Erik Howell and Maria Popova from First Annapolis
Consulting consider the opportunities for airline and hotel
co-brands, and profile the top 25 global players

 

One of the most enduring credit card products
is the travel co-brand. And Airline co-brands are particularly
widely recognised by issuers as highly attractive products due to
their attractiveness to lower-risk, higher-spend customers, the
strength of frequent flyer programme marketing, and their widely
understood value proposition.

In the US, the average active airline co-brand
account spends over six times more than a generic bank-branded
account, and over three times more than retail co-brands. Co-brand
credit cards are also a major source of revenue for airline
partners, and their importance to both issuers and airlines is
illustrated by the financial assistance (in the form of prepaid
miles and secured loans) provided by issuers to their airline
partners during bankruptcy or financial distress (for instance
Chase/United and American Express/Delta).

Hotel co-brands are often viewed as “second
best” by issuers, but from the customer’s perspective have a very
attractive (some would argue more attractive) value proposition
relative to airline co-brands. However, hotel co-brands are much
less prevalent than airline co-brands outside the US.

To ascertain different approaches to airline
and hotel co-brands, First Annapolis Consulting examined the
co-brand offerings of the 25 largest airline and hotel groups in
the world (ranked based on 2010 average seat kilometers per week
and total number of rooms, respectively). We found substantial
differences between the top 25 airlines and hotels in terms of
co-brand penetration, product sets, and geographical coverage, but
also several new opportunities for both issuers and brand
partners.

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Programme coverage

While all of the top 25 global airlines had a
co-brand programme, only 11 of the top 25 global hotels had a
co-brand partnership. Airline co-brands have a widespread presence
around the globe, whereas hotel co-brands remain mostly US-focused.
While several airlines such as American Airlines and Lufthansa have
co-brands in a large number of countries, most of the top 25
airlines have co-brands only in the home country or a small number
of adjacent markets.

 

Issuers and Networks

In the Americas and Europe, airlines typically
partner exclusively with one bank issuer per country, while in Asia
and the Middle East, airlines often have multiple issuing partners
in the same country. Of the top hotel chains, only Hilton in the US
uses more than one issuer (American Express and Citi).

The lack of issuers with true global or
regional coverage necessitates that in most cases, airlines form
partnerships with a different issuer in each country. However, a
small handful of airlines have formed partnerships with one issuer
for multiple countries in a region (like Delta Airlines and Citi).
Among airline co-brand issuers, Citi and American Express have the
broadest geographical reach, and there are a few issuers with
multiple programmes in a particular region or country (such as JCB
in Japan, Chase in the US).

Given the smaller number of hotel co-brands
and their concentration in the US and UK, the list of issuers with
more than one hotel co-brand is fairly short: American Express,
Bank of America/MBNA, Barclaycard, and Chase.

Among networks, Visa has the lion’s share of
the number of hotel co-brand products (67%), while airline products
are more evenly distributed between Visa and MasterCard (39% and
37%, respectively). Between its proprietary cards and its Global
Network Services relationships, American Express has 17% of airline
co-brands, while Diners Club, JCB, and CUP have much smaller
shares.

 

Products and Value
Propositions

Part of the success of airline co-brands is
their widely understood rewards structure of earning (in most
cases) 1 mile per unit of cardholder spending. In many products,
double miles are earned for purchases made at the airline.

While this specific “earn rate” varies by
product, in recent years several airlines have introduced premium
products with higher annual fees and higher earn rates (e.g.,
Delta, American Airlines, Emirates, Continental, Air Canada,
Quantas, KLM, and ANA). Delta also introduced a no annual fee
product with a lower earn rate. Overall, only 7% of airline
co-brand products had no annual fee (as opposed to 42% for hotels),
and 44% of airline co-brand products had an annual fee of over $150
(against  4% for hotels).

The fiinverse relationship between annual fees
and miles earned as a percentage of cardholder spending is
therefore not surprising.

On a US dollar basis, airline co-brand annual
fees average $100 – $135 in all regions except the Middle East,
which averages $197. On average, cardholders in Asia need to spend
around $61,000 in order to earn 25,000 miles, while in the North
and South America, 25,000 miles can be earned with around $25,000
in spending.

On average across regions, $30,500 in
cardholder spending is required to earn a rewards ticket within the
same region (assuming 10% of spend is on the airline, and not
adjusting for differences in rewards ticket values between
regions). On a normalised basis across regions, the average top-25
airline co-brand requires $33,500 in cardholder spending to earn
25,000 miles.

Because the number of hotel programmes is
smaller, the range of card products is also simpler. Hilton and
Marriott in the US offer premium card products, as does Melia in
Spain. In order to differentiate from airline co-brands, hotel
co-brands typically offer a strong cardholder value proposition
combing lower annual fees and a faster path to rewards.

Annual fees are generally lower than those of
airlines, and average $30 – $40 in the US and Europe. The average
spend required to earn a free night stay is $7,000, and 23% of
hotel products offer a free night stay for under $3,000 in
spend.

Both airline and hotel co-brand programmes
give bonus points to new cardholders with the exception of a few
programmes in Latin America and Asia. Annual fee waivers for the
first year are also common. Hotel co-brands in particular offer
very attractive new account and anniversary bonus packages to
cardholders. Moreover, several hotel co-brands offer “fast track”
loyalty programme status upgrade procedures.

 

Marketing

Marketing for airline and hotel co-brand
programmes varies widely by country. In North America, direct mail
and the internet are the primary marketing channels, while in
Europe, telemarketing is more common. Local regulatory policies
also heavily influence the channels used. For example, in Europe
many countries require physical signatures by the applicant, so
mass advertising, person to person marketing (e.g., displays in
airports), and the use of couriers in response to Internet
applications is common. While marketing offers typically focus on
bonus miles/points for applying, there is more variety and
creativity in the use of channels (in-flight advertisements on
cocktail napkins and seat back tray tables, and refer a friend
offers).

 

Opportunities for Issuers and
Partners

Although airline and hotel co-brand programmes
are already highly successful, based on First Annapolis
Consulting’s survey of the top 25 global airlines and hotels we
identified four key opportunities to expand the reach and
penetration of these programmes.

 

Expanding Programme Score

As noted above, while all of the top airlines
have a co-brand programme, many limit the geographic scope of their
programme to their home country market. For airlines with
international routes, exploring new partnerships in secondary
markets is an opportunity to expand the reach of their frequent
flyer programmes via a proven loyalty product. For hotels, which
have few co-brand programmes outside the US and UK, there is
significant opportunity to launch new programmes in other
markets.

 

Launching New Products

Both airline and hotel programmes have the
opportunity to increase the penetration of existing markets by
broadening their product range.

Both types of programmes are well suited to
introduce new premium or super premium products to compete with the
trend towards bank issuers targeting the affluent market.
Introducing lower priced products with reduced earn rates to
further penetrate the mass market, such as Delta and American
Express have done, is also a potential option for both mature
programmes as well as in developing markets in order to penetrate
the growing segment of aspirational and emerging affluent
customers.

When launching new products, airline and hotel
partners can also consider establishing a direct contractual
relationship with a network (instead of via their issuer) in order
to take advantage of network resources and marketing support.

 

Enhancing
Existing Products

Another path to expansion is to enhance the
features of existing products, such as by providing special
redemption options for cardholders, adding special partner-related
benefits exclusively for cardholders (e.g., priority boarding,
extra checked bag, lounge access, etc.), or by adding lifestyle
benefits (e.g., concierge services). These enhancements increase
the attractiveness of the product to cardholders and can help
maintain relevance in the increasingly competitive affluent
segment.

The emerging opportunities presented by mobile
commerce also provide opportunities for innovation and
differentiation. For example, Swiss-based Loylogic’s PointsPay
product enables customers to use frequent flyer miles to pay for
merchandise at the physical POS via a mobile solution around the
globe.

 

Maximising Sales

Finally, issuers and partners can increase
their use of unique partner sales channels to increase programme
penetration. For airlines, this could include solicitors in
airports, on board promotions by flight attendants, on board
advertisements, increased visibility in lounges, etc. For hotels,
this could include targeted offers at check-in, increased
visibility of promotions in rooms, and the like. While the
effectiveness of marketing tactics and cost per acquisition varies
by market, both issuers and partners should continually test new
marketing concepts.

Through these four opportunities, issuing
banks and their airline and hotel partners have the opportunity to
grow these already successful programmes. While in First
Annapolis’s experience, specific opportunities vary depending on
the partner and the local market, our examination of co-brand
programmes for the top 25 global airline and hotel groups shows
that even with these variations, the core attractiveness of these
programmes to issuers, cardholders, and partners is strong, and
that the programmes are well positioned for further growth.