Amex Gains From Travel Joint Venture

During yesterday’s second-quarter earnings call with analysts, American Express Co.’s chief operating officer, Jeffrey Campbell, appeared to want to head off discussion of the Department of Justice’s antitrust trial against the company that began in Brooklyn on July 7. And why not, Amex has a lot at stake.

The DOJ is challenging Amex rules that prevent merchants from imposing extra fees for Amex cards and offering consumers discounts, rewards and information about card costs to lure them into choosing a form of payment that is less expensive to accept. As a result, consumers are paying more for the purchases, the antitrust enforcer contends.

Campbell declined on the call to discuss specific testimony occurring during the trial. “As much as we might like to, I don’t think it would be beneficial for us to offer color commentary on any of the specific testimony,” he said.  “We will make our arguments where it matters – in the courtroom.”

But Campbell did note several key reasons Amex chose to take the case to trial. For one, Amex believes it’s unfair to allow merchants who have agreed to honor its cards and then discriminate against Amex and its cardmembers. Moreover, Amex also believes it’s unfair to interfere with consumer’s right to choose how they want to pay, he said.

“The results the Justice Department seeks would provide no benefit to consumers,” Campbell said. “Instead, it would weaken the competition.”

Earlier this week in testimony in the DOJ’s case, Joshua Silverman, Amex president of the U.S. consumer services business, told U.S. District Judge Nicholas Garaufis the card brand attracts wealthy clients with perks, a business model that would be jeopardized if it had to cut its discount fees to match those applied to Visa and MasterCard purchases. Amex contends its high-fee card model enables it to offer such rewards to differentiate it from other card brands to boost competition.

“You’re either the biggest or the best,” Silverman said under questioning from Justice Department lawyer Ethan Glass, according to Bloomberg coverage of the trial. “The place you can’t be is just like them but smaller.”

Visa and MasterCard earlier settled with the Justice Department on similar allegations. As a result of the networks’ deals, both bankcard brands agreed to allow merchants to impose surcharges and to offer discounts, incentives and information to consumers to encourage the use of less-costly payment methods. Amex refused on the contention that its business model is much different from those of the bankcard brands.

The trial is expected to end later this quarter with a ruling several months later. A significant appeals process also is expected.

Travel Joint Venture

Amex’s net revenues for the quarter ended June 30 totaled $8.66 billion, up 5 percent from $8.25 billion during the same period a year earlier. Net income was up 8.5 percent, to $1.53 billion from $1.41 billion, aided by a $626 million ($409 million after-tax) gain from the closing of the joint venture transaction for the company’s business travel operations. Before the joint venture, Amex operated the initiative as its own Global Business Travel unit.

Under the deal, Amex now owns 50 percent of the American Express Global Business Travel venture, and the investor group the rest, Campbell noted on the call. The deal closed on the last day of the second quarter.

Amex used a substantial portion of the gain to fund several incremental initiatives. Most significantly, Campbell said, Amex used the funds step up investments in support of growth initiatives.

“These investments primarily consisted of media spending to support some of our newer products, such as Amex Everyday and Serve in the U.S. as well as incremental customer acquisition activities around the world,” he said.

Amex, by the Q2 numbers

Card billed business in the U.S. during the quarter totaled $173.4 billion, up 9 percent from $159.7 billion from the same period last year. Outside the U.S., card billed business was up 9 percent, to $84.7 billion from $78 billion. The totals include activities, including cash advances, related to proprietary cards, cards issued under network partnership agreements and certain insurance fees charged on proprietary cards.

Total cards issued and outstanding in the U.S. totaled 54.1 million, up 3 percent from 52.5 million, while outside the U.S. the total was up 8 percent, to 55.8 million from 51.8 million. Basic cards issued and outstanding in the U.S. totaled 42 million, up 3 percent from 40.7 million, while outside the U.S. the total was up 9 percent, to 45.6 million from 41.8 million.

Comparatively, total U.S. Visa credit cards at the end of March totaled 289 million, up 4 percent from 278 million a year earlier. Visa also reported total operating revenues of $3.16 billion for the fiscal third quarter ended June 30, up 5.3 percent from $3 billion during the same period last year. Net income rose 11.4 percent, to $1.37 billion from $1.23 billion.

Amex’s average discount rate for the period was 2.48 percent, down from 2.52 percent a year earlier. Average cardholder spending during the quarter was $4,288, up 5 percent from $4,097. Average fee per card was $41, up 3 percent from $40.

Worldwide receivables totaled $45.3 billion, up 3 percent from $44.1 billion. The net write-off rate on principal only was 1.8 percent. The percentage of receivable 30 days past due was 1.5 percent. A change in the write-off formula made it impossible for a year-ago comparison.

U.S. Card Services average receivables totaled $21.3 billion, up 4 percent from $20.5 billion. The net write-off rate on principal only was 1.8 percent, down from 1.9 percent. The 30-day delinquency rate on total receivables was 1.5 percent, down from 1.6 percent.

By comparison, Discover’s net principal charge-off rate (based on total receivables) for the same quarter was 2.33 percent, down slightly from 2.34 percent a year earlier and down a basis point from the previous quarter. Moreover, Discover reported net revenue of $2.17 billion, up 6.4 percent from $2.04 billion during the same period last year. Net income was $644 million, up 7 percent from $602 million.

In terms of net revenues by business unit, Amex U.S. Card Services earned $4.5 billion, up 6 percent from $4.2 billion. Net income was $770 million, up 4 percent from $743 million. International Card Services generated $1.4 billion in net revenues, up 7 percent from $1.3 billion, reflecting higher card member spending and higher revenues from the Loyalty Partner business. Net income was $77 million, down 63 percent from $208 million.

Amex Global Commercial Services net revenue totaled $1.3 billion, up 3 percent from $1.2 billion, as net income more than doubled, to $561 million from $226 million, reflecting the joint venture transaction gain. Global Network and Merchant Services revenue rose 5 percent, to $1.5 billion from $1.4 billion, as net income dropped 9 percent, to $373 million from $412 million.