American Express Membership Rewards - why does AMEX have a frequent flyer redemption fee?

I just withdrew 5000 Membership Rewards points to top off a ff account and was surprised to be hit with a car-rental-type tax surcharge for the redemption. It was very nominal -- $2.50 on 5000 points. But still. I know with the price of fuel airlines are imposing all sorts of fees, but it's pretty cheap for AMEX to do this. It's not like their Membership Rewards program is all that generous -- most credit cards favored by flyertalkers are far more generous in dishing out rewards. It seems like AMEX could afford to eat this nominal sum in the interest of enhancing customer satsifaction.

This charge is to recover Federal Excise Tax on airline tickets, nothing to do with fuel.

Q: What are excise taxes?

A: Similar to other rewards programs, we charge a fee to offset the federal excise tax that American Express must pay when transferring points into a frequent flyer U.S. airline account. The fee is $0.0005 per point, with a maximum fee of $75, which will be charged to your account at the time the points are transferred.

http://www.membershiprewards.com/help/homepage.aspx?t=faqs

This charge is to recover Federal Excise Tax on airline tickets, nothing to do with fuel.

Obviously -- that's why I compared it to the car rental ff excise taxes.

But for their customers, the closest comparison is the few bucks the airlines are now charging in connection with most ff redemptions (due to the skyrocketing price of fuel).

But AMEX isn't burdened by this problem. It seems that they could eat this "excise tax." That's why I'm a bit surprised they're charging it.

But AMEX isn't burdened by this problem. It seems that they could eat this "excise tax." That's why I'm a bit surprised they're charging it.

What makes you say they aren't burdened by it? While the cost is low, the number of points that AmEx deals with annually is quite high, so this "little" cost would add up on their bottom line. I am not surprised that they initiated it. At least it appears to be a real tax, unlike fuel surcharges and some of the other fees that get added in to various purchases.

While I've always understood the reasoning behind AMEX charging the excise tax for redemption, it makes me curious why the airline credit card programs do not charge a similar fee. Is it that the UA and NW credit cards for example simply eat those fees?

As an aside, I am fairly certain that the AMEX IDC cards do not charge the excise tax for miles redemption. (I can understand that because the program is based outside the U.S.) They just charge $35.25 annually to participate in the program for a green card, free for all other cards. Currently I understand they have a generous MR program for IDC Centurion card holders where they award an annual 100,000 mile bonus when members reach a $100,000 annual spending threshold. That program crosses calendar years and runs from September 1 of one year to August 31 of the following year to meet the $100k spending requirement for the bonus.

...I compared it to the car rental ff excise taxes.
... seems that they could eat this "excise tax."

Sorry, I overlooked the reference to excise tax in the original post. I think the tax liablity is real, but it is American Express' choice to pass it on to cardholders. When this fee was implemented I believe they regarded Diners Club Rewards as their primary competition. Diners charges a higher amount ($0.95 per thousand) and charges it on all airline transfers, international as well as domestic. From American Express's perspective they have priced the service well below competition.

Obviously this does not address the competition from hotel programs, such as Starwood, or the airline's own affinity cards. In the latter case I assume provision for the execise tax is built into the price the card issuer agrees to pay the airline for the miles. I have no idea why the hotel programs do not seek to recover the tax.