What is the future of airline credit cards in the UK?

I wrote this article last week for potential use in another publication.  It seemed a shame not to run it on here too.  Whilst very little in this article will be new to regular readers, it does pull together a lot of news and ideas from various different HfP articles into one place for the first time.

On Monday 6th November, all eight UK airline credit cards issued by MBNA were closed to new applicants without any warning.  This meant that 75% of the UK airline credit cards disappeared overnight to new applicants.

This article explains:

What cards have gone
Why it happened
What cards consumers should focus on now if they want to collect airline miles
How I believe the airline and broader loyalty credit card sector in the UK should evolve if it is to survive the world of 0.3% interchange fees

What cards were withdrawn on 6th November?

These are the UK airline credit cards you can no longer apply for:

Lufthansa Miles & More
Emirates Skywards
Emirates Skywards Elite
Virgin Flying Club White
Virgin Flying Club Black
Etihad Guest
United Airlines MileagePlus
American Airlines AAdvantage

I know that the two Virgin Atlantic cards will return shortly under the Virgin Money banner. There are no confirmed plans for the other cards to return under a new issuer. 

I know that some early stage discussions are taking place with niche low-cost card issuers – there is an opportunity here for someone to come into the market and pick up these contracts if they can make the numbers work.

Why did 80% of the UK airline credit card market disappear?

Today, the only UK airline credit cards still open to new applications are the two British Airways Avios credit cards (one from American Express, one from Lloyds) and the very small Flybe credit card.

Two linked events caused this. The core driver was the European Union cap on interchange fees charged by Visa and Mastercard.

The EU believed that Visa and Mastercard were operating an oligopoly. It claimed, arguably correctly, that the two companies were exploiting their oligopoly on payment processing by charging disproportionate fees, especially as all of the risk was taken by the retailer (in case of chargebacks) and the card issuer (in case of bad debts).

New rules brought in last year restricted the fee that payment processors could charge retailers for accepting credit cards to 0.3%. It is very difficult to run a successful mileage card on this basis – if you earn 0.3p per £1 spent, you cannot pay an airline 0.5p to 1p per £1 to buy the cardholder an air mile!

There is interest income, but airline cards tend to be held by wealthier people who do not run a balance. The only other source of income is the 3% foreign exchange fee, but increased awareness of specialist 0% FX fee cards such as Halifax Clarity has cut this income stream too.

How did American Express get dragged into this?

The second driver was American Express being caught up in the 0.3% cap, even though it was originally expected to be exempt.

In theory, American Express should have nothing to do with this. Amex is vertically integrated and there is no intermediary sitting between the retailer and Amex who is adding additional fees. A retailer was free to either work with Amex, paying the fees they requested, or not.

There was no doubt that American Express could no longer issue franchised cards in the UK as, under the convoluted EU interchange rules, they were capped at 0.3%. This meant that MBNA, Lloyds, TSB and Barclays had to stop issuing Amex-branded products. (The Lloyds Avios Amex is still being issued but the end is nigh.)

Weirdly, even ‘directly issued’ Amex cards are being capped

Back in July, the EU’s Advocate General ruled against an American Express appeal that it should not have fees on its co-brand cards capped.

This primarily impacts the British Airways American Express card. With over £1 billion of monthly billings, it is by far the most successful travel credit card in the UK.

This Head for Points article goes into this ruling in more detail.

The bottom line is that unless the EU court throws out the preliminary view of the Advocate General – which is rare – the British Airways Amex will be at risk too. The current generous benefits package cannot be funded if merchant fees are cut from 1.75% to 0.3%.

The ONLY personal credit and charge cards which will remain outside the interchange fee cap are non co-branded Amex products – Gold, Green and Platinum.

What can customers do if they still want to collect airline miles?

The British Airways American Express credit cards, and the Lloyds Avios Rewards credit cards, are – for now – still available.

ALL other airline credit cards have been closed, apart from the small Flybe card.  Some may return next year in a different guise – I will discuss in a minute what that guise may be.

You can still earn airline miles via American Express Membership Rewards points.  I recommend American Express Preferred Rewards Gold as the best choice. This card is free for the first year, comes with a 20,000 points sign-up bonus and comes with two free airport lounge passes.

Amex points can be transferred at 1:1 into three of the airlines whose cards were closed – Virgin Atlantic, Etihad and Emirates.

Anyone wanting Lufthansa, United or American Airlines miles should take the Starwood Preferred Guest American Express card instead. Whilst this is a hotel credit card, the points transfer into almost 30 airline schemes at 1:1 (United is 2:1). The card does have a £75 annual fee.

How will this change the face of travel loyalty cards?

For years, credit cards have been a licence to print money for airline loyalty schemes in the UK. It is believed that 2/3rd of income from the sale of miles to third parties comes from financial services companies.

It’s not just about money though.

Co-brand credit cards are an amazing marketing tool. The value to British Airways of having you see their brand every time you pay for something is HUGE.

Going forwards, these cards will not be able to offer huge numbers of miles per £1 spent. So, what now?

I have been arguing for a while that I expect airline status to become available via a UK credit card in the medium term. Here are two possible scenarios I envisage could happen (these examples are both made up, of course):

Would you pay £495 for a new British Airways Elite American Express card which came with BA Silver status, giving you airport lounge access, fast track security and priority boarding, potentially with a high spending threshold?

Would you pay £195 for the British Airways Premium Plus if the earning rate was cut to 1 Avios per £1 but you also received free British Airways Bronze status? This would give you fast track security and free seat selection.

This is the future, I believe. A future where co-brand partners need to bring more to the table if they want to keep their logo in your wallet as a marketing tool.

For years the airlines have had it all their own way. They found a way of placing their logo in a prominent position – on a payment card – where you would see it every day. And, instead of actually paying for this exposure, they were making money, lots of money, from it.

Those days are gone. MBNA’s actions in culling eight airline cards overnight proved it. It would be a foolhardy loyalty programme that decided to walk away from such an amazing marketing tool though, even if they have to actually spend money – instead of making money – to achieve it.

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Want to earn more points from credit cards? – April 2024 update

If you are looking to apply for a new credit card, here are our top recommendations based on the current sign-up bonuses.

In February 2022, Barclaycard launched two exciting new Barclaycard Avios Mastercard cards with a bonus of up to 25,000 Avios. You can apply here.

You qualify for the bonus on these cards even if you have a British Airways American Express card:

You can see our full directory of all UK cards which earn airline or hotel points here. Here are the best of the other deals currently available.

Earning miles and points from small business cards

If you are a sole trader or run a small company, you may also want to check out these offers:

SPECIAL OFFER: Until 12th May 2024, the Capital on Tap Business Rewards Visa card is offering a bonus of 30,000 points, convertible into 30,000 Avios. You must have a Limited Company to apply. Click here to learn more and click here to apply.

For a non-American Express option, we also recommend the Barclaycard Select Cashback card for sole traders and small businesses. It is FREE and you receive 1% cashback on your spending.