Airlines and Credit Cards

Via Marginal Revolution, I thought this was fascinating:  The profits from those airline frequent flyer Visa and Mastercards (like my Citibank Advantage Visa) dwarf those of the airline business itself.  OK, so the profits of my tiny little company probably dwarfed the anemic profits of most airlines last year, just because they were positive.  But the magnitude is staggering:

Juniper bank is contributing $455 million to the merger of America West and
USAirways in exchange for the right to issue its frequent flyer credit card. This was a
huge blow to Bank of America, which had been issuing cards for both airlines,
and BofA is taking the deal to court.

They have several more examples, with credit card companies providing much of the new financing in recent airline bankruptcies.

By the way, why is it that frequent-flyer miles holders, who are a creditor of the airlines after all, are the only major creditor consistently NOT asked to take a haircut in these bankruptcies.  For god's sakes, there are retired workers losing a large portion of their pensions, but I still get to retain all my miles so I can go to Hawaii next year?

Update:  The fact that mileage holders have not taken a hit in bankrupcy does not mean they have not ever taken a hit.  Airlines from time to time devalue miles, by raising redemption rates, as Northwest did last year.

8 Comments

  1. Charles L:

    While not an official policy, it is now almost impossible to redeem 25000 sky miles for a ticket from Delta. The going rate these days is 50000 miles. While this is only anecdotal, many of my friends have had the same experience.

  2. Duane Gran:

    Another question is why they call them miles. For such an international entity, you would think that they communicate in kilometers.

  3. Gary:

    First, the reason that airlines try not to make changss to their frequent flyer program in bankruptcy is because they don't want to alienate their customers -- who'll be key to the airline COMING OUT OF bankruptcy.

    So you'll find that while airlines devalue miles, they don't usually do it WHILE in Chapter 11.

    As to the comment about miles vs kilometers, several non-US programs do in fact use km...

  4. Matt:

    Well, if they're ever liquidated, we know we'll get _nothing_. (The retirees will get the PBGC. The banks will get whatever cash the fire sale brings in. But holders of miles will be left holding worthless paper.) There's a viable case to be made that, given such a circumstance, mileage holders deserve their preferential consideration. (Not to mention that, as others have noted, since mileage holders are high-value customers first and creditors only second, maintaining a good working relationship with them is in the interest of anyone who wants to see the airline in question return to profitability.)

  5. Dave Schuler:

    I think there's a little more to it than that. Frequent flyer miles are carried on the books of airlines as contingent liabilities. Cutting frequent flyer miles, then, would make the airlines appear to be more profitable (without actually making them more profitable) and create ill-will among the paying customers. Neither would seem prudent.

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  7. Frank J Baltra:

    Basicly, credit cards in and of theirselve's, are illegal in the U. S.. The only one that can create a currency, is the U. S. Congress. Most of the company's that issue credit card's do not have the funds to back them up.

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