The Brancatelli File By Joe Brancatelli
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Thursday, January 18, 2018 -- Once upon a time, there were airlines. And hotels. And credit cards. Distinct. Separate. Each an empire to itself.
Now? It's all a blob, a mix of push-and-pull and politics and clashing corporate egos and cultures. You can't talk about one without the other, can't judge value without weighing a forest of financial data and frequent travel patterns.
Consider these little tidbits from Delta Air Lines.
Delta reported $34.8 billion in 2017 passenger revenue, up 3 percent over 2016. Its pre-tax operating profit was $6.1 billion. Delta says its "partner," American Express, kicked in an estimated $3 billion in revenue in 2017, up 10 percent over 2016. You read that right. Delta's 2017 revenue growth was more than three times higher from Amex than from paying flyers.
Profit on that $3 billion in Amex revenue? Conservative estimates say the margin is 40 percent. I think it is closer to 67 percent. You don't even need the back of an envelope to figure that out. If Delta indeed garnered $2 billion in profit from Amex's purchase of SkyMiles, that's about a third of its pre-tax income. Pretty nifty since SkyMiles are the least valuable currency in the airline world.
Other airlines and the hotel industry aren't doing quite as well in the credit card game, but they're all striving to shake down their partners as completely as Delta owns Amex. And it's all possible because we business travelers make it possible when we use those affinity cards.
Still think the decisions you make about what's in your wallet aren't that momentous? Yeah, I didn't think so.
What do we need to know, right now, about how to manage our portfolio of credit cards? Allow me to weigh in with some observations.
THE HIGH COST OF DUMPING COSTCO
Delta's master-and-servant relationship with American Express also happens to be a textbook case of unintended consequences. When Amex walked away from its deal with Costco in 2015--Amex said it couldn't make a profit if it agreed to Costco's renewal terms--Delta became Amex's largest customer. And Delta has responded by beating every cent it can from Amex--and that probably includes taking the pennies from the loafers worn by Amex's now-prostrate executives.
We see the result of the uneven "partnership" every time Delta slashes the value of SkyMiles. Amex is helpless to object or even protest on our behalf. After dumping Costco, 10 percent of its portfolio, Amex simply can't afford to make Delta unhappy. So Delta cuts and cuts and cuts and cuts and cuts and Amex stands mute.
We also see Amex's desperation in Tuesday's announcement that it would open a Centurion Lounge in Terminal 4 at New York's Kennedy Airport. Amex began opening clubs in 2013, mostly as a way to fill a gap after American Airlines pulled Admirals Clubs from the Amex Platinum lounge program. Amex has mostly positioned Centurion Lounges in airports and terminals not sufficiently covered by Priority Pass and Delta SkyClubs, the underpinning of the Amex lounge benefit. But Tuesday's announcement makes no sense: Delta's primary international hub is in Terminal 4 and Delta should be the one building there. Delta has nine lounges at its Atlanta/Hartsfield hub, but only one SkyClub in Terminal 4, which leads to insane overcrowding during key departure hours. If Amex builds Centurion Lounges solely to keep Delta happy, Amex cardholders are the losers. Amex should have done a deal to open in one of the other lounge-poor JFK terminals, not fill Delta's egregious, self-inflicted club gap in Terminal 4.
NO HOTEL HONORS, EITHER
While we're on the topic of Amex's desperation, we might as well talk about its decision to pay to become Hilton's exclusive card issuer. Hilton Honors points are the lodging equivalent of SkyMiles: worth less than any other hotel chain's currency. But desperation drove Amex to pay big to lock up Hilton, which once also had a credit card deal with Citi.
The good news? Amex this week rolled out four new Honors-related cards. The Hilton Amex Business Card, for example, has a very attractive acquisition bonus (75,000 points for $3,000 in spend); a kicker (25,000 more points for $1,000 more spend); 10 free Priority Pass club visits; Hilton Gold Elite status; and a low annual fee ($95). Meanwhile, the new Aspire card might work for you if you look at card fees as a zero-sum game. Its stiff annual fee ($450) is offset by a $250 annual Hilton resort credit; a $250 annual airline-fee credit; full Priority Pass membership; and a free weekend night each year.
MEANWHILE, BACK AT MARRIOTT
Without wanting to make this all about Amex desperation, don't ignore the elephant in the Marriott and Starwood rooms. As Marriott has delayed merging Starwood and its SPG program into the mothership, it has meant an opportunity for Amex to hold on to its SPG card and pay its way into a future card-sharing arrangement with Chase-dominated Marriott Rewards. If you're looking at maximizing your return, make sure you've milked the acquisition bonuses from the existing Amex SPG card as well as Chase's Marriott Rewards and Ritz-Carlton cards. Then jump on any new Amex or Chase card when it is introduced.
CHASING A COMPANION
The Holy Grail for Southwest flyers is the Companion Pass, which permits you to take a friend or family member along for free. In recent years, Southwest has reduced the ways you can accumulate the points you need to score a Companion Pass. But credit card spend remains--as does the card acquisition bonus. Chase temporarily has bumped up the acquisition bonus on the three Southwest-branded cards it issues. Right now you can score 50,000 or 60,000 points. That's around halfway to what you'd need in 2017 to grab a Companion Pass in 2018.
Like most of us, I think of credit cards as financial vehicles. We spend on them and the perks are mostly financial. We use them to offset airline fees, obviate the need to pay for airport lounge entry. But as cards change and second-tier credit card providers elbow their way onto the playing field, there are some quirky perks to be had.
The newish Cathay Pacific Visa Signature Card is an example. Issued by Synchrony Bank, a former subsidiary of GE, the card has an improved acquisition bonus of 35,000 Asia Miles and waives the $95 first-year fee. It has the usual spending perks, but also a curveball: 1.5 miles per dollar spent on purchases made outside the United States. That's a nice earnings "accelerator" if you buy lots of non-travel goods overseas. Another possibly useful quirk: free Green Level status in the Marco Polo Club. The Club, which usually costs $100 to join, offers a spread of interesting options not offered by U.S. carriers. It's worth examining if you travel frequently to Asia.
Closer to home, I found a perk I didn't know I had with the Amex Platinum Card: free roadside assistance service. When my car's battery died during the nasty cold snap earlier this month, I did what I usually do: Call AAA. The response time: four hours. When I first called, they promised a two-hour wait. They didn't show and when I called again, they said it would be an additional two hours because I was at home and not a priority. Annoyed, I vaguely recalled the Amex benefit. It arranged for a jump in less than an hour.
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