A hot topic in the airline industry will be thoroughly examined at the upcoming
Mega Event in Montreal
Airlines and credit card companies enjoy an obvious, symbiotic relationship. For travelers, credit cards represent convenience and eliminate the need to carry cash. For airlines, credit card companies and the card issuing banks, they are a huge revenue source. But these relationships, however, are under assault.
Marc Berman,
Mega Event
Co-Brand Chairman
Co-branded cards are one of an airline’s highest-grossing ancillary revenue streams, as consumers are only too happy to use their co-branded credit card to earn frequent flyer miles toward their next flight or other purchase. Every time a customer is awarded a frequent flyer mile by the card issuer for a purchase, the bank pays the airline between 1 and 2 cents for per mile, amounting to billions of dollars annually for the airlines. Issuing banks and credit card companies also enjoy huge profits from airline co-branded credit cards, which have traditionally generated more spending than other types of cards, as consumers love to collect their miles.
But big problems exist with the credit card-airline arrangement. As airline co-branded credit cards proliferate, more and more miles are chasing fewer and fewer free frequent flyer redemption seats. This means that cash-back and hotel co-branded credit cards are becoming more valuable to the credit card companies and banks, as well as to consumers who can't get free frequent flyer seats and can more easily enjoy other types of credit card rewards.
And while airlines earn billions from their own co-branded credit cards, airlines are leading the worldwide movement away from credit card purchases of their own tickets to lower-cost forms of payment such as PayPal, Bill Me Later,UseMyServices and Moneta.
This is understandable as the airline industry's credit card payment acceptance and fraud costs will account for more $22 billion in 2010, or more than 4% of the airline industry's total worldwide revenues -- a figure higher than the industry's profit margin. Reducing payments and credit card fraud costs is critical for airline profitability, but is directly in conflict with the airlines' own co-branded credit card programs and with the airlines' relationships with credit card companies and banks.
The Credit Card Quandary
Co-branded credit cards are clearly big business for airlines and financial services company, so their use should be examined and analyzed to ensure that this valuable revenue source doesn’t disappear. That is why Airline Information, organizers of the upcoming Mega Event to be held October 12th, 13th and 14th at the Fairmont Queen Elizabeth in Montreal, has dedicated an entire conference track to examining best practices and innovative strategies in co-branding development. This track, “The Co-Brand Partnerships Conference” will bring together airline, hotel, credit card, bank and other financial services executives to discuss relevant co-brand issues.
Do Airline Co-brand Credit Cards Meet Travelers’ Needs?
Ai Editorial by Christopher Staab, Managing Partner, Airline Information
The airline co-brand is the king of credit cards, spurring consumer spending, as well as airline and bank revenues, like no other card. Consumers love to hoard frequent flyer miles, meaning they often choose airline co-brands versus cash-back and hotel cards which can offer more generous rewards. But, how long can the party last for this major source of revenue for airlines? It has been much discussed already that the lack of availability of frequent flyer seats is putting this model under pressure, but I believe airline co-brands could eventually be de-throned for also not meeting the needs of international travelers.
Almost all U.S.-issued airline co-branded credit cards, which are logically aimed at frequent travelers, charge a 3% foreign transaction fee on charges made on overseas purchases. 1% of this is the interchange fee charged by the Credit Card Networks and 2% is charged by the issuing bank (and it is reported that in some cases that the airline partner may share in this 2%.) The exception is American Express, which charges a 2% foreign currency transaction fee. Now many U.S-issued credit cards are even charging "foreign transaction fees" on U.S. Dollar transactions made abroad or even charged by foreign merchants via Internet, even though no foreign currency
exchange takes place.
The principal justification banks offer for these fees is a high fraud rate on card usage abroad. However, many banks generate revenue as many as four times on each foreign transaction. First they often offer poor exchange rates, earning a return on the exchange; Second, they make money hedging currency; Thirdly, they earn from the foreign exchange fee; and, Finally, they profit from the fees paid by all merchants who accept credit cards!
The high fraud rate on card usage abroad is also the direct result of the U.S. financial services' industry not offering chip & pin security as is at least offered, if it's not standard, on cards issued in many countries. The lack of chip & pin makes U.S. cardholders specific targets when paying with credit cards abroad. Waiters, subway operators, and hotel clerks in places abroad frequented by Americans all too frequently steal credit card numbers from American patrons and sell the numbers on the Internet to mafia rings. Reinforcing this trend, The New York Times recently reported that 38% of all credit card fraud occurs in hotels, by far the largest percentage of any single industry.
I myself have had my credit card numbers stolen abroad four times in the last year- twice with my personal card (a major U.S. airline co-brand) and twice with my company debit card (a major airline co-brand debit). So, essentially I have paid 3% foreign exchange to be the repeated victim of identity fraud, costing me considerable time to straighten-out and jeopardizing my credit rating!
Another problem with the lack of chip & pin is that in Europe and some other places, many small vendors don't even know how to swipe credit cards anymore and therefore can not process U.S. credit cards. For example, I could not make a charge in March in a small merchant in Portugal because the clerk did not know how to charge a magnetic strip credit card.
Does it really make sense for U.S. credit card banks to charge a 3% foreign currency transaction fee to use cards that specifically make U.S. travelers the victims of fraud and which can not be used with some merchants abroad? Is this value for money? Does this meet travelers' needs?
One exception in terms of the foreign currency transaction fee is Capital One, which has yet to have an airline partner, although it's rumored that Spirit Airlines is its pipeline. Capital One not only doesn't charge a foreign transaction fee, but it also "eats" the one percent interchange fee charged by the credit card networks. This offer was so enticing that I got one and I expect to save hundreds of Dollars per year in foreign exchange fees. So, now when I travel internationally, I tuck away my airline co-branded credit card and use my Capital One for essential charges. I still use my Capital One as little as possible abroad due to the lack of chip & pin security.
So, I come back to my original question, do airline co-branded credit cards meet travelers' needs? Could a credit card that does meet travelers' needs dethrone the airline co-brand as king?
The global recession from which airlines are now recovering was a nasty one—no doubt about that. But there’s also no doubt that the makers of the world’s aircraft still view air transport as a growth sector.
Both Airbus and Boeing believe that global air traffic, measured by revenue passenger kilometers, will grow by about 5% a year for the next 20 years. That’s significant because 5% is faster than the 3% annual economic growth expected. Combined with a need to replace aging planes, this growth will fuel demand for approximately 25,000 new 100-plus seat jets in the coming decade, according to similar estimates by Airbus and Boeing. Bombardier expects airlines to need 12,400 new 20-to-150 seat planes in the next 20 years, while Embraer sees demand for 6,750 new units in the 30-to-120 seat category.
If that sounds overoptimistic, consider first that history is on their side. Worldwide air traffic has historically doubled every 15 years and is expected to do the same
in the next 15.
The enabling forces are many. New aircraft themselves will have better technology and therefore better capabilities and economics, providing airlines with opportunities to open new routes and stimulate new demand. Airbus, for its part, expects almost 400 new longhaul routes between now and 2028. Further deregulation, the spread of lowcost carriers, new ancillary sources of securing revenue, new cost saving technologies and greater participation of emerging economies in world trade will be other engines of growth.
But of course, forecasts are just forecasts. And sure enough, there are countervailing forces that could lead to slower-than-expected traffic growth. Anything that results in higher-than-expected costs for airlines, for example, including high energy prices, is a risk. So are infrastructure constraints, which
are already depressing traffic in markets like London and New York. New laws and taxes designed to reduce the industry’s carbon emissions, competition from trains and videoconferencing, unforeseen geopolitical shocks that depress trade and tourism, new taxes and fees, etc.—all of these negative factors could prove influential. Other forces like consolidation, meanwhile, could prove either good
for growth (by enabling more routes through network synergies) or bad (by
forcing up fares and depressing demand).
The smart money, however, including the billions of dollars being invested in
new aircraft technology, is on robust long term expansion. And not even a severe downturn is changing anybody’s mind.
Top Passenger Growth Markets by Forecasted Annual Average Growth,
2009-2029:
1. Domestic Turkey 10.1%
2. Domestic India 10.0%
3. ex USSR- China 9.4%
4. North Africa- China 9.4%
5. Sub-Saharan Africa- China 9.3%
6. Middle East-South Africa 9.1%
7. Sub-Saharan Africa-North Africa 9.0%
8. China-South Africa 8.7%
9. North Africa-South Africa 8.6%
10. China-Russia 8.5%
11. Indian Subcontinent- China 8.4%
12. Indian Subcontinent-U.S. 8.2% Source: Airbus. China is mainland only
Powered by Airline Weekly (Excerpt from Airline Weekly Special Report)
Top Passenger Growth Markets
by Forecasted Annual Average Growth, 2009-2029:
1. Domestic Turkey 10.1%
2. Domestic India 10.0%
3. ex USSR- China 9.4%
4. North Africa- China 9.4%
5. Sub-Saharan Africa- China 9.3%
6. Middle East-South Africa 9.1%
7. Sub-Saharan Africa-N. Africa 9.0%
8. China-South Africa 8.7%
9. North Africa-South Africa 8.6%
10. China-Russia 8.5%
11. Indian Subcontinent- China 8.4%
12. Indian Subcontinent-U.S. 8.2%
The airline co-brand is the king of credit cards, spurring consumer spending, as well as airline and bank revenues, like no other card. Consumers love to hoard frequent flyer miles, meaning they often choose airline co-brands versus cash-back and hotel cards which can offer more generous rewards. But, how long can the party last for this major source of revenue for airlines? It has been much discussed already that the lack of availability of frequent flyer seats is putting this model under pressure, but I believe airline co-brands could eventually be de-throned for also not meeting the needs of international travelers.
Another problem with the lack of chip & pin is that in Europe and some other places, many small vendors don't even know how to swipe credit cards anymore and therefore can not process U.S. credit cards. For example, I could not make a charge in March in a small merchant in Portugal because the clerk did not know how to charge a magnetic strip credit card.
The enabling forces are many. New aircraft themselves will have better technology and therefore better capabilities and economics, providing airlines with opportunities to open new routes and stimulate new demand. Airbus, for its part, expects almost 400 new longhaul routes between now and 2028. Further deregulation, the spread of lowcost carriers, new ancillary sources of securing revenue, new cost saving technologies and greater participation of emerging economies in world trade will be other engines of growth.
