Compunction Sparks Competition Between Airlines and Financial Institutions over Rewards Programs
Airline Rewards Credit Cards: A Double-Edged Sword for Consumers
The profitability of airlines is significantly bolstered by airline rewards credit cards, with loyalty-related revenues making up a substantial portion of total revenue for major U.S. carriers. However, consumers face complex challenges navigating these programs due to varying earning rates, complicated redemption options, and changing benefits, as highlighted in recent regulatory hearings.
The Financial Impact of Airline Rewards Credit Cards
- Key Revenue Sources: Airlines generate a noteworthy share of their revenue from loyalty programs tied to co-branded credit cards. For instance, Southwest Airlines derives about 21.1% of its revenue from loyalty-related income, followed by Alaska at 16.3%, American at 13.1%, United at 12.9%, and Delta at 10.8%[2]. These figures demonstrate that loyalty programs are integral financial components, often making up double-digit percentages of airline revenues.
- Economic Mechanics: When customers spend on co-branded airline credit cards, airlines receive payments from the issuing banks, which partly go on their balance sheets as liabilities (air traffic liability) and partly as marketing revenue. When members redeem points, the liability shifts to passenger revenue. Additionally, unredeemed points lead to "breakage," which converts liabilities into revenue without a corresponding cash outlay, boosting profitability[2].
- Loss Leader Strategy: Loyalty programs and related credit card products sometimes operate as loss leaders, meaning airlines may incur direct costs in points redemptions and marketing but expect to gain revenue indirectly through increased flight purchases, higher customer retention, and co-brand credit card commissions[2].
The Consumer Perspective
- Complex Earning Structures: Airline credit cards typically offer variable earning rates depending on the type of purchase. Higher points may be earned on airline tickets, baggage fees, and upgrades, with some cards offering higher rewards on other categories like dining, gas, or grocery stores. This variation complicates the maximization of rewards based on individual spending habits[1][3][4].
- Changing Rewards and Benefits: The value of miles and perks can fluctuate based on ongoing changes in welcome bonuses, redemption policies, and perks such as free checked bags, priority boarding, companion tickets, or lounge access. Consumers must time card applications to capitalize on top welcome offers and regularly reassess card benefits to ensure they align with spending and travel patterns[1][4].
- Difficulty in Comparing Cards: The evolution of airline credit cards now includes transferable rewards and fixed-value points, making direct comparison more difficult. Consumers must consider sign-up bonuses, long-term earning potential, bonus categories, and extra benefits, none of which are standardized across different cards[3][4].
- Regulatory Focus: The recent U.S. Department of Transportation and Consumer Financial Protection Bureau hearing likely addressed these issues, scrutinizing how the complexity of airline rewards programs affects consumer understanding and decision-making, and how much transparency consumers have about the true cost and value of these loyalty offerings. These agencies aim to protect consumers from potentially confusing practices that may obscure the real value or costs involved, though specific data from the hearing are not available in the search results.
Challenges for Consumers
- Operating Costs and Revenue: Sara Nelson, International President of the Association of Flight Attendants, stated that operating costs exceed passenger revenue for every major airline except Delta[5]. This underscores the importance of revenue-generating strategies like airline rewards credit cards for airlines' financial stability.
- Denied or Devalued Rewards: The CFPB has stated that consumers often encounter devalued or denied rewards even after program terms are met[6]. This further emphasizes the need for transparency and fairness in airline rewards programs.
- Comparing Programs: Javelin Strategy & Research has built a card benchmarking tool to help consumers compare programs, but finds it difficult due to constantly changing redemption values[7]. This demonstrates that despite efforts to improve comparison tools, the dynamic nature of airline rewards programs poses ongoing challenges for consumers.
In conclusion, airline rewards credit card programs are pivotal for airline profitability through complex accounting and revenue-generating mechanisms, but pose significant challenges for consumers who must carefully navigate and compare evolving program terms to gain value.
References
- The Points Guy
- CreditCards.com
- NerdWallet
- Forbes
- Association of Flight Attendants
- Consumer Financial Protection Bureau
- Javelin Strategy & Research
- The intricate nature of airline rewards credit card programs, with varying earning rates, fluctuating rewards, and constant changes in benefits, positions them as a critical element in the financial lifestyle of consumers, yet the complexity and potential devaluation of rewards can create difficulties in managing and maximizing their value.
- With technology playing a significant role in transforming financial transactions and loyalty programs, airline rewards programs have evolved to include transferable rewards and fixed-value points, making it challenging for consumers to compare the advantages of different cards, especially when considering their unique spending habits and travel patterns in the general-news landscape of regulatory scrutiny aimed at ensuring transparency and fairness.
