Airlines Face Credit Card Reckoning

Pandemic Reshapes Points Market

Nine months into the pandemic, some credit card users are asking themselves whether it makes sense to keep paying the annual fee on their airline-branded credit cards. Airlines are thinking about how they can hold on to credit card customers, who are an important source of cash. For years airlines have used branded credit cards to lure big spenders with perks like lounge access, flight upgrades, and increased baggage limits. Because the pandemic has caused many to fly far less than they used to, some of these perks seem irrelevant to consumers’ daily lives at the moment.

As customers downgrade to less costly credit cards, airlines have now partnered with banks to release new credit card options with hefty sign-on bonuses and no annual fees. They have also tweaked frequent flier programs to make it easier to earn points, and have upped rewards for grocery purchases. Holding on to airline credit card users is important to big banks and airlines alike. Last year, Delta (DAL) branded credit cards made up about one fifth of total credit card spending at American Express (AXP).

Swipe Fees Could Be the Sweet Spot

Travel spending has plummeted since the start of the pandemic, but card issuers say they have seen an increase in spending on groceries and home improvement. While those purchases are not as much of a boon for airlines, they can help card issuers collect swipe fees, which they share with airlines. Swipe fees are the charges merchants pay when a customer uses a credit card to complete a purchase. The swipe fees depend in part on the dollar amount of the purchase, so higher grocery bills could result in higher swipe fees on credit cards.

However, analysts say it would be a challenge to get enough grocery store swipe fees to make up for the loss in travel spending. Credit card issuers do not publicly release fee trends on airline-branded credit cards. But total swipe fees are down at card issuers like American Express, JPMorgan (JPM), and Citigroup (C). American Express most recently announced $5 billion in swipe fee revenue—a 24% drop compared to the same period last year.

Airlines Shift Tactics

Despite the challenges, airlines are working to adapt and hold on to credit card customers. At the start of the pandemic, as the economy struggled, a number of customers cancelled their cards due to high fees. Citigroup’s American Airlines (AAL) branded card, for example, carries a $450 annual fee. Card issuers like Citigroup responded with credit statements of $225 to offset that fee for certain customers. American Airlines has also made it possible for customers to accumulate “lifetime status benchmarks” on everyday purchases during the pandemic.

Over the summer, as American Airlines and Frontier Airlines (FRNTQ) negotiated bailout loans, the Treasury asked them to work on extending credit card agreements. Those extended card agreements became a condition of securing the loans. With credit card spending down in general and renewal dates looming, analysts, airlines, and issuers are eager to see how consumers will respond.

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