An educated consumer is a powerful thing. In various ways, I think that’s what lead to both American and United Airlines widely missing their estimates on revenue from their co-branded credit card relationships.
I refer to two recent posts by View From The Wing. American Airlines was first to announce a “miss” on credit card revenue, potentially as much as $200 million in the most recent quarter. United Airlines discussed earnings earlier this week and noted that credit card sign-ups are sluggish with them as well. But, why? Let’s look at some reasons.
Significant Program Devaluations
This is the popular refrain I hear from folks. The Big 3 all made big changes that were mostly worse for some of their best customers. Those changes lead to less “stickiness” on the part of those customers. Delta was the first one to start changes, eliminating award charts and changing their earning to a revenue-based structure.
United Airlines broke out the photocopier, rolling out the exact same changes as Delta. American held off while they were in the process of merging with US Airways. Then, they borrowed United’s copy machine. They at least had the foresight to move a few commas, but ended up with mostly an identical structure to the other two. Not to be outdone, United finished up with a thorough mucking of their award booking rules, making it much harder for customers to book the awards they wanted.
Is that what lead customers to stop signing up for credit cards? It’s a reasonable argument. There’s less reasons to be loyal to a specific airline now, since the programs are so similar. That means business travelers are more “hub captive”, flying with the airline who has the dominant position at their home airport. It also leads to those same business travelers filling in random flights on other carriers if the routing and price are agreeable.
Translation: elite status is less appealing than it used to be.
If you’re a regular reader of this blog, chances are you don’t have 15 different credit cards in your wallet. I have a whole bunch, and some of my craftier/crazier friends have double or triple the amount I have. Most folks I meet have 1 or 2 credit cards they use on a regular basis.
The last few years have seen a number of great flexible currency credit cards enter the market. What do I mean by that? I’ll use Chase Ultimate Rewards as the best example. Cards like Chase Sapphire earn bonus points for certain categories (dining, for example). Those points transfer on a 1:1 ratio to partners like United Airlines. But, Chase has more than a dozen such partners. Just like you wouldn’t put your entire retirement nest egg into one stock, customers are learning the valuable of more flexible points.
Starwood Preferred Guest was really the pioneer here, establishing very generous transfer ratios to many airlines. American Express has generally been in this business for a while with Membership Rewards, though with mostly less rewarding transfer ratios. Chase put some really nice cards out there, like Sapphire Reserve and the Ink cards for business owners.
Then, they poured gasoline on the fire with Chase Sapphire Reserve. That card earned even more points in certain categories. Those points are worth more when buying an airline ticket versus transferring them to airlines. And, they featured a 100,000 point sign-up bonus when they launched the card.
Chase noted how red-hot sign-ups were. That’s definitely taking customers out of the marketplace for airlines like American and United.
Customers “Trading Out” Of Miles
To some degree, the airlines are victims of their own success. Planes are more full than they’ve been in a long time. Airlines are getting very good at yield management. With the advent of Basic Economy fares, they can offer a number of different revenue products to their customers. Business is booming, thus less total award seats.
Couple that with a compelling product like the Costco Visa Card from Citibank. I happen to be a Costco nut. I took a long hard look at this card recently and applied for it. It’s now getting part of my wallet share, but it’s almost certainly getting a big chunk of wallet share from Joe Public. It offers 4% back on gas and 3% back on dining and travel. That’s likely enough to motivate folks to change their spending habits.
The Final Two Pennies
I don’t think the answer lies simply in the damage the airlines have done to the value of their loyalty programs. Very few people I meet are as, ahem, enthusiastic about the finer points of airline loyalty as I am. I’m sure many loyalty program members don’t even know the airlines switched to a revenue-based earning model.
The landscape is more nuanced. The airlines and hotels used to create a 1:1 bond with customers via their loyalty program and, by proxy, their co-branded credit cards. Flexible cards like Chase Sapphire Reserve and the SPG American Express gave customers more choices. And, “cash back” cards became more lucrative.
As the economy improves and banks offer more lucrative sign-up bonuses, they’re betting they can retain customers long enough to pay off that initial investment. Everyone is betting on the same pie. Sooner or later, they’re all fighting for the same crumbs.
The post People Aren’t Signing Up For Credit Cards Offered By American And United Airlines. Here’s My Opinion Why Not was published first on Pizza in Motion