Ai Editorial: Airline Co-Brands - Who is Winning?



Gaining an upper hand as a stakeholder in the arena of airline co-branded credit cards is always an interesting saga.

In this context, it is fascinating to assess the extent to which airlines tend to rely on credit card issuers for “buying of miles”. Is this dependency going down? What sort of control can airlines exert over the frequent flyer or rewards earn/ burn rate at the issuer?

Also, it is important to assess how the regulatory environment on interchange fees for card-based payment transactions, says in a region like Europe, is going to impact the ties between stakeholders of an airline co-branded credit card.

These are some of the vital issues as things stand today.

Ai’s Ritesh Gupta interacted with RFi Consulting’s MD Lance Blockley regarding how the scenario is evolving,  how rewards earn and/ or burn rates on consumer co-brand credit cards are likely to shape up, what happened in Australia when The Reserve Bank of Australia (RBA) intervened and lot more. Excerpts:

Ai: As an airline co-branded credit card holder, if you were to assess the major utility/ attraction of using such cards, what would it be?

Holders of airline co-brand credit cards have them for the airline loyalty points that they can earn. In some countries these cards have no annual fee, and therefore whatever frequent flyer points you earn on the spend is all “upside”.  However, in those countries where there is an annual fee on these credit cards, our analyses have shown that there is always a minority of the cardholder portfolio who don’t spend enough on the card to earn back the annual fee in frequent flyer points  -  these cardholders would be better off not taking out a rewards card.



Ai: Co-brand deals are generally complicated relationships between multiple stakeholders. Is there any major development that you would like to highlight?

There is always tension between the payment acceptance (ticket selling) side of the airline, which wants to pay the lowest Merchant Service Fee and Interchange rate on the transaction; whereas the bank issuing the co-brand credit card wants to receive the highest possible Interchange rate, as many issuers around the world use this revenue stream to fund the frequent flyer points that they are buying from the airline as part of the co-brand programme.

Some of the co-brand programmes are set up not only to purchase frequent flyer points from the airline, but also to contain some form of profit share in the credit card portfolio.  This usually becomes contentious as neither party feels that they are being adequately rewarded from the business.

A further area of contention is the marketing and new cardholder acquisition of the co-brand portfolio, usually both parties (the issuing bank and the airline) feel that the other could be doing more and better leveraging their assets (e. g. airline magazines, business lounges, etc) to get more cardholders.  Also, depending on the profile of new card applicants, the airline can sometimes become upset by the rejection rate on new applicants due to the issuer’s credit assessments.

Ai: Talking of Europe, what do you make of the regulation on interchange fees for card-based payment transactions – interchange fees will be capped at 0.2% for debit cards and 0.3% for credit cards?

Because commercial cards have been “cut out” of the legislation and usually get high use by frequent business flyers, there is likely to be a focus on expanding co-brand commercial credit card programmes  -  where the higher interchange rates will support a strong frequent flyer points earning offer.

The rewards earn and/ or burn rates on consumer co-brand credit cards are likely to decline (as they did in Australia in 2003-4, when interchange rates fell from 0.95% to 0.55% due to the Central Bank’s intervention), as the interchange revenue stream to the card issuer will decline and most use this to fund the purchase of frequent flyer points from the airlines.  Hence the airline frequent flyer programme revenues from co-brand consumer cards may fall, although this could be offset by an increase in the amount of card transactions.

Ai: Considering that airlines manage their co-branded credit card differently for different countries, what sort of impact do you foresee on fee-free credit cards, cashback payouts etc. as a result of interchange caps? What should airline watch out for?

In Australia, when the Reserve Bank of Australia (RBA) interventions occurred in 2003, just about all credit cards saw an increase in annual (and other) fees and a number of issuers brought in an additional fee for rewards programme participation. 

These higher fees did not put off cardholders who were really high spending on their cards and relished earning the airline frequent flyer points, but they did slow down participation at the lower spend end of the market , which probably should not have a rewards card anyway.

The earn and/ or burn rates on co-brand credit cards are likely to be changed by the issuer, in a downward direction.  Subject to contractual arrangements, the airline may or may not have any say on these levels, and therefore should keep a close eye on what is changing.

In addition, the issuing banks often view airline frequent flyer points as the most expensive rewards/ loyalty option that their cardholders can choose.  Hence they often try to steer cardholders into the bank’s own proprietary rewards programme, where the bank has full control over the cost of redemptions i.e. setting the number of points needed to redeem for a gift card or a return ticket to city X - many banks form linkages with travel agents and just buy airline tickets on the open (often cheap) market.

Ai: Even after the RBA regulated interchange down to a weighted average of 0.5% on MasterCard/ Visa in Australia, the co-brand card market and the loyalty points associated with many of them still continued to flourish. What does this indicate as far as the market for airline co-branded credit card is concerned?

It indicates that, if a cardholder thinks that they are getting something for nothing, changing the “exchange rate” (i.e. the earn and/or burn rate on frequent flyer points) on the points does not change the premise that “I’m getting something for nothing” – even if the rate of earning the “something” has diminished.  Plus, in Australia at least, more and more of a household’s expenditure is going on to payment cards (displacing cash and cheques), so to some extent the reduction in points earn rate can be offset by the cardholder increasing their spend on the card  -  hopefully without getting into any credit difficulties. 

Obviously inflation and economic growth also help grow overall card spend to grow in dollar terms.

Ai: What according to you would be the key areas for airlines as they structure their co-branded credit card deals going forward?

If I was an airline, I would want –

·       Some form of control over the frequent flyer or reward point earn /burn rate at the issuer

·       Some form of control over the fees being levied on cardholders

·       Access to the cardholder transactional data, for example so that I can see when my co-brand cardholder spends money buying a ticket on a competing airline

·       Maintain the pricing on my frequent flyer points to the card issuers, and take care having different prices to different issuers - as it is a very incestuous business

·       Maintain the pull of frequent flyer points for the consumer (making them a “must have” for a bank’s credit card portfolio), and fight a rear-guard action against the bank’s in-house proprietary rewards programmes.

Outside of the USA, the profit margins on credit card operations are likely to decline, so you might want to avoid profit sharing arrangements, but rather maximise the revenue achievable from selling frequent flyer points.

Plus I would not rely on the frequent flyer point revenue from credit card issuers growing as fast in the future as it has been in the past.

Ai: How do you foresee airlines gaining desired price for mileage sales, and selling more miles? What would you make of concern pertaining to money available to fund mileage payments going down and these impacting airlines in a negative way?

There are plenty of other financial services products, outside of credit cards, on which financial institution partners could offer frequent flyer points as an inducement to their customers/ prospects to act in a certain way; for example, frequent flyer points when you renew your mortgage, term deposit or other instrument.

Similarly there are plenty of businesses outside of financial services that might want to offer frequent flyer points as an inducement to their customers/prospects to act in a certain way; for example, in Australia, BP gives Virgin Velocity points on purchases of petrol, etc from its outlets; just as hotels have given frequent flyer points in the past.

But you can’t get away from the fact that, via high interchange rates (which come through in the Merchant Service Fee), merchants who accept credit cards have been funding, at least in part, the purchase of frequent flyer loyalty points from the airlines’ loyalty programmes.  The level at which this has occurred in the past is certain to decline.

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