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Is there a future on the cards for co-brands?

Co-branded credit cards have literally taken off in the aviation industry, but market regulations that differ from one country to another have proved a challenge for airlines and banks. Often overlooked are pre-paid cards, which come with a different set of regulations and might just be the next big thing. Michael Smith reports

According to Airlines4America, formally known as the American Air Transport Association, the top 10 largest carriers in the US only make 50 cents profit per passenger. That amounts to a margin of just 0.2% – and that’s in a market where co-brand credit cards are in virtually every flyer’s wallet.


So, is there a future for what is often seen as the cash cow of airline frequent flyer programmes (FFPs)? According to IdeaWorksCompany’s Ancillary Revenue Guide 2011, of the 114 billion miles sold by American Airlines, the vast majority – probably in excess of $1 billion in revenue – were sold to Citibank, which is American’s co-brand partner in the US market. The co-brand of Delta Air Lines in the US market represents 5% of American Express’ worldwide billed revenue, according to AMEX’s 2011 Annual Report. This amounts to over $41 billion and, on top of that, Delta FFP members are some 15% of all card member loans. It would appear with these large figures that co-branded products have a very good future ahead of them, for both airlines and their bank issuers.


Taking advantage of these opportunities, however, is a challenge for airlines. On the one hand, regulated interchange is a fact of life in markets like Australia. ‘Interchange’ – essentially a fee the merchant pays the ‘networks’, such as VISA and MasterCard, to accept their cards – is the main margin used by the bank or issuer to buy miles. If that amount is limited by regulation or competitive pressure, then the money available to fund mileage payments is squeezed. The end result is that the card offering to the end customer is less generous, since the banks can’t buy so many miles from the airline.


Innovation is often driven by market challenges, as is the case with co-brands. Starting in Australia (which has regulated interchange), but now in markets such as Spain, the UK and India, we have seen the rise of the dual card. These are two cards with one account. One card is an American Express or Diners Club card (which does not charge interchange, but has a higher merchant fee) and the other is a regular network card such as those issued by VISA or Mastercard. In some markets like the UK, for carriers such as American Airlines or Virgin Atlantic, it is Amex and VISA.


Customers benefit from these innovations by having the wider acceptance of VISA along with the higher mileage earning from American Express. And, of course, the airlines benefit in two ways: by getting a higher price for their mileage sales; and by selling more miles. The dual cards are claimed to lift overall usage by a considerable percentage.


Airlines can structure their co-brand deals with their card issuing bank in a variety of ways to maximise revenues and profit. Two airlines that have taken this a step further are Norwegian and Iberia. Norwegian set up its own bank (run by professional bankers) to issue its co-brand. Iberia Airlines partnered with three Spanish banks, including BBVA, to form Iberia Cards. It also has an agreement with another large Spanish bank, Santander, which covers its loyalty programme in some 20 markets around the world where cards issued by the bank will be able to convert into Iberia’s frequent flyer currency, Avios.


Most airlines manage their co-brands on a country-by-country basis. Companies such as Emirates Airline and British Airways for example, which have cards in several markets, work with different issuing banks, rather than having one global supplier. The challenge facing both the banks and their airline customers is that the market regulations – even in the European Union – are still on a national level. Added to that, not every bank has representation in every market. Even global banks like Citi, which partners with Emirates in some markets, are not present in the co-brand market in the UK. These factors each represent a different headache for airlines looking to have cards in multiple markets.

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