Embattled airlines such as Delta and United are reportedly considering selling discounted frequent flyer miles to their credit card partners ahead of schedule. Does that mean all these miles are going to trickle down to cardholders? Not necessarily.
There is precedent for such a move. In 2004, American Express helped Delta avoid bankruptcy with an advance miles purchase worth $600 million.
These programs, of course, are big business. Amex bought about $4 billion worth of Delta SkyMiles last year, and Chase reportedly spent almost that much on United miles. The card issuers use the miles as marketing incentives to encourage consumer sign-ups and spending, and it creates a virtuous circle for all parties.
I think this move would make a lot of sense for the card companies in particular. They know their customers love miles, and stockpiling them well below market value would be smart accounting. The airlines need money fast and they’re wary of the restrictions that would come with a potential government bailout. An early, discounted mileage sale would be the lesser of evils.
Before consumers’ mouths start watering at the possibility of those miles trickling down to them at a discount, I’m going to speculate “not so fast.” For the past few years, the card industry has been much more cautious with sign-up bonuses. They came to view that escalation as an unprofitable, unsustainable arms race. (I think it peaked in 2016 when the Chase Sapphire Reserve launched with great fanfare.)
What this means for you
That’s not to say that there aren’t still compelling bonuses, because there are. They’re just not as lucrative as they were three or four years ago. And the COVID-19 pandemic has banks even more nervous. The recent spike in unemployment – 22 million initial jobless claims over the past four weeks – has led them to clamp down on lending standards and new customer acquisition programs.
I suppose there’s a chance, if the economy bounces back sooner and stronger than expected, that card issuers might shift back into an offensive mode and dangle more of these miles and points in front of potential customers (especially if they acquired them at a discount). But in my view, the risk meter is tilted much more firmly to the downside.
The state of the economy
Banks’ nightmare scenario is high unemployment leading to lots of delinquencies and defaults. The Federal Reserve Bank of St. Louis recently speculated the unemployment rate could hit 32% this spring, which would be almost three times higher than the Great Recession peak.
In late 2009, credit card charge-offs (bills so delinquent they’re unlikely to be repaid) crested at 10.5%. It’s entirely possible that figure will be surpassed this time around.
Card issuers are also being hurt by the sudden and dramatic falloff in spending. American Express, for example, counts about 30% of its billings from travel and entertainment, two industries that have ground to a nearly complete stop. Up until very recently, travel credit cards had been the darlings of the industry.
Travel benefits vs. cash back
Almost all of the higher-end cards focus on travel perks such as free flights, hotel stays, airport lounge access and Global Entry and TSA Precheck fee waivers. Right now, those aren’t of much use to consumers.
The big question is how long this shutdown will last, and no one really knows. If travel is still greatly diminished six months or a year from now, it will have major ramifications for travel providers, credit card companies and consumers.
Short-term, we’re seeing some travel cards refunding cardholders, at least in part (for example, the Chase Sapphire Reserve is giving cardholders with near-term annual fee renewals a $100 discount, and the Citi Premier is reportedly waiving its $95 annual fee for some customers). We’re also seeing many airlines and hotel chains extending the expiration dates for perks such as elite status and free nights.
If the travel and economic disruptions last much longer, I think we’ll see a lot more of these refunds and extensions. And in the spirit of “everything is negotiable,” I suggest asking for a break, especially if you’re being charged an annual fee and not getting much value from a card.
Right now, cash back cards are more useful. They provide immediate benefits and universal appeal. Plus, they tend to charge lower annual fees and they emphasize the kinds of everyday spending (such as groceries) that are especially relevant these days.
Getting 6% back at the grocery store or 5% at Amazon.com may not be as sexy as a first-class flight to Paris or a free stay at an overwater bungalow in the Maldives, but cash back is a lot more practical, especially these days.
Have a question about credit cards? Email me at email@example.com and I’d be happy to help.