As recently as April 2019, I had some nice things to say about Delta Airlines. But CEO Ed Bastian soured me on the company. Given that a trusted travel source tells me that Delta is the industry leader on average in flight cancellations, I imagine more people have come around to my way of thinking. Among travel professionals, Delta stands for “Doesn’t Ever Leave the Airport.”
Bastian angered me last year with his preening on national television expressing his displeasure about Georgia’s proposed election law. I care not one iota about Georgia’s elections laws, but I’m opposed to CEOs taking political stances and feigning their wokeness, even for positions I possibly support. Bastian obviously cares little about his employees; if he did, he’d quietly relocate Delta’s Atlanta headquarters employees on the midnight trains out of Georgia. I take gubernatorial aspirant Stacey Abrams at her word that Georgia is “the worst state in the country to live.”
My anger with Bastian turned to rage two weeks ago upon reading this story in the Wall Street Journal quoting him as saying the airline industry was caught “off guard” by the pandemic and “stretched ourselves to try and grab and secure as much of the revenue pie as we could” when business picked up. Maybe if Bastian had focused on his business instead of opining on Georgia politics, he wouldn’t have got caught off guard.
On any given day, hundreds of U.S. flights are cancelled or delayed because the airlines are still focused on savoring as much “revenue pie” as they can. The airlines know full well they don’t have the resources to fulfill all their sold ticket obligations, but it’s only until the last minute that they know just how many planes they can put in the sky. If you and I continuously sold a product across state lines we knowingly didn’t have, the FBI would be banging down our doors at dawn and conspicuously hauling us away in front of our neighbors.
The Biden Administration is nonplussed by the chaos the traveling public is experiencing. Secretary of Transportation and presidential aspirant Pete Buttigieg is on record as saying the aggravation U.S. airlines are heaping on the traveling public will continue into the Thanksgiving and Christmas holiday season.
“I don’t think this is going to be resolved overnight,” Buttigieg told the Desert News last week.
Americans were once famed for a “rugged individualism” so fierce it sparked a revolution. The defiant spirit has diminished over the centuries, but hopefully there are still some Americans with some fight in them. In the tradition of the Massachusetts colonists responsible for the “Boston Tea Party” protesting taxation tyranny, here’s how to oppose the tyranny of the U.S. airline cartel:
Cancel your airline mileage rewards credit cards.
In a moment I’ll explain why canceling your airline credit cards will mean more personal “revenue pie” for you, and less for Bastian and Scott Kirby and Robert Isom, respectively the CEOs of United, American. But first allow me to explain the excruciating personal financial pain Bastian, Kirby, and Isom would experience if the public got wise to the con of their airline credit cards.
As reported by New York Times columnist Ron Lieber, Delta disclosed in a securities filing two years ago the essence of its American Express issued credit card is “the fundamental aspiration of earning a free flight.” Delta readily admitted that it can exploit that aspiration by managing costs and “by modifying inventory levels and value.”
For those who still require demonstrations on how to fasten your seatbelts, Lieber explained the meaning of Delta’s disclosure in simpler terms: “In other words, the airline can raise the prices of trips and upgrades, in miles, at any time. And it believes it can do so with relative impunity from a passenger revolt or from intense protest by American Express cardholders.”
United’s boast on its hold on the company’s credit card holders rivals Delta’s. United said in a securities filing that it can “nimbly” control how its doles out redemption awards on “peak days,” meaning the times when travelers most want to use them.
American pioneered the affinity rewards program and credit card; rest assured, the airline’s credit card portfolio is also extraordinarily profitable and valuable.
Who’s the loser?
How valuable are the credit card businesses to the airlines?
Delta said its card holders made up 22 percent of the balances carried in 2019 by holders of Amex’s traditional credit cards. United in 2020 valued its MileagePlus program at $21.9 billion, whereas Wall Street values the entire company at about $12 billion.
That Delta’s credit card holders are carrying balances underscores their financial illiteracy; airline credit cards carry considerably higher interest rate charges than cards offered directly by the banks themselves.
Lieber noted the superior benefits of a credit card offering a straight 2 percent cash back on every purchase. That’s two cents for every dollar you spend, but the pennies add up if like me you charge everything, including the kitchen sink. Charging $50,000 annually puts $1,000 back into your pocket.
Lieber in his column walked readers through the math, but here’s all you need to know. He said Ariana Arghandewal, the “the travel-mad points and miles editor of The Points Guy,” admitted that “the vast majority of travelers would be better served with cash-back cards.”
Let that sink in. An expert working for a publication focused on the ins and outs of airline rewards programs publicly acknowledged that most people would be better off ripping up their airline cards and opting for a 2-percent card.
Lieber’s missing analysis
To be clear, I was promoting the merits of 2 percent cash back cards over airline cards more than a decade ago, as this April 2010 column I wrote for Forbes confirms. The one flaw in Lieber’s column is that he ignored the cumulative savings of 2 percent cash back cards.
If any Forbes readers heeded my counsel, they would have accumulated $12,000 since my column was published if they charged $50,000 a year. Had they invested the money in Vanguard’s dividend growth ETF or some other income producing fund, the value would be even greater. (I’m hoping this commentary finds its way to IBD reporter Matt Krantz, who is a wizard with market analysis and could calculate various returns on $1,000 annual investments over a 12-year period.)
The credit card miles of several airlines, including Delta and United, never expire, which is a good thing since travelers on major routes have a better chance of getting hit by lightning these days than redeeming points for “free” tickets and upgrades. That means mileage rewards balances are piling up, making it even more unlikely that the redemption fairy will be sprinkling much pixie dust on Joe and Jane Schmoe travelers anytime soon. In the current environment, most people consider themselves lucky if their flight takes off or lands reasonably close to their scheduled departure and arrival times.
Just as there is no such thing as a free lunch, redeeming miles for points doesn’t get you a “free” ticket. The cost of the “free” ticket was factored into the price of the airline tickets you bought and the kickbacks the airlines receive on their affinity credit cards.
The skinny on 2 percent cards
Here is a link to a June column in NerdWallet featuring credit cards earning 2% cash back or more. Most of the recommendations are flawed.
The problem with 2 percent cash-back rewards cards is that they aren’t very profitable, so there’s no guarantee an issuer will continue with the benefit. I learned that the hard way.
Years ago, I signed up for a 2-percent cash back card from Bank of America issued through Charles Schwab. Bank of America subsequently discontinued the 2-percent benefit, and insultingly tried to convert me to some other card with considerably fewer benefits. I cancelled the card, but that hurt my credit rating. Most consumers don’t understand this, but when you cancel a credit card it adversely impacts your FICO credit rating because the percentage of available credit declines. The more credit you’ve utilized, the lower your score.
Wells Fargo recently introduced a 2-percent cash back card, but it could potentially be a teaser promotion to get you to sign up. I know it seems beyond belief that Wells could do something untoward to consumers.
Earlier, I signed up for the Barclaycard World Elite Arrival Plus 2-percent cash back card, which had great customer service in its initial years. Barclays has since offshored its credit card call centers. I could barely understand the person I spoke with, who couldn’t comprehend, let alone resolve, my recent issue. I’m canceling the card.
NerdWallet didn’t consider the quality of customer service in its recommendations, something increasingly important given the rise of identity theft and other fraud. I maintain that offshoring credit card call centers puts consumers at risk, which many issuers do. The FCC levied a $25 million fine against AT&T for identity theft at its Mexican, Columbia, and Filipino call centers, impacting 280,000 Americans. The fine was a pittance for a company the size of AT&T.
Citibank for years has offered a 2-percent cash back card, but it offshores its call centers. In my previous experience the bank’s customer service was atrocious.
For years I’ve held the Fidelity 2-percent cash back card and I’ve been extremely satisfied. Although the card is serviced by an outsourcing company, the reps I’ve dealt with were very well trained and based in the U.S. It’s obvious that to gain Fidelity’s business, the outsourcer committed to maintaining a very high level of service, sparing customers the pervasive “due to unexpectedly high call volumes” message and interminable wait times. There’s no annual fee for Fidelity’s card, and the cash backs I receive are automatically deposited into my checking account.
There you have it. Travelers who subsidize the major U.S. airlines paying for their bogus rewards credit cards need to suck it up if they don’t like current travel conditions. As long as Ed Bastian and his rival airline CEOs can continue to feast on their revenue pies, they have little financial incentive to make things better.