defection and send them an offer to keep them on board," says Chris X. Moloney, director of market development and strategy for Maritz Loyalty Marketing. Maritz works with seven of the top 10 card issuers.
  Citi's parent Citigroup Inc. also owns Diners Club, the card company that pioneered the travel-and-entertainment field. Diners has mileage rewards programs with all the major airlines so the blow would be cushioned if one were to fail.
  Diners recently expanded its "Friends Fly Free" program on its Carte Blanche card. The deal with British Airways allows for a companion to fly free when the cardholder purchases a full-fare, round-trip, trans-Atlantic ticket with his card. Previously, the deal was limited to one round trip a year for the companion.
  Another old travel-and-entertainment pro is American Express, issuer of the Delta SkyMiles card. One nice reward offered early this year was an opportunity to earn three miles for every mile flown on Delta paid for with the SkyMiles card.
  For the most part, AmEx offered similar programs to those of United's Mileage Plus. SkyMiles cardholders could earn double miles for purchases at restaurants and for payments of taxes during a strict time frame.
  The SkyMiles and Mileage Plus programs also suffered the same blow in March when partner Hilton Hotels announced it was suspending a point exchange program with their two airlines. A Hilton spokesperson says the suspension was a joint business decision with each of the carriers. The airlines would still accept Hilton points in exchange for miles.
  AmEx, of course, has its own Membership Rewards program for its cards with 20 participating airlines worldwide. Air miles are still the top reward sought by the nine million enrolled cardholders, according to Chris Lynch, vice president, rewards management.
  But AmEx has been offering other goodies and cardholders have been responding. The idea is to reach consumers not interested in travel and those that may not have the points to qualify for a trip.
  A Wider Choice
  "After travel, brand-name retailers and electronic merchandise are popular," says Lynch.
  Other issuers are responding to that trend for a wider choice of rewards, says Moloney.
  Cards that allow spending to be redeemed for a mix of rewards are growing, he says. One such program is the Citi Diamond Preferred MasterCard, which offers travel certificates, gift cards at major retailers and national restaurant chains, and a rebate on monthly payments or a reduction of the card's interest rate. The cardholder chooses.
  "Those (type of) programs did well in the last year and a half. Our clients are moving to a broader rewards mix," says Moloney. "Mileage cards are saturated in growth."
  It's good that issuers are trying to mix it up when offering rewards, he says. But issuers should be realistic as to what these cards can achieve as a loyalty builder.
  Rebate cards are popular but cardholders often forget where they spend the money, says Moloney. A reward like a television is better because its tangible, though there is no guarantee the cardholder will remember the card program that helped her get the set.
  Fact is, nothing beats travel for touching the cardholder. "If I give you a hotel (stay) or travel, you don't forget," says Moloney. "That creates loyalty. It's something lasting."