Industry Debate: Are Co-Brand Credit Cards Better Than Bank Rewards Cards?

Last year Airline Information asked me to debate Stifel analyst Joe DeNardi on whether airlines should spin off their frequent flyer programs. I argued that they should not, that they were more valuable with incentives aligned through common ownership.

Joe and I didn’t disagree these were valuable assets (just look at the $9 billion Delta raised mortgaging SkyMiles!), though we’ve always disagreed that airlines were undervalued because of how valuable these loyalty programs are. I’ve suggested that the value of the loyalty programs was accurately captured by the markets, and that airlines themselves just weren’t very valuable.

I suspect that the ability for each of American, United, and Delta to all raise over $6 billion apiece on their programs has meant the market is fully informed about their value, yet at the time of the raising there wasn’t a sudden revaluation of the airline equity.

This year Airline Information again asked me to do a debate as part of their loyalty industry conference. This time I squared off against Charanpal Brar from Bond Brand Loyalty on the question of whether airline co-brand cards are as valuable as bank currencies.

I argued that the co-brand deals have gotten so expensive that there’s less revenue to rebate to the consumer, and banks have done a better job building up their own cards which give customers the ability to earn points faster and the flexibility to transfer those points to many airlines (or redeem at high value elsewhere).

Charanpal argued that airlines can deliver better experiences to their co-brand cardmembers, such as offering free checked bags and earlier boarding and having spend contribute towards elite status. I responded that many benefits were reasons to get the card (like free checked bags) but not to spend on the card and that airlines like United have made their cards contribute less towards elite status than they used to. Only Hyatt, Frontier, and now Spirit Airlines do this well.

Airlines need to do a better job leveraging their co-brand cards as a tool towards better experiences during travel, with card perks riding on the rails of the loyalty program itself. I believe there’s been too much focus on the mechanics of the card deals with issuers, and adding new acquisition channels (like inflight), and not enough on how to really drive experiential value to the cardmember.

My opening remarks (which were actually inserted into slides) were pre-recorded.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. The benefit structure for most co-brand loyalty cards create a it of a Catch-22. Presumably, the biggest spenders–hence the most lucrative for the banks/airlines/hotels–are the people who already organically reach elite status. The higher the status, the higher the spending in general. But it’s those people for whom card benefits like early boarding, free luggage, hotel lounge access and upgrades, and so forth are least useful. Moreover, the highest-spending elites are probably already accumulating points/miles faster than they can spend them, so the prospect of earning additional points/miles for card spending–miles that might not actually get touched for years–is a perfect example of the economic principle of decreasing marginal utility. Until hotels and airlines can figure out how to make the acquisition of these cards (and spending on them) truly beneficial for the elites, the value proposition will always suffer in comparison to the more flexible bank cards, or even the cards that offer cash back (after all, cash will always have the highest level of flexibility).

  2. Different flyers have different needs. Some fly to grandma’s house once a year, some fly for business once a week, some save for that special trip to Europe in Business class. Some (like me) fly 6 to 8 times a year for business and pleasure, and that special trip to Asia or Europe every other year. Therefore credit card perks are dynamic depending on the person. I work the system with all bank cards and all airline cards. I use them and dump them for my needs. Airlines Do Not have loyalty to their customers anymore and neither do I have loyalty to Airlines. BEST DEAL GETS my money or points and I don’t care which credit card I have to use.

  3. Airline & hotel branded cards make sense to a very small percentage of the population, while cash back is something that benefits pretty much everyone. As someone who will be retiring in a few years, I will probably switch most of my travel cards to cash back, especially since quite a few cash back cards don’t have an annual fee.

  4. Let’s go back to square 1. The way it SHOULD work is simple. The airline/hotel produces a product for 80¢ and sells it for $1. With a loyalty card, the airline/hotel sells the product to the consumer for a discount and the company gets more volume.

    However, the cobrand credit cards have been a huge money maker for the banks, while the airlines/hotels have been saddled with burgeoning loyalty redemptions. So now the companies are pushing back and driving harder deals with the banks. That is the free market at work.

    I see the idea of making up for the declining value of cobrand rewards by adding more low cost/high value benefits, but there is no way that banks’ in house rewards cards can supplant the cobrand cards. They’re marketed to overlapping but separate segments.

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