For a long time, financial analysts and the general public have come to realize that airlines are no longer just ways of moving people from place to place. They’re credit cards with wings.
- Some carriers often lose money just flying people and cargo alone (American Airlines)
- Others may make money flying, but make the bulk of profit from their bank partner (Delta)
- And in any case, frequent flyer revenue is very high margin (39% – 53%, depending on how the airline does their internal math)
What’s changing now, though, is that airlines have started to choose where to fly based on how that will influence customer spending behavior on their credit cards.
During Thursday’s third quarter earnings call, Delta reported $2 billion in revenue from American Express for the quarter and projected being on track for $8 billion in revenue for the full year. They’ve previously shared that spend on their cobrands is ‘approaching’ 1% of U.S. GDP.
While they talk about a “long-term goal” of generating $10 billion a year from this relationship, that’s something they had projected for 2029 before the pandemic – that didn’t have 20% pandemic-era inflation baked in. So they’re actually behind where they expected to be at this point.
The airline shared that one-third of active SkyMiles members have co-brand Amex cards currently. That tells me they continue to be topped out in terms of finding new customers for these cards, though they continue to report record cardmember acquisitions (it’s unclear how many of those new cardmembers are previous cardmembers, and what their retention of these customers will be after the first year). They are on their “seventh year of a million or more” acquisitions.
They’ve leaned into driving more spend out of existing customers, and they’re building new routes and building up markets so to attract more card customers.
- As they raise annual fees and layer on card benefits, they’re finding this attracts better credit score customers with higher card spend (and higher approval rates). Ed Bastian is assured that “as long as you’re providing good value to customers there’ll be strong demand for products at higher fees.”
- And, Delta says, it helps explain their big growth in Austin and Raleigh – with CEO Ed Bastian sharing that “these are places we acquire a lot of cards.” They no longer just look at profitabilty route-by-route but want to understand where potential cardmember growth lies, and what flights will attract cardmember spend.
Credit card deals aren’t just the profitability engine of airlines, they now drive where airlines fly. And it isn’t just Delta.
- A key reason Southwest went into Hawaii (and also why they need premium products, international and partners) is to drive cobrand spend. Cardmembers need aspirational destinations to motivate them to get the card and keep it top of wallet.
- When Scott Kirby joined United he laid out card acquisition and spend as a key rationale for restoring the airline’s domestic route network. He argued that being number one in a market produced outsized credit card uptake, and that relevance in a market was needed to generate card spend. And we’ve seen some of the ‘sexier’ routes United has added clearly supported by aspirational redemption bets – destinations like Nuuk, Greenland; Bilbao, Spain; and Faro and Madeira, Portugal.
- Meanwhile American has been hurt (their card spend volume has dropped from first to third) because of weakenss in high spend markets. They’ve pulled back in Los Angeles, New York and Chicago. In fact, they retired too many planes during the pandemic and lacked the aircraft to build Chicago back up, and are now slated to lose O’Hare gates. Retiring widebodies and focusing on short haul flying and the Sun Belt, they’ve lost some of the drivers of aspirational points acquisition, though they still have far-flung partnerships. (Their close partnership with Fiji Airways isn’t just a benefit to Fiji.)
What this also points to is the changing way that airlines think about how to attribute cobrand revenue to their operations. It doesn’t show up in passenger revenue in the financials, but internally you allocate card spend to the markets where cardmembers live.
It used to be that an airline might just spread out total card revenue across all flights, or at a macro level look at ‘total revenue’ per available seat mile instead of passenger revenue per seat mile and compare that to cost.
Bank partner revenue needs to go to the market where the customers live, to understand what’s driving that revenue and the real profitability of a flight. Ticket price might not cost a flight but if the flight makes an airline relevant to customers in a market to spend on their product it may still be profitable.
As long as they operate reliably, I am okay with this (credit cards with wings.) And, in some cases, our credit cards are literally repurposed metal from old planes (see the limited-edition Delta Reserve Amex cards from the old 747 aircraft).
I can earn more SkyMiles from a Membership Rewards card (with transferrable points) than from a Delta cobranded card. That makes no sense. Airlines for some reason are not capitalizing on the brand marketing opportunity that is a consumer pulling out their card at a restaurant to pay the bill.
That’s fine now but it is at risk to crashing one day.
Credit card usage can be very fickle depending on a sign on bonus. Credit card profits are made on the backs of small and medium sized businesses that have consumers as customers (instead of other businesses). Some of the fees are high. Gary likes to think that credit cards are wonderful for the merchant but that is not always true. What is true is the entire cost of this credit card scheme, other than the sign on bonuses, are on the backs of the merchant.
Some people don’t travel much. Others may realize that certain currencies, like Delta Skypesos are not worth too much and that 2% cash back is better. Other big spenders might find that they only need one business class ticket for a vacation per year and don’t need that many miles.
A lot of variables. Things can change.
AI and Credit Cards now running our lives! How much more fun can this get?
@derek — So, back to Rule #1, then: Don’t hoard points. Earn ’em and burn ’em. Mitigate risk of devaluations, shutdowns.
Gary’s post about CAVA’s “status” program earlier today is illustrative for the types of things I would be thinking about if I ran a loyalty program. Rewards Network for instance partners with AA, DL, UA, Bilt, Rakuten, etc. and runs their dining loyalty program. That’s great, and i’m sure the airlines get a cut, but you don’t get anything different for being an airline status member (becoming an AA Dining VIP is just based on number of visits per year to any restaurant, not like AA hotels where you get 5-10x points for being a status member / CC holder). Feels like Rewards Network itself is more interested in restaurant financing versus truly incentivizing consumer spend through to the credit card.
Just feels like there is a golden opportunity to make those “stars” align a bit more in terms of driving more CC spend. Perhaps Amex is on the right path with Resy credits, but then has not connected the dots back to Delta. Would expect we will see more on this front over the next few years.
Given the terrible value proposition of Delta points, the only acceptable spend on on their cobranded cards (outside of SUBs) is for loyalty status, correct? If so, how are so many people spending so much on these cards??? I really don’t understand it, Delta has lead the way in destroying the value of their points how on earth on consumer responding by accruing them.
> aspirational redemption bets – destinations like Nuuk, Greenland
WTF?
@toomanybooks — According to reviews and flight records, United barely even operated that route this summer, frequently delayed and canceled, leaving folks stranded. And yet, they say they’re bringing it back next year… oof.
Everyone is missing the point. The customers are driven by STATUS! Delta miles are relatively less valuable, but the MQDs are not. Diamond Choice benefits are unparalleled. United Plus Points and American SWUs are fairly useless, but Delta RUCs and GUCs are easy to use and quite valuable.
@Gene — Now, you’re speakin’ my language! Woop woop!
Everyone has a take on what is and is not useless about a loyalty program. Comes down to individual needs and what you value. I find elite status on DL good for one two things: early boarding so I get my bag in the overhead and preferential assistance during IRROPS. UGs are worthless (even as a 2MM DM), Limited seats in EC make that hit or miss. Diamond Choice benefits are marginal, so I always take the travel vouchers. No one I’m gifting status to and I really do not need another Tumi gift card.
Personally, DL’s comment today solidifies a few things in my mind:
1. DL has fully pivoted to a lifestyle brand, not an airline. They make their money through credit card deals and selling miles to their preferred network of vendors.
2. DL cares more about cc spend than they do loyalty, repeat business, their hard product, their soft product or anything else. If not, they would put as much emphasis on their inconsistent hard product, overcrowded SkyClubs and slipping operational performance.
3. DL’s focus on finding more people to use their credit cards means focus on major markets at the expense of secondary cities that lack the population.
4. There is nothing DL is doing here that can’t be easily replicated by UA and AA and, to some extent. WN.
For folks like me that do not live in a fortress hub I have adopted a strategy of splitting my credit card spend between my DL card and my UA card. The second I hit the $75K threshold so I can stand in the absurd queues to use the SkyClub as much as I want, I immediately rest the card and switch to my UA card to max out my benefits with them. And, If UA ever decides to drop a hub in FLL, my frequency of using DL will drop precipitously and I’ll drop my AMEX Reserve.