IAG, the parent company of British Airways, announced this morning that it has extended its credit card deal with American Express.
In return, American Express has agreed to pay IAG £750 million. A ‘significant part’ of the £750 million is pre-payment for Avios points which will be used for British Airways credit card rewards and via Membership Rewards redemptions.
This deal is not unexpected. We have covered several similar deals across the industry recently – see, for example, Hilton’s $1 billion deal with American Express.
It is a win for both sides, as long as the airline or hotel group isn’t expected to implode:
the credit card partner gets to extend its existing relationship on softer terms than could be expected in normal market conditions
the airline or hotel group gets a large upfront cash payment to ease its liquidity problems
The deal appears to have been brewing for a while. Back in March, IAG’s Chief Executive Willie Walsh said on a telephone call with analysts that Mastercard was very keen to do a global deal with the group. This appears to have been a signal to American Express that it could have problems if it didn’t get its cheque book out.
American Express has also had its partner problems in recent years, primarily over the loss of the global Costco credit card contract. Each loss leads to a hit to the American Express share price and it has got very nervous about losing additional partnerships. IAG was in a very strong position to extract a good deal.
American Express has paid for a large percentage of the contract in advance. The BA Amex cards do over £1 billion per month in billings. Let’s assume £1.25 billion x an average of 1.25 Avios per £1 x 0.8p per Avios. This would see Amex paying IAG £12.5 million per month, plus whatever would normally be paid for Membership Rewards transfers and BA Amex sign-up bonuses – let’s assume a total of £175 million per year. This would mean that Amex has paid for four years of Avios upfront.
Why did IAG sign a new American Express deal?
What is more interesting is why IAG wanted to do this, apart from the fact that the £750 million will come in handy.
The bottom line is that Amex could pay and Mastercard probably could not. Whilst Mastercard could offer a global deal, the problem is that Mastercard is not a card issuer. British Airways would need to agree a separate deal with a separate bank for each country where it issues cards. I doubt that Mastercard would be willing to pay £750 million upfront without any guarantee that it would get the money back from whatever banks ended up issuing the cards.
Sticking with Amex does cause strategic issues for BA, however.
The previous American Express contract was meant to cover all IAG airlines. Since it was signed, however, Iberia, Vueling and Aer Lingus have all launched Visa / Mastercard products. In the new world of capped interchange fees and – outside the UK – low American Express acceptance, it turned out that Amex didn’t have a lot to offer.
Let’s turn to the UK. Avios has a strategic problem here. Marketing people like to talk about ‘share of wallet’. When talking about credit cards, this is a literal as well as a metaphorical issue.
You cannot survive in the UK with just an American Express card in your pocket. This means that you are obliged to hold a Visa or Mastercard on top. With the Lloyds Bank Avios cards closed to new applicants, this is an opportunity for Virgin Atlantic or another travel group to get themselves into your wallet or purse alongside your British Airways American Express card.
It isn’t clear if this new American Express deal includes a carve-out to allow an Avios-branded Visa or Mastercard via another issuer. There is a workaround at present, as used by Capital On Tap, HSBC, Tesco and NatWest, where a Visa or Mastercard can offer points which are not Avios but which convert to Avios.
This isn’t as effective, however. Capital On Tap, HSBC, Tesco and NatWest cannot put the Avios logo on their cards, and there are strict marketing rules on how they can be advertised. Capital On Tap cannot say ‘get our card and earn Avios’ – it has to be ‘get our card and earn Capital On Tap points which can be converted to Avios’ which isn’t anywhere near as snappy.
In general, however, this agreement is good news for HFP readers. It gives IAG a financial shot in the arm and almost certainly secures the future of the British Airways American Express 2-4-1 voucher for another 5-7 years. It will also encourage other travel brands to continue to compete for the Visa / Mastercard slot in your wallet.
Here is the full announcement issued to the Stock Exchange this morning:
IAG and American Express extend global partnership
International Airlines Group (IAG) announces that it has signed a multi-year renewal extending its worldwide commercial partnership with American Express.
Under the agreements American Express will make a payment to IAG Loyalty of approximately £750 million, a significant part of which is a pre-purchase of Avios points that American Express will utilise in the UK and world-wide for its British Airways co-branded cards and Membership Rewards Programme.
IAG Loyalty is a subsidiary of International Airlines Group that offers a wide range of services to IAG airlines and business-to-business clients. These include the Avios reward currency for the British Airways Executive Club, Iberia Plus, Aer Club and Vueling Club customer programmes and loyalty management tools.
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