Higher Oil Prices = Lower Airline Card Bonuses?

On a somewhat regular basis, employees and ex-employees of banks email Credit Card Forum to tip us off about something. Sometimes the tips are shocking, other times they’re nothing but what I call “no duh” information.

Then there are some tips, like the one I received today, that can be quite disappointing. According to an employee from a top 5 bank (whom at her request shall remain anonymous) the signup promotions for airline credit cards will be scaled back if fuel prices exceed a certain threshold. Reportedly the offers only make sense for them when airfare costs are below a given point. Otherwise the value of the free miles goes up, and hence, they become too expensive for the airline and bank to continue offering.

Is there really a correlation?

So far in 2011 we have seen the exact opposite of this. Thanks to the chaos in the Middle East, fuel prices have surged, but instead of airline promos being scaled down, they are becoming more generous! For example, Capital One recently ran the “Match My Miles Challenge” which gave up to 100k bonus miles with signup (that’s a staggering value of $1,000). This promotion ran until giving out a total of a billion miles, which unfortunately, has already been reached. However not to be outdone, Chase (whom my site is an affiliate of) is now running a 100k miles promo for the British Airways credit card, which is enough for 2 round trip flights to Europe. Offers like these clearly seem to suggest that oil and airfare promos are not inversely correlated.

On the other hand, during the past few months there are some airline programs which are obviously positioning themselves to accommodate rising fuel costs. The new Southwest Rapid Rewards program, which went into effect March 1st, totally changed the way that free flights are earned… awards are now based upon how much you spend, not how many times you fly. As far as their card is concerned, the value/cost of the bonus will be same no matter which way fuel prices go. Why? Because the new Chase Southwest Airlines credit card gives a set number of points for the promotion. Points which convert to a dollar value towards airfare (the exact conversion varies between their 3 airfare classes; Wanna Get Away, Anytime, and Business Select). That means Chase & Southwest won’t have to worry about wild price swings in oil affecting their profitability on the card program.

What’s next?

Will oil continue to hover between $100 and $110? Will it climb to the prices we saw in summer ’08 (like the record setting $147.27) or drop back down to summer 2010 levels (in the neighbourhood of $80). No one has a crystal ball but given the fragile state of the economy, my guess would be that oil will remain close to current levels – and according to the aforementioned insider – that would mean airline credit card offers should more or less stay the same. But if I’m wrong, if the Middle East destabilizes further or just plain old speculation drives up oil prices, then that could be bad news for card bonuses.

Either way, I would not be the least bit surprised if we continue to see more airlines re-vamp their frequent flyer programs. Not necessarily this year, but certainly within the next five years. From a business perspective, the way many are setup now are quite risky when you think about it. If an airline promises a free domestic flight for a flat rate of 25,000 or 50,000 miles, obviously the cost associated with such varies drastically when oil is at $80 vs. $147. I think we will continue to see more like Southwest Airlines and fewer of the fixed-rated redemption programs.  

Disclosure: As mentioned above, Credit Card Forum is a Chase affiliate and therefore advertises their Southwest and British Airways credit cards.