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

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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What cards were withdrawn on 6th November?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 overnight?

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 from a credit card?

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 pointsI 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.

(Want to earn more miles and points from credit cards?  Click here to visit our dedicated airline and hotel travel credit cards page or use the ‘Credit Cards Update’ link in the menu bar at the top of the page.)

Aer Lingus and Avios Part 3 - I try US pre-clearance in Dublin and the '51st and Green' lounge
Aer Lingus launches new Seattle route - and how to redeem Avios with minimal taxes
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Comments

  1. Jimmyjimmy says:

    What do we think is going to happen to the Mbna cards for existing card holders? I have the AA and Utd versions primarily for extending expiry dates.
    J

  2. Slightly OT, but I can’t seem to find the answer anywhere (especially now that the card has been withdrawn) – I finally got my premium economy upgrade voucher through from my VS black card. How long before it expires, and do I have to just book, or fly the outbound journey before the expiry date?
    Thanks all,
    Cat

    • It’s valid for 12 months…. just need to book within 12 months of issue of the voucher. Can fly anytime!

    • About to get mine soon aswell, IIRC just need to book by expiry date, so in practice you should be able to use it by Nov 2018 for a flight returning by Oct 2019.

  3. So I find the outlook a little depressing …

    Im a middle class professional working in consultancy with a salery in the mid-£50k, mortgage etc.

    My work does not require me to travel by air so will never be able to accrue airmiles through regular flying. Credit cards were my only answer.

    I got into this hobby about 2 years ago. It’s gone well. I was able to collect enough points for 2x Rtn Virgin Upper class flights to LAX and currently have a balance of 260,000 Virgin FC miles and 245,000 Avios.

    So there is some immediate questions I have.

    I am the holder of the following cards:
    – Virgin Black
    – BA Premuim
    – Amex Gold Reward

    As the first of those cards no longer exists and we assume that the replacement might not be so generous, should I use it for all it’s worth until it expires in 2022? Especially given the recent merger with Air France/KLM which may increase the value/use of my Virgin Miles!?

    – do I take out a LLyods card which based on current news could also be at risk?! Take advantage whilst I can?

    Thoughts and comments welcome

    • lloyds wontbgetnyou a bonus.. Good for upgrade voucher if you use MasterCard a lot. Or foreign spend. Make sure you continue to churn the BAPP and gold cards tho ..seems you can use the 241, so you have a churning partner. Aim for an F 241 redemption to Asia eg KUL or HKG, and have a blast. Or use your upgrade to NYC J…enjoy them when you can.

      • So a few additional questions:

        – I have a BA 241 voucher but I’m pretty sure I’ll lose it if I cancel my card for churning purposses?!

        – Can you churn the LLyods Avios cards?

        …you are correct, churn is the way, but in this current state of play, there’s nothing to say that your card will still be around in 6 months time and then you’ve lost out!

        • No, no

        • It has always been my policy never to churn my main bread and butter earning cards. (Or where I want the long term relationship).

          Having enjoyed the earning rates on the old Tesco mastercard and also the bmi diamond club credit cards for MANY YEARS after they were withdrawn to new applicants, but before their earning was enhanced or cancelled it is a policy that has done me well.

          Similarly I don’t personally churn Amex MR, holding the Plat indefinitely. This is also because Amex MR are one of my ‘reserve currencies’, so I’d always be sitting on some.

    • Just to highlight that the expiry date on the card means nothing – they could close it much earlier than that!

  4. Yes!

  5. The_real_a says:

    Yes non of the three you mention are MR cards so they dont effect you 6 months quarenteen period.

  6. andrew porwol says:

    Surely another possibility is a card targeting the small business / self employed market as the interchange fees for business cards aren’t affected by the 0.3% cap?

    • The reverse of that is that we small businesses may simply start refusing to take cards where we don’t benefit from any cap on interchange fees.

      I currently pay <0.6% for some credit cards but 1.9% for Amex. I don't publicise that we take Amex and our volumes are small but were it to rise significantly, in a world where mastercard and Visa fees have fallen from circa 1.2% a few years ago to roughly half that now, then Amex would have to go.

      Equally, we may look for a way to decline World cards or any others which cost too much.

      • Talay

        How you going to police refusing the World cards? Has your card transaction issuer provided any suggestions or solutions?

        I’m paying 1.99% for Amex and 2.18% for Business Mastercards such as Curve, then down to 0.38% on some bank cards.

        • the real harry1 says:

          presumably Talay will accept Amex once the potential customer says he doesn’t have any other cards, since Talay’s margin will be [say] 20% & he doesn’t want to lose a sale

        • If it was an online transaction through an online store you could identify the cards before sending the data to the processor similar to what HMRC does however what is actually entered on the gateway can’t be accessed by your site unless you are storing the data which I think would be very rare. This may explain why people can enter the details of a cheaper card on the HMRC site and then use another card…. shame its ending in Jan.

          For offline in person transactions it maybe possible for the POS software to identify the transactions but unless its already included it would likely be a pain to get implemented.

      • andrew porwol says:

        I agree with that, and as a retailer we have virtually no premium credit cards used. From our point of view though, whilst the charge for credit cards has fallen, Visa debit (which accounts for half our card turnover) has gone from a fixed fee of 11p to 0.4%, as it is subject to the interchange fee now, so the net result of the EU intervention hasn’t reduced our costs at all. What the banks give with one hand, they taketh with the other!

  7. RussellH says:

    I do not see any change. I have an SPG Amex and an Amex Gold Credit Card. Clicking on the ‘Recommend friends and earn rewards menu, on the home screen for either card takes me to an offer to recommend SPG only.

  8. Hmm. I agree that the landing page for those referred has changed – it now offers a menu at the bottom to pick any card you like! Which referral link you give changes which one is initially displayed, but picking any of the others certainly still has the text ‘you have been referred for’ in it.

    However the T&Cs of the referral programme still say:
    You must have a Nectar Credit Card Account to receive bonus points.
    You must have a Starwood Preferred Guest Credit Card Account to receive bonus Starpoints.
    You must have a Platinum Card Account to receive bonus points.
    (as examples)

    Of course that could just mean you need to still be holding the card you referred from to receive the referral points, and they would just convert across the bonus to that card ‘currency’ regardless of which one is then picked.

    Unless Rob has any contacts at Amex that can help with this, perhaps we just need to see what happens when (for example) a Plat cardholders refers a friend who then opts for the SPG card. It would seem a bit harsh if you received nothing for doing this given the person being referred seems free to pick and choose…

  9. You must be Bill Gates Talay 🙂

    ZRH-SIN = 85,000 Singapore airlines Kris flyer miles plus 26 quid in first per person.
    DME-SIN = 85,000 Singapore airlines Kris Flyer miles plus 12 quid in biz saver per person.

    • Is this regular redemption numbers or a sale?

      I know absolutely zero about Kris flyer miles.

    • Cate, where are you seeing those prices and points. Can’t see it in their new award chart.
      Thanks

    • @Darren and jtz – you need to log in to Singapore’s own website on the book flights page, choose rewards, pick a date and search. Plenty of availability for biz savers if you look far enough. First is tight though. If you’re looking for a cheap point redemption just to try out the new A380 suite and you’re in the area, checkout SIN-HKG for 37,500 per person plus 18 quid.

      • Is the new Suite going to be on that route though? I thought it was just on SIN-SYD initially? (with possibly SIN-LHR from March)…

    • Cate, thanks for your help on searching krisflyer, but I am seeing 115,000 for first from ZRH to SIN?
      Thanks

      • Are you looking at saver pricing? If you look at the PDF I linked to above you’ll see it’s definitely 85k…

  10. Deal still on via Iberia until Friday.

  11. OT
    I have just discovered that One4All gift cards can no longer be used on Amazon https://www.one4allgiftcard.co.uk/amazon
    They can, however, still be used in most major retailers.
    Hope that we have the usual December ‘get £5 back on £10 spend at Post Office’ offer on Amex.

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