The Secret Sauce: How Your Airline/Hotel Credit Card Actually Works

A question I got yesterday in the comments prompted me to put together a post explaining how airline credit cards work — how co-brand credit card deals get put together by banks, airline or hotel company, and payment network like Visa or MasterCard. (With American Express, the card issuer and payment network is usually the same.)

I thought some readers would find it interesting to discuss a bit about ‘how the sausage gets made’ and what that means for which banks will issue which cards for which airlines and hotels going forward.

Reader Win asks,

@Gary, how are co-branded card perks determined and paid for, and what do you think might happen in the American Airlines card space, considering the legacy vs. primary issuers, the merger, etc.?

How Airline Credit Cards Work: it’s Big Business

The process of giving birth to a co-brand credit card — your United Visa, Delta American Express, Hyatt Visa, etc. — is a complicated one.

There’s tremendous money at stake. Remember that banks are the largest buyer of frequent flyer miles. 2/3rds of American AAdvantage miles are awarded by partners rather than by the airline for flying for instance. And banks are the biggest customers.

The major airlines as well each got between $500 million and a billion dollars of cash during rough times in the industry, in exchange for the pre-purchase of miles. Big money.

The Third Seat at the Table: the Payment Network

One thing I didn’t really realize about these deals until the summer of 2012 at
At the launch party for the Citi Hilton Reserve Card was the role that the payment network plays in constructing the credit card deal. I spoke to several of the representatives at that event from Visa who candidly shared their role in putting the deal together.

    how airline credit cards work

    how airline credit cards work

First, the payment network has several basic benefits like roadside assistance and trip delay and cancellation coverage as well as purchase protection. Specific benefits are opted into.

Second, and most importantly, the payment network takes a cut of transactions (merchant processing fee). That amount, the split between the network and the bank, is negotiable. The amount of money available to fund specific rewards and benefits depends on the overall economics of the deal, how willing the payment network is to discount their cut on a given card.

The more charges on a card the better. Discounting, if it funds benefits that increase card use, can be profitable for a Visa. But they also don’t want to simply cannibalize other charges they’d have run through their own network at a higher price. They’re involved in benefit design and pricing.

These deals can be more than just card-by-card although most often they’re card-by-card. Chase has gone almost all-Visa. They stopped issuing several cards that used to be available as MasterCard (you used to be able to get Sapphire Preferred as a MasterCard or a Visa for instance) and have converted MasterCards like the Ink cards over to Visa. They still have a toe in MasterCard waters, of course, they now issue the IHG Rewards card as a MasterCard.

Every Detail is Negotiated to Get the Most Money for the Travel Provider and Most Uptake and Usage for the Bank

Beyond the payment network, the bank and travel provider negotiate over every detail of the product.. from benefits, to cost, to card design. The look and feel of the card is something that the loyalty program gets involved with, it isn’t entirely on the card issuer.

At its simplest, the bank buys points from the hotel or airline and gives those to customers. They’re rebating back part of the interchange fee that they would otherwise get to keep, in order to incentivize use of the card and increase volume of charges. They make less on each transaction, but more overall because of the huge volume of transactions that some of these cards can generate. In general, and while fees and interest can be higher on loyalty program cards, they aren’t making their money on fees and interest. They just aren’t discounting those to appeal to a consumer segment that is sensitive to these prices. They make their money on charge volume from a relatively affluent customer base.

They want charge volume, and to get that they need uptake. They get consumers to sign up for a card in a number of ways. Credit card companies know that one of the biggest pain points, for instance, is checked baggage fees. That’s why the card companies now often bundle waiving those fees as part of the value proposition. It really drives cardmember acquisition.

And that’s why card companies are willing to pay for checked bag fee waivers. Banks do pay the airlines for this. A percentage of revenue goes to the airline for benefits like bags, priority boarding, lounge passes. That revenue is recognized by the airline immediately. And a percentage goes to the miles awarded, which is mostly deferred to fund future travel redemptions.

Keeping a card product top of wallet is really valuable and also expensive. It’s why premium travel cards increasingly waive foreign transaction fees. When consumers travel abroad, if they put their card away and use a different one to save on foreign transaction fees, the card doesn’t return to the top of wallet when the trip is over. For cards whose customers travel outside the U.S., it’s profitable to waive those fees because it keeps them from losing the future charge volume stream.

Airlines and hotels love having their card products in the hands of consumers, and not just because they’re getting paid for points and benefits. Their customers carry the travel provider’s brand around in their wallet and that increases loyalty, and thus wallet share — the percentage of total travel spend that goes to the airline or hotel. Just having an airline credit card increases the likelihood that the consumer will choose the airline for future flights.

Travel Providers and Banks Don’t Break Up Very Often Anymore, Outside of Mergers

For the most part credit card partnerships are locked in, except in the case of a merger (and there aren’t that many big travel providers left to merge!).

The lock-in comes from:

  • Installed cardmember base. An incumbent card issuer already has a huge number of customers. That means the card franchise starts off worth a lot more to the incumebnt issuer than to a potential competitor.
  • Big financial deals would have to be undone. When a billion dollars worth of miles are prepurchased, a competitor bank would have to front that billion dollars just to bring the travel provider even — and then the competitor bank needs to offer a better deal, but see the first constraint it’s hard to offer a better deal when the incumbent has the revenue advantage.

These billion dollar prepayments are being paid down, and in the current revenue environment may not be renewed. That can reduce lock-in.

Citibank Will Be the Exclusive Consumer Card Issuer for American Airlines Going Forward.. But American Keeps Relationships With Four Card Companies!

The US Airways merger was largely funded by American West bringing on Juniper Bank (now Barclaycard) which fronted money to acquire the franchise. US Airways had an existing Bank of America relationship, a lawsuit ensued, and Bank of America was able to continue servicing existing US Airways cards. They do so today, and will continue to do so when Dividend Miles is folded into American AAdvantage. There will be an American Airlines Visa issued by Bank of America that you cannot apply for.

Similarly, with the US Airways – American Airlines merger, the two airlines had different bank partners. Barclaycard issued US Airways cards, and Citibank issued American cards.

  • Citi had the huge installed cardmember base.
  • American still owed Citibank over half a billion dollars worth of miles.
  • Citibank is much larger, and a bigger card player, than the US subsidiary of Barclays.

So it was no surprise that Citibank got to keep the franchise after the merger.

But Barclaycard still issues US Airways credit cards. And when US Airways Dividend Miles gets folded into American AAdvantage, they will have to stop acquiring cardmembers.. but will be able to continue servicing existing cardmembers under the American AAdvantage brand.

So there will be at least 3 banks issuing American Airlines co-brand cards — Bank of America and Barclaycard as legacy US Airways issuers who cannot bring on new cardmembers, and Citibank who will be the exclusive issuer of American cards going forward.

There’s actually a fourth issuer, technically — American Express — who offers the corporate Business ExtrAA card. But that’s more of an asterisk because it’s neither a consumer nor a small business card.

How airline credit cards work is big business, complicated transactions, and locked-in relationships… all to provide you rebates to win your business, because the more you charge the more both the banks and the travel providers will make.

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, 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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  1. […] I watched a documentary on British Airways, and on the first couple episodes they showcased flight Attendant training. Anyway, they stressed the importance of good, attentive customer service especially in the presence of a.premium cabin passenger. (no small detail should go unnoticed) Likewise, cabin cleanliness and ATTENTION TO DETAIL should be highly regarded for everyone, but especially for premium customers I just apply the same standards and expectations to citi as well (since they have proven that they can handle situation on the customer service front well I think this post from "view from the the wing" will help further explain it http://viewfromthewing.boardingarea….dit-card-deal/ […]


  1. is there a real cost in foreign credit card transactions that banks are passing on to consumers (or not) using foreign transaction fees?

  2. @Mason part of the fee goes to the payment network and part to the bank. So either the bank has to eat the payment network portion, or they negotiate to get the payment network to waive it (I am not certain which) but that presumably comes at the expense of something else they could otherwise get. Either way there’s a cost besides just revenue foregone.

  3. Gary, that was a great post but I still completely do not understand or agree with you at all about the forex “fee waiver” actually costing the bank a single cent. Maybe they make no money, but I cannot see how it costs them a cent out of pocket. I will use two examples, a US transaction and a foreign transaction.

    US example, $100 purchase: customer pays $100, network takes a 3% cut paid for by the merchant, bank and network split that $3 however they have negotiated.

    Foreign example, Euro 78.93 = 100 USD: customer pays $100 + 3% “foreign exchange fee,” which is 1% network + 2% bank, the network still takes a 3% cut paid for by the merchant, split between network and bank.

    Anyway, in the example above if the bank “decides to charge no forex fee” they lose 2% of their own fee and they owe the transaction network 1%. If you are arguing that the merchant fee split is so lopsided that the bank isn’t getting 1% I simply don’t believe you. Provide some evidence. Interchange fees have got to be 1.5% or more.

    Anyway, the bank is making money on the transaction. Even if they waive forex fees. They make less money, yes. But they are still making money every single transaction.

  4. @bode no, we agree that the bank’s split is greater than what they might owe the payment network.

    (1) i was saying they come out of pocket, that they are giving up something more than just giving up making the 2% foreign transaction fee. we agree on that.

    (2) remember that any points or rebate earned on the card costs the bank money, too.

    If you pay a hotel bill with a Sapphire Preferred card overseas, and earn 2 Chase points with no foreign transaction fee, do you believe Chase is making money on you?

  5. My thought was that the forex is likely just a made up charge, but I was wondering if this assumption is actually correct. Maybe I’m dense, but I’m still not clear on which one it is.

  6. Re: no forex and 2 chase points, I suspect the answer is “do those points cost chase more than 50 bps?” I am guessing that when all is said and done there is still 1% profit post paying for exchange forex fee. So if those points cost chase more than half a cent each, then they are losing. I find that impossible to believe – so no, I don’t think they’re losing money on any individual transaction. Curious though if you have any idea on the percent Chase spends on “benefits” – 1% would seem outlandish, 0.5% would seem high to me. I’m guessing more like .125% or .25%.

  7. They make money from the merchant/swipe fee (whether in the US or abroad). I don’t understand how the bank is incurring an additional fee for foreign transactions. Who are they having to pay? I’m confused. I thought that credit cards charging forex fees was just another pure profit center.

  8. Gary,

    Thank you for this insightful post, great amount of information, and great introductory material for this audience. Great post!



  9. @steve that’s pretty closely held info, certainly closer to a penny (on either side) than to two cents, the amounts do vary though — prices would have been much lower when buying in bulk half a billion dollars at a time or more than under other circumstances.

  10. @Gary, Very informative post! It is said that those who like sausage and the law shouldn’t see either being made: meetings between card issuers and airlines must get interesting, although perhaps not to the same degree now that flight occupancy is up.

  11. Every Visa card I have with no FTF is still exactly 1% above the posted Visa rate, so they aren’t truly no FTF.

    My MC cards seem to use a real time rate that matches interbank FX exactly.

    Not sure what’s going on there. The Visa cards in question are Chase and a card from a local CU. They had an identical FX rate.

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