Gas prices are down and, naturally, travelers are taking advantage – including business travelers. Researchers say this uptick in travel is an overall sign of economic improvement, and is certainly good news for corporate travel managers looking to save on costs. But American Express’s most recent earnings report, released last week, revealed an intriguing consequence of lower gas prices and cheaper corporate travel: the issuers of commercial cards are profiting less.
American Express held a conference call last week to discuss its Q2 2015 earnings. The largest card issuer by purchases revealed a continuing slowdown in card spending by corporate clients. The company slightly missed analysts’ predictions in reporting $8.28 billion in revenue – a 4 percent drop – as Amex’s commercial services operations saw weakened performance.
Part of the problem, according to American Express CFO Jeff Campbell and analysts, is the ongoing decline in gas prices, meaning business travelers are spending less on their trips, and the card issuers with which those travelers pay for their travel are seeing reduced earnings from these products.
Plus, Campbell added during a conference call discussing quarterly earnings, airlines are “a little flush with cash right now,” meaning they aren’t using fuel-buying corporate cards as often as they once were.
“There was a sequential decline here Q1 to Q2 from 4 percent to 2 percent,” Campbell explained in response to a question regarding to the decline in the firm’s Global Commercial Services billed business. “That decline, actually, relates to one product with actually maybe one large customer. It’s an airline fuel-buying product, very, very low-margin product.”
While he declined to name which airline customer to which he was referring, the executive added that because airlines largely have positive cash flow, fuel cards are less in-demand. “They’re minimizing the use of these products,” he said, “which help them out with cash flow.”
The firm’s GCS division saw $46.4 billion worth of card-billed volume, 3 percent less than the year before (though, when accounting for foreign exchange rates, amounts to a 2 percent increase). Amex saw 4 percent growth in this segment the year prior, while the unit’s overall net income declined 64 percent year-over-year, hitting $203 million. The dramatic drop can be attributed to the firm’s sale of its 50 percent stake in its business travel division, which boosted Amex figures in 2014.
Overall, American Express saw a “sequential decline in growth” of its commercial card-billed business volume, Campbell said, that was concentrated in the U.S. and attributed to lower gas prices. Gas billings, the executive added, account for about 3 percent of the company’s total volumes.
The good news is that American Express’s decline in its commercial card earnings are not attributed to a decline in business travel. The bad news is that, while plummeting gas prices encourage corporate travel, the issuers of corporate cards – like Amex – earn less with every purchase made.
Corporations seem to be taking advantage of lower fuel costs. The Global Business Travel Association has forecast rising in the business travel segment for the years ahead. Research published this week by the GBTA, in conjunction with Visa, revealed business travel spending will reach a new record this year and experience a 6.5 percent year-over-year growth, hitting $1.25 trillion around the globe. This growth, researchers said, is likely to continue through the end of the decade; business travel will see an additional 6.9 percent hike in 2016.
The U.S. is among the world’s leading markets when it comes to corporate travel spending, the GBTA said, as North America accounts for 27 percent of the market. According to Visa’s SVP and Head of Commercial Product Brian Triplett, however, China is set to see the largest growth in business travel, and the Asia Pacific region already holds the top spot when it comes to business travel spending.
This rise, Triplett said, is due to more sophisticated corporate payment solutions. “As these markets develop, safe and secure electronic payments will help corporations and business travelers around the globe track and manage their business travel spend,” he said. Oil prices, researchers concluded, are having a significant impact on the rise in corporate travel.
But, according to American Express, cheaper travel for businesses translates into financial losses for commercial card issuers, and the rising volume and spending by corporate travelers has failed to make up for it.
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