Ai Editorial: The tide of co-brand contracts – airlines enjoying the wave

Ai Editorial: Airlines, especially ones in the U. S.,  have been thriving on improved economics of respective co-brand contracts. This trend is set to continue, states Ai’s Ritesh Gupta
First Published 8th February 2016

The multi-party model associated with a card transaction is a complex one. And a big change such as one in interchange fees for card-based payment transactions can simply disrupt an associated stakeholder’s economic model.

For instance, referring to EU’s new regulation on interchange fees (IFR) which came into effect in December last year, Visa Europe pointed out that the development has the “potential to alter the economics of card payments (through interchange caps), to foster competition (through access to the current account, and elimination of territorial licences) and to drive structural change (through the proposed separation of scheme and processing)”.

It is rightly being pointed out that such regulatory changes are among many disruptive forces now hitting European payments. So how does it alter the equation for those involved in setting up a co-brand credit card? And if we talk of airlines in this chain, are they sort of immune to such changes at this juncture?


Regulations on interchange fees in Europe, UK and Australia are being rolled out by regulatory bodies. 

With interchange rates north of 1% currently, the governing bodies in each stage are planning to cap the fee from 0.2% - 0.8% depending on the country and region of the transaction.  Changes are already underway in Europe and while these are partner of larger regulatory changes – there will be an almost immediate impact on frequent flyer programs.

For banks – lower interchange rates fundamentally means less revenue from each card transaction.  The hefty drop in fees obtained by the bank means they’re not able to pass on high earning rewards to consumers as an inducement for using the card.  As such, we’ll see card products across the region begin to offer lower frequent flyer points as banks realign the costs to their newer, lower revenue associated with every card transaction. The logic behind limiting interchange fees is to wipe out card surcharging, reduce business expenditure on merchant fees – which governments want to see passed on as cost savings to consumers. How this will play out is another story to wait for.

Income benefits for airlines

To the advantage of the aviation industry, airline co-brand credit card programs are considered to be an attractive proposition by banks. Experts point out that customers typically spend far more on the airline card than on a typical credit card.  Also, post consolidation in the U. S., there are less of the programs available to bid on, and the programs are much larger so this augments negotiating power of airlines. So carriers are strongly placed to garner monetary benefits.

Consider the case of JetBlue Airways. The team is gearing up for the upcoming launch of its new program relationship with Barclay card on the MasterCard network. This is scheduled for later in the first quarter of 2016. In late January, JetBlue indicated that it continues to expect annual incremental operating income benefits from the new agreement of $60 million. 

For Hawaiian Holdings, its value-added revenue per passenger continues to swell and in Q4 grew by $0.40 to $22.25 and by $2.29 to $22.01 for the full year. The sale of HawaiianMiles was one factor that contributed to this growth. Importantly, HawaiianMiles sales also set a record for the year powered by account growth and stronger than industry average trend on co-branded credit card.The group also mentioned that Q4 performance of HawaiianMiles sales were further buoyed by a limited time 50,000-mile bonus offer, driving an increase in new HawaiianMiles credit card account growth. 

Southwest Airlines also spoke about improved economics of the co-brand contracts few months ago.

It should be noted that American Express Company, in its Q3 earnings call in October last year, did acknowledge that the changes in its co-brand relationships reduced EPS by approximately 5% during the quarter. This estimate includes the impact of renewed co-brand relationships with Delta, Starwood, Cathay Pacific, British Airways and Iberia.

Revenue generation

Talking of the U.S., it is interesting to assess the way the price of airline miles to banks has shaped up. Also, it is worth knowing as and when co-brand deals are renegotiated, how they pan out as per the prevalent competitive levels. What would be the key for airlines as they structure their co-branded credit card deals going forward. Can airlines exert additional control over the frequent flyer or reward point earn/ burn rate at the issuer?  

As for banks, they do also make money from annual fees and interest on balances. In all likelihood, airlines are expected to devalue their programs, and would accept a lower price per point. But then what about flyers’ expectations?

If card issuers are forced to look at new avenues for revenue aside from interchange fees, one may find loyalty programs needing to become more innovative and forward thinking.  While large sign-on bonuses and ongoing transaction fees pay the way for high profits into co-brand cards currently; with likely regulatory changes affecting many markets – it opens up new opportunities to cross-pollinate loyalty products in a new way that never seen before.  The easiest way to achieve this is to follow the money, and place the highest recognition of value in that segment. 

A source shared: “For example, we might begin to see retailers pay acquiring banks to bring new customers, and the benefits passed on to the end users when they shop at these retailers.  This also represents a chance for frequent flyer programs to flex their creative muscle and use the might of their virtual currency in the real world where profit centers are not derived from interchange fees, but rather focused on leveraging their popularity and taking the time to ingrain their brand in a physical sense rather than being an  ‘airline program’.”

So, yes, FFPs can sell their offerings to new partners, and make the better of contracts. But if the market is flooded with offers by airlines, it will turn into a position where the FFP brand is everywhere and consumers will ‘switch off’ to the brand because it’s no longer exclusive, offers them no greater value over the next program, and ultimately cheapens the brand in the consumers’ mind.

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First Published 8th February 2016