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Few extra charges have inspired as much hatred as the recent checked baggage fee that most airlines now impose. But in a strange, roundabout way, airlines are now using those fees to make their frequent-flyer rewards credit cards more valuable, which is good news not just for the airlines themselves but for the banks that stand behind them.
Airline rewards cards that offer free frequent-flier miles have been in danger of becoming irrelevant, as other cards have moved to simpler cash-back offers that in many cases are more valuable. With air miles becoming harder to use for free travel, the sure payoff of a cashback reward was attractive by comparison. By offering to waive fees to cardholders, though, airline rewards cards may suddenly move back to the top of the list for many travelers.
Turning anger into attraction
It's no secret that airlines have scampered over one another to cut costs and raise revenue. With charges for everything from food and snacks to in-flight Wi-Fi, airlines are doing whatever it takes to shore up their bottom lines. According to the International Air Transport Association, various ancillary fees now make up 12% of airline revenues and could amount to more than $58 billion once final 2010 results are tallied.
The latest available figures from the Bureau of Transportation Statistics show that Delta (NYSE: DAL ) took in the most fee revenue during the first three quarters of 2010 at $1.3 billion, with United Continental (NYSE: UAL ) combining for just more than $920 million and AMR's (NYSE: AMR ) American weighing in at $785 million.
Having established baggage and other fees as an apparently permanent entrenchment for travelers to deal with, many airlines are now using their branded credit cards as ways to get around those fees. The move could make what once looked like a bad bargain worth considering again.
Airline cards and you
Airline credit cards have appealed to miles-hungry consumers for a long time, but they've had their drawbacks. High annual fees combined with lofty redemption levels for using miles to get free travel make the cards a net loser for many people who don't spend enough on their cards to get sufficient numbers of rewards miles.
But the fees make it possible to offer extra deals that pay off immediately. Delta's card, for instance, waives the $25 first-bag fee for as many as 10 people traveling together, easily paying for its $95 annual fee in just two roundtrips for a single person. Continental offers reduced prices on entertainment packages, along with enough bonus miles when you sign up to get as many as two roundtrip tickets for travel within the U.S.
The moves are just the latest in a series of revamped airline rewards programs. Southwest (NYSE: LUV ) , which doesn't charge baggage fees, is changing its program and associated credit card effective March 1, moving to a point-based system that makes it easier to fly free on lower-cost flights. All these changes have reawakened interest in the programs; JetBlue (Nasdaq: JBLU ) reported 30% higher applications for its frequent-flier program since late 2009.
Of course, the banks that issue these credit cards should be happy about the increased interest. American Express (NYSE: AXP ) , JPMorgan Chase (NYSE: JPM ) , and Citigroup all work with airlines on branded credit cards.
Still, those banks shouldn't count on smart cardholders to act in a way that boosts their revenue from airline cards. As people get cards in order to avoid fees rather than to earn miles, there's less incentive to use the cards for anything other than travel-related charges. That would make the cards a net loser for airlines and banks alike.
For now, though, it appears the incentives are on your side if you do a fair amount of traveling. With the added perks, airline cards may now make you more money than you'll spend on them. Yet even though they'll be very valuable when you fly, just remember that having a cashback card on the side may be a better bet for your everyday spending.
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