BA Amex who's paying for the avios?

Old Jun 16, 19, 10:05 pm
  #16  
 
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In a cost competitive environment, overhead reduction eventually gets passed through. Not as an immediate reduction but by giving room to reduce prices over time.
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Old Jun 16, 19, 11:24 pm
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Originally Posted by bisonrav View Post
Part of the Amex calculation will be about having direct marketing access to high earning customers - the card offers are not provided out of the kindness of their hearts, they are co-marketing deals with usually quite high end high margin retailers.
<snip>
Every co-brand agreement is different.

The involved parties (and thus, ones who will provide some level of contribution towards the product)
Amex merchant acquiring
Amex consumer
British Airways
Avios

To understand how the card benefits are funded we need to look at what each party stands to gain from being involved in the card.
Some output benefits from the card to the invested parties include...
- Branding
- Sell more airline tickets
- Increase loyalty
- Drive Avios currency buy-in
- Access to premium travellers
- Transactional data
- Governments
- Revenue protection
- MDR
- Revolvers/interest payers
- Annual fees
- Intl transaction fees
- Non-card banking products
+ More!

In my experience in working with airlines and FFPs, the biggest benefit of the card to the AIRLINE is not the sale of points/miles.
While consumers think that banks buying points is the key (and it is to some degree), it's often only one piece of the puzzle which brings the deal together making it viable for all parties.

If you want to learn more I write a lot about this stuff on my blog, but this should provide enough insight to get an idea of who pays for what.
Ultimately you can get a sense of funding by who benefits - and sometimes it's multiple beneficiaries that chip in.
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Old Jun 17, 19, 1:51 am
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Originally Posted by jags86 View Post


I’m not an EU resident but my guess is you haven’t seen any prices drop since the capping of interchange fees. This benefits the retailers who no longer are paying 1%, 2%, 3% fees vs 0.3% fees today.

The level of economic ignorance in this statement is both shocking and not unexpected given the dire state of economic / business education in general.

For a start you are assuming prices have any relevance to cost, which is tenuous. I then invite you to imagine a world in which a store changed its prices every time a single input cost changed, and what a ludicrous world that would be.
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Old Jun 17, 19, 2:46 am
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In a commoditising market - air travel and credit cards are perfect examples of this - price tends very quickly to cost+ based on the minimum margin people are comfortable accepting. Hence at the sharp end, any cost reduction ends up feeding through.

Value based pricing is where you can persuade people to pay more depending on the value to them of what is being purchased. Luxury brands are in this category,; value can be fiscal or perceived. Thus BA can add three finger sandwiches and a drink to the same basic product and charge people three times more for it.

For thiise of us who shop in supermarkets and look for travel deals, cost+ dominates. Which is why a reduction of credit card costs is generally a good thing for consumers.
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Old Jun 17, 19, 2:58 am
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Originally Posted by jags86 View Post


Iím not an EU resident but my guess is you havenít seen any prices drop since the capping of interchange fees. This benefits the retailers who no longer are paying 1%, 2%, 3% fees vs 0.3% fees today.
This confuses interchange fees and credit card processing fees. The former are capped at 0.3% for credit cards, the latter are between an additional 1.5% to 3% depending upon the provider.
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Old Jun 17, 19, 3:14 am
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Originally Posted by lhrsfo View Post
This confuses interchange fees and credit card processing fees. The former are capped at 0.3% for credit cards, the latter are between an additional 1.5% to 3% depending upon the provider.
Quite. AMEX have their own rates as they are by and large independent from merchant accounts that deal with MC/Visa etc, and in recent years have dropped their rates considerably in the travel industry - it's the one place I guess they want high acceptance rates as they are first and foremost associated with travel, but still hover around 2% +/-.

The travel industry got hit badly by the removal of cc fees / surcharges as by and large (not exclusively as some naughty companies around) the surcharges covered the costs of the charges in a very low margin industry, and there were ways to avoid (debit cards, BACS) whilst maintaining financial protection (ATOL, trust funds etc). There is no scope to 'cover' the fees charges so prices across the board have increased to cover the increased costs. There was very little scope to cover the AMEX/CC fees in most travel companies margins. In my field costs to the consumer have increased to meet the average cost incurred now by not being able to chargeback the fees (which as mentioned vary considerably).
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Old Jun 17, 19, 3:50 am
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Not to blow AMEX's trumpet here, but the Blue BA card is free for consumers. Literally a no brainer IMO.
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Old Jun 17, 19, 4:13 am
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Originally Posted by jags86 View Post


Iím not an EU resident but my guess is you havenít seen any prices drop since the capping of interchange fees. This benefits the retailers who no longer are paying 1%, 2%, 3% fees vs 0.3% fees today.
We have't seen prices drop, but we've seen much greater card acceptance particularly for smaller transactions. Previously many smaller merchants would insist on a minimum £10 spend in order to use a card, or charge an extra fee.
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Old Jun 17, 19, 6:44 am
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In the US, sales of frequent flier miles by airlines to banks (for co branded credit cards) are a major source of airline revenue. Some airlines like AA estimate nearly HALF of annual revenue comes from frequent flier miles sales. Several interesting articles online regarding this topic.
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Old Jun 17, 19, 8:05 am
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Originally Posted by vj_rama View Post
In the US, sales of frequent flier miles by airlines to banks (for co branded credit cards) are a major source of airline revenue. Some airlines like AA estimate nearly HALF of annual revenue comes from frequent flier miles sales. Several interesting articles online regarding this topic.
I think you are confusing profit and revenue here. And even for the profit the statement is tenuous.
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Old Jun 17, 19, 10:53 am
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Originally Posted by BlackBerryAddict View Post
I think you are confusing profit and revenue here. And even for the profit the statement is tenuous.
Nope. I'm talking strictly revenue.
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Old Jun 17, 19, 11:02 am
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Originally Posted by BlackBerryAddict View Post
I think you are confusing profit and revenue here. And even for the profit the statement is tenuous.
https://upgradedpoints.com/selling-m...selling-seats/

Please read this article and the embedded source reference from bloomberg.
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Old Jun 17, 19, 12:54 pm
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Originally Posted by vj_rama View Post
Nope. I'm talking strictly revenue.
You misread the article. I cannot read the source in Bloomberg, because I don't have a subscription to it, but you've clearly fallen victim to a sensationalist headline. "Selling Miles Can Be Bigger Business for Airlines Than Selling Seats" is total bollocks, if you interpret that as they get more revenue from selling miles than from selling seats. When they say "earnings" they mean "profit", not revenue. Delta expects to earn $ 4 billion in revenue from their Amex partnership in 2021. Their 2018 revenues were $ 44.4 billion. So that's 10%.

Delta pre tax income was $ 5.1 billion. Depending on how you account for the cost of selling miles (or rather providing the services) you could arguably get to a profit near half of the total profit. But that would require some heroic assumptions on the costs.
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Old Jun 18, 19, 12:40 am
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Originally Posted by BlackBerryAddict View Post
You misread the article. I cannot read the source in Bloomberg, because I don't have a subscription to it, but you've clearly fallen victim to a sensationalist headline. "Selling Miles Can Be Bigger Business for Airlines Than Selling Seats" is total bollocks, if you interpret that as they get more revenue from selling miles than from selling seats. When they say "earnings" they mean "profit", not revenue. Delta expects to earn $ 4 billion in revenue from their Amex partnership in 2021. Their 2018 revenues were $ 44.4 billion. So that's 10%.

Delta pre tax income was $ 5.1 billion. Depending on how you account for the cost of selling miles (or rather providing the services) you could arguably get to a profit near half of the total profit. But that would require some heroic assumptions on the costs.
Correct!

Selling miles is actually creating more liability. It's not directly profitable per se, aside from a small marketing component.

Redemption is revenue recognition under IFRS 15, and that is where the profit is generated. The miles being redeemed may have been generated from the banks and while that process is critically important, it's not how profits are booked

Additionally, "Delta expects to earn $ 4 billion in revenue from their Amex partnership in 2021", does not mean $4B directly from the co-brand card. There are multiple revenue streams buried within co-brand card economics.
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Last edited by d00t; Jun 18, 19 at 12:50 am
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Old Jun 18, 19, 2:22 am
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Originally Posted by d00t View Post
Correct!

Selling miles is actually creating more liability. It's not directly profitable per se, aside from a small marketing component.

Redemption is revenue recognition under IFRS 15, and that is where the profit is generated. The miles being redeemed may have been generated from the banks and while that process is critically important, it's not how profits are booked

Additionally, "Delta expects to earn $ 4 billion in revenue from their Amex partnership in 2021", does not mean $4B directly from the co-brand card. There are multiple revenue streams buried within co-brand card economics.
Exactly. By the way, interesting blog. I've subscribed to your newsletter yesterday. And, perhaps unsurprisingly, we seem to have a few linkedin contacts in common.
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