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New credit card could converge loyalty programmes and ancillary revenue

Is credit card technology going to drive the convergence of two airline financial trends, loyalty and ancillary revenue? New York start-up Dynamics Inc. is offering a credit card in which consumers, prior to swiping, press one of two buttons to determine which account the purchase should come from: checking or savings, credit or savings and even credit or loyalty points. It is not pie in the sky: Citi, the world's largest card issuer, has a trial with Dynamics' 'Redemption' card. The question is if airlines, as they increase ancillary offerings, will let passengers use this card to pay in-flight for a Coke or watch the latest Harry Potter with their frequent flyer points.

Dyanmics' 'Redemption' Card

The idea originated from Dynamics' reckoning the US would not be able to switch its card processing method from the traditional magnetic swipe to the alternative chip & PIN or near-field communication, and so created a hybrid: pressing the different account buttons sends a signal to programme the magnetic strip, based on what account the card will be used for. What was planned as an alternative for the US could be used globally for redeeming loyalty points, the APEX Association suggested in a blog with this video, below, of the card:

Passengers may like the ease and greater chances to use their frequent flyer points with this card (if not enough points are available, the purchase is deducted as a regular cash transaction). But using this type of card would require fundamental changes in airline frequent flyer programmes (FFP), which should be revenue, not cost, centres. FFPs are based not on earning rewards but the possibility to earn rewards; various estimates suggest upwards of a third of all points earned may never be redeemed. Those that are redeemed may still come with the airline receiving cash revenue: ticketing fees, redemption fees, points and cash options.

See related feature from CAPA's journal publication, Airline LeaderThe airline frequent flyer programme: for love and money

Using this type of card would require a shift in the time between earning and burning points. The FFP objective is straight forward: have customers return multiple times, earning points on each occasion, and eventually reach a reward. In the standard US FFP rubric, the basic flying reward starts at 25,000 miles. The typical member would not earn that many miles in a single trip. Mileage redemption values are based around USD0.2 cents per miles in the US, making a USD7 sandwich possibly redeemable for 350 miles. American Airlines' average flight last year, according to regulatory filings, was 810 miles. With members earning at least one mile per mile flown, a passenger could have two free sandwiches per flight using miles they stood a good a chance of never redeeming, or incurring fees if they did. While that redemption is tied to a credit card that buys miles from airlines, those cash-for-miles agreements are based on assumed levels of distant redemption and some miles never being redeemed. Besides, an aircraft cabin is a captive audience, and if most passengers wanted a sandwich, they would purchase it whether or not miles were available as the currency.

The economics could change if the reward values were inflated: 5000 miles for chicken on rye. Then there would have to be a calculation of demand and profit versus the cost to use the redemption card and have the supporting infrastructure. It is early days for this concept, and successfully leveraging it in an airline environment remains to be seen, but to its advantage is that all airline models are adding ancillaries and LCCs like AirAsia are creating loyalty programmes.