Finally, No-Fee Airline Credit Cards. Will They Matter?

Activities: Money & Currency, Tips and Resources
Author: Jason Sheftell

September 1, 2004 -- For the past few years, the United States airline industry continued to charge annual fees to its credit card holders who signed up for the get-one-mile-for-each-$1-spent frequent flyer mile programs. Not surprisingly, they lagged behind marketers in other industries such as retail, gasoline, hotels and entertainment companies like Disney. Finally, some major airlines are waking to the growing consumer interest in no-fee credit cards.

But is this a big deal? And if it is, how do you get one of these cards? An unbiased, non-commissioned report by IdeaWorks, a consulting company out of Shorewood, Wisconsin that researches consumer expectations and matches them with corporate development, recently released a study taking a close look at the no-fee airline credit card.

First, let's look at how the work and who exactly is making a profit. When you use your award-based credit card, the merchant or the owner of the store where you made your purchase is required to pay a small transaction or processing fee to the credit card company of approximately 1.5%. In order to make an award-type credit card such as a frequent flyer card worthwhile, the credit card company negotiates a payment fee that they pay the airlines. Typically, this amount comes to 70% of the 1.5%. The remaining 30% goes to the bank. Airlines also make money by charging the bank that issues the credit card for each mile contributed to the cardholder's frequent flyer account. The industry average comes in at usually around one cent per mile. This sounds like pennies if you're buying a $15 Nellie compact disc or a Rolling Stones Box Set. But what if the album goes platinum, or you buy a lot of airline tickets?

According to the IdeaWorks report, which can be found in its entirety at www.ideaworkscompany.com, the airline can make out like a bandit. One example the report cites uses the American Airline credit card program. With over 45 million AAdvantage members, say 3% of American's members hold an AAdvantage credit card and make monthly charges of $1,000. In this scenario, says the IdeaWorks report, American would receive $162 million from the bank each year for the purchase of frequent flyer miles at the before-mentioned rate of a penny per mile. Not bad. Even better when you consider the airlines charged the consumer from $45 to $65 per year to use these cards.

Unfortunately, the new no-fee cards are very hard to find (unless you're reading this, that is). Of the five airlines who just issued no-fee credit cards -- American, United, Delta, Frontier and Midwest -- only the two lesser known airlines have the offer available on their websites. To get the no-fee card from American, United or Delta, you need to specially request them over the telephone from the airline. (We've included the necessary information below for ordering the credit card of your choice.)

Now for the all-important question, are the no-fee credit cards worth it? Depends on how much you buy. Typically, a holder of an annual fee airline frequent flyer awards-based credit card receives one mile per $1 spent. The no annual fee cards give the credit card user 1 mile for every $2 spent. That means if you purchase $25,000 worth of goods or services, the no-fee card gets you 12,500 miles. If you decide to pay the $45 to $65 dollar annual fee, you get all 25,000 miles. You can do the math based on how much you buy, but the no-fee card may not be the way to go.

If you're still interested, you can get the no-fee airline credit cards from the following sources:

American AAdvantage Bronze MasterCard
Mileage offer: 1 mile for each $2 of net charge activity
Standard bonus offer: 2,500 bonus miles after first use of the card
To apply: Call 800/359-4444 (issued by Citi)
Web site: Information is not available at the airline web site

Delta SkyMiles Options Card from American Express
Mileage offer: 1/2 mile for each $1 of net charge activity
Standard bonus offer: 1,000 bonus miles after first use of the card
To apply: Call 800/223-2670
Web site: Information is not available at the airline web site

Frontier Airlines Platinum MasterCard
Mileage offer: 1 mile for each $2 of net charge activity
Standard bonus offer: 2,500 bonus miles after first use of the card
To apply: Call 866/750-6024 (issued by Juniper Bank)
Web site: Visit www.frontierairlines.com to apply

Midwest Airlines Platinum MasterCard
Mileage offer: 1 mile for each $2 of net charge activity
Standard bonus offer: 2,500 bonus miles after first use of the card
To apply: Call 866/750-6024 (issued by Juniper Bank)
Web site: Visit www.midwestairlines.com to apply

United Airlines MileagePlus No Annual Fee Visa
Mileage offer: 1 mile for each $2 of net charge activity
Standard bonus offer: None
To apply: Call 866/422-6566 (issued by Bank One)
Web site: Information is not available at the airline web site