Maximizing the value of payment cards. Panel Discussion 1 April 2004

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2 Maximizing the value of payment cards Panel Discussion 1 April 2004

3 This presentation will introduce our firm and provide some context to our panel discussion > Edgar, Dunn & Company (EDC) was founded in 1978, and provides our clients with > Deep expertise in financial services with a global perspective > Offices in the USA, UK and Australia > Studies across 30 countries > Unique insights into consumer payment preferences (Payment Dynamics) > We will be sharing some insights about > The value of cobrand cards for airlines > Some fundamental changes happening in the cards industry, and the impact it may have on airline card programs

4 This presentation will provide you with a starting point to understand some of the significant trends in card payments > This presentation includes > Definitions of cobrand and loyalty cards > Role that an airline can play as a > Merchant accepting cards > Supplier selling frequent flyer points to issuing banks > Cobrand partner > High-level findings for US consumer preferences and behavior > The impact of these findings for airlines Please ask us your specific questions either during this presentation, or during the panel discussion

5 At first, some definitions to avoid any confusion > What is a cobrand card? > Typically a Visa or MasterCard credit card issued by a bank (e.g., Bank One) and that can be used at millions of merchants > Branded with the partner s name and logo (e.g., United Airlines) > Typically including a loyalty program (e.g., frequent flyer points) related to the level of card spend > What is a loyalty card? > Payment card issued by a bank that provides (essentially) the same rewards as traditional cobrand card but without a connection to a non-bank partner

6 Why should airlines care about payment cards? First, they are a predominant form of payments for airlines (as merchants) > Airlines generated globally about US$95bn of card billings in 2002 > BSP billings of $32bn > ARC billings of $53bn > Estimated direct sales of $10bn (source: IATA) $10 $8 $52.6 $6 $4 $4.7 $4.0 $3.0 $2 $1.7 $1.6 $1.6 $1.5 $1.4 $0 USA Germany Canada UK Spain Japan Korea Australia France

7 Second, airlines can derive significant revenues by selling frequent flyer points to credit card issuers > A large number of cobrand cards offer frequent flyer points to their cardholders as a key component of their loyalty program > Typically an airline would sell its frequent flyer points (e.g., 1 ct per point) to the issuer of the cobrand card > In cases like Australia, the sale of frequent flyer points can generate a significant amount of net income for an airline > Qantas is the only major airline in Australia selling its frequent flyer points to a large number of Australian credit card issuers > Sales of frequent flyer points have generated in excess of AUD 400m in 2002 revenue for Qantas, resulting in over 30% of the total airline EBIT (source: Macquarie Bank analyst report May 2002)

8 Finally, airlines can derive benefits from offering cobrand cards to their customers > Cobrand cards can offer a number of benefits to the partner (such as the airline) > Increased loyalty and repeat purchase from high value customers (e.g., business travelers) > Financial benefits depending on the commercial arrangements with the issuing bank > Revenue share including > Account opening fee (level driven by the amount of marketing activities funded by the partner) > Percentage of retail spend (and more rarely of net interest income) > Annual fee for active accounts > Lower Merchant Service Fee / Discount Rate (if the issuing bank is also the airline s acquiring bank) on airline tickets purchased with its cobrand card > Access to cardholder data and targeted communications (e.g., selective statement messaging) > Brand exposure and reinforcement

9 EDC s PaymentDynamics 2004 Preferred Card Study thoroughly explored what s in the consumer s wallet, what s being used, what s preferred and the reasons for each Study Segments Total Debit Credit/Charge Cobrand Standard Cobrand Loyalty Affinity Retail/PL Smart Standard Air Auto Financial Hotel Internet Oil/Gas Retail Telecom Other Part I Wallet Overview 6,525 Consumers 26,695 Cards Subject Summary Ownership Usage Primary and secondary card preferences Consumer demographics Part II Preferred Cards Attitudes & Behaviors 3,183 Consumers Subject Summary Card Acquisition & Cancelled, Reduced Usage Loyalty Cards Would NOT Give Up Usage Reasons and locations Rewards Valued Attributes Partner Impact and Benefit Communication Methods Opinions About Payment Cards About You and Your Interests

10 There are some significant trends that all airlines should consider > Preferred card share is shifting in the US, with loyalty cards the fastest growing category > Yet, airline cobrand cards continue to increase share within the cobrand category > But, importantly the internal churn within both the preferred air cobrand and the preferred loyalty groups favors loyalty cards Preferred Card Market Share Loyalty cardholders are attriting ~ 40% more air cobrand cards than they are adding Air cobrand cardholders are adding ~ 140% more loyalty cards than they are attriting 60% 50% 40% 30% 20% 10% 0% % Share within Cobrand Standard Cobrand Loyalty Affinity Airline Cobrand

11 The reason for acquiring new cards and for choosing to use a specific card are similar between cobrand and loyalty preferred cardholders Reasons- New Card Acquisition Preferred Card Usage Decision Brand/Mktng 6% 5% 8% 9% 10% 15% 5% 11% Brand/Mktng Issuer Svc/Features Rewards 41% 44% 74% 63% Issuer Svc/Features Rewards Pricing 48% 39% Pricing 12% 11% Loyalty Group Cobrand Group Loyalty Group Cobrand Group

12 Air cobrand cards are important to their cardholders > Air cobrand cards provide important additional value to the cardholders > 42% view the airline as responsible, 31% view both the issuer and the airline as responsible for the additional value > 95% view miles as the most important > 72% view special treatment as most important > So what? > 95% report the rewards and features prompt the use the card more than other cards > The mean increase in the purchase of the airlines services was 74% > What problems have the cobrand air cardholders had? > Customer service & fee-based typically related to the issuer > 79% report the air cobrand card has met expectations, highest overall rating by any segment

13 But, while the consumer perception of partner value is high overall it becomes very limited when rewards are held aside 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Does partner provide unique value? YES Cobrand Group Affinity Group Smart Group 70% 60% 50% 40% 30% 20% 10% 0% Does partner card provide unique value (rewards aside)? Cobrand Group Affinity Group Smart Group Yes, A Lot Yes, A Little No

14 What does all this mean to the airlines? The Challenge Airline s previously unassailable position in payment reward cards is threatened, potentially reducing the airline s > Direct revenue from the card programs > Account opening fees > Royalty from spending > Account renewal fees > Consequential sales, brand and customer relationship benefits The Opportunity > Increase the program s competitive differentiation using the same assets that originally built the programs - - the airline s > Brand and relationship power > Customer contact frequency > Creative recognition of valuable customers

15 What s next? > Panel to discuss key business issues related to payment cards for airlines > Should an airline offer or continue to offer cobrand cards? > Untapped opportunities > Potential risks > Who should be targeted with these cards? > Consumers > Corporate clients > How does an airline introduce a new program or strengthen an existing program given card market changes? > How can an airline sell more miles to issuing banks? > What do merchant fees cover and how can airlines pay lower fees? > How can the airline s payments strategy result in higher loyalty?

16 Please contact us after this session if you have any other questions > Company Web site > > For any questions > > >