Magazine article American Banker

How Issuers Navigate Airlines' Turbulence

Magazine article American Banker

How Issuers Navigate Airlines' Turbulence

Article excerpt

As domestic airlines suffer one of their worst periods in recent years, issuers of frequent-flier cards say they are relying on product innovation and on longstanding relationships and frequent communication with carriers to keep the programs healthy.

Such cards have been among the most profitable for issuers; they are among the few card types that still command annual fees. The popularity of air-mile rewards also means that use - and therefore interchange income - is high.

But observers say issuers can share the blame in the eyes of consumers who are unable to redeem their miles. And the potential for such cardholder frustration has risen in recent months as airlines have reacted to soaring oil prices by announcing mergers, grounding planes, and reducing domestic flights, all of which can reduce the number of seats available for redemption.

The constant stream of news stories about airlines filing for bankruptcy protection and cancelling thousands of flights also could discourage card use, observers said.

"If the consumer perceives more difficulty in redeeming rewards as a lesser value in the program, they may not use the card as often ... which could lead to some renegotiations of agreements between the issuer and the airline," said Chris Theoharides, the president of Advantage Consulting Group Inc., which has advised most domestic airlines on their cobranded programs.

Tony Hayes, a partner in the financial services division of Marsh & McLennan Cos.' Oliver Wyman Group, said, "To the extent that the airlines become less attractive as a hook to get customers to select credit cards, there will be an impact there."

If customers perceive a reduced "ability to redeem those miles, airline cards become less attractive," he said.

David Rabkin, the vice president of Delta consumer cobrands for American Express Co., which issues SkyMiles cards for Delta Air Lines Inc., said, "We're both facing difficulties in the market, and we're both feeling pressure from all directions. ... One thing that we try to do is have constant communication. I'm talking to my counterparts on a daily basis."

Likewise, Terry O'Neil, an executive vice president of Citigroup Inc.'s cards unit, which issues AMR Corp.'s American Airlines AAdvantage cards, said, "We spend a great deal of time with American Airlines to ensure that our strategies are aligned. They're fully informed of any development in our business models."

Both executives spoke in interviews last month - before Delta announced its deal to buy Northwest Airlines Corp. (See related story on page 7.); before American grounded more than 3,000 planes for wiring inspections; and well before American's announcement Wednesday that it would reduce domestic capacity by as much as 12% in the fourth quarter, retire at least 75 planes, and start charging customers fees for checking luggage.

Citi's partnership with American Airlines, which began in 1987, is the oldest in the frequent-flier sector.

"The program is still doing very well, and the industry is cyclical," Mr. O'Neil said last month. "We've weathered a number of changes in the industry."

Citi AAdvantage, Mr. O'Neil said, "has experienced its most successful [customer] acquisition years from 2003 to 2007" and expects a continuation of the trend this year. Last week a spokesman for Citi said this expectation remains valid.

American Airlines would not respond to questions about its relationship with Citi. A spokeswoman for the airline said by email, "we certainly feel that the AAdvantage program - the world's largest travel awards program - offers numerous benefits that our 60 million-plus members enjoy."

Another dominant issuer in the field is JPMorgan Chase & Co, which runs rewards programs for UAL Corp.'s United Airlines, Continental Airlines Inc., and Southwest Airlines Co. The banking company declined to comment for this article. …

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