Tuesday, December 18, 2018

Credit Cards Won’t Save Airlines From the Next Downturn: Co-branded credit cards have become a key source of profit for U.S. airlines, but may be less stable than they expect

The Wall Street Journal
By Jon Sindreu
December 17, 2018 8:31 a.m. ET

There is a dirty secret behind the record profitability of U.S. airlines in recent years: Credit-card fees. But these won’t be the hedge against bad times that some investors are hoping for.

Credit cards bearing airline insignia are a lucrative business. Delta Air Lines’ partnership with American Express should generate $3.7 billion in revenue for the airline next year, it said Thursday—an 85% increase in five years. That is particularly remarkable because Delta has been cutting discounts and upgrades given to credit-card users when they spend.

Merchants pay credit-card issuers and banks when consumers use their cards, and some of these so-called interchange fees are passed onto airlines. This arrangement gives airlines margins as high as 60%, analysts at brokerage firm Raymond James estimate. This would mean they contribute almost a third of the operating profit reported by major U.S. carriers.

Airlines have long tried to retain customers using loyalty programs— American Airlines launched the first one in 1981—but with limited success. They have often struggled to make money precisely because people aren’t loyal to airlines, instead flocking to the cheapest flights.

The programs are thriving because carriers have found something else to sell: Their brand.

People might not choose their airline based on which credit card offers the best rewards, but they do choose their card based on which carrier they use most. Because such customers are often big spenders, financial firms are willing to pay a lot to attract them.

Yet investors who think airlines have successfully diversified their income might end up disappointed. Over the past five years, strong profits have given carriers the clout to negotiate better co-brand deals with financial firms. The balance may shift back if there is a recession and ticket sales plummet.

Moreover, retailers have started to fight back against high interchange fees, with some success. In Europe, regulations already limit these fees.

A downturn would also reduce usage of credit cards. Americans usually prefer cashback cards or those that offer discounts for a range of airlines or hotels, like the American Express Platinum.

Airlines can benefit from their loyalty programs in other ways. Delta has invested heavily in a customer-friendly experience that makes it easy to redeem points. Flyers can now upgrade to a wider range of premium cabins on their phones at the airport, which has also allowed Delta to funnel customers into premium cabins, these seats now account for 32% of the airline’s revenue, from 18% in 2011.

With their wealth of data and boom-time profits, credit cards are sensible investments for airlines to make. But they won’t save the industry from the economic cycle.

Original article can be found here ➤ https://www.wsj.com

1 comment:

Anonymous said...

It’s obvious the “all-in” price of air travel is yet to reach a point of turning away customers. It’s always a question of how to maximize revenue without the dolts catching on to what is happening. Food, baggage, seat size/location, and flight departure times are all part of the shell game.