Amex upbeat on consumer travel, less so on business

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American Express is banking on consumers' desire to travel to address an important revenue category that has spent much of the past year grounded.

But there still won't be a full return to normal; much of what Amex envisions for the coming year is based on its expectation that travel and entertainment spending could recover at about a 70% rate. And even in that case, Amex is betting on consumer spending — not corporate — to drive much of this year's travel resurgence.

It has been a slow crawl to earnings recovery for American Express as cardholder spending has been tepid during the pandemic, though non travel-and-entertainment spending topped pre-COVID levels for the second straight quarter. Amex reported on Tuesday fourth-quarter 2020 income of $1.4 billion, about a 15% drop from $1.7 billion a year earlier, while delivering total revenue of $9.4 billion, down 18% from $11.4 billion in 2019.

The recovery of travel is important to Amex, even though non-travel and entertainment spending accounts for more than 80% of the company's revenue. Knowing full well that major corporations or midsize businesses aren't likely to jump back into extensive business travel, Amex is relying on consumers' desires to break out from the pandemic and take part in leisure or business travel.

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"We do believe that consumer travel will be back because of the pent up demand," Stephen Squeri, the company's chairman and CEO, said during Tuesday's fourth-quarter and year-end earnings call.

"I see the vaccines working and herd immunity coming and certainly see that happening by the fourth quarter" of 2021, Squeri said. "If, God forbid, with the vaccines we see the efficacy not working, then we have a whole different issue for the entire economy and we're not just talking about American Express traveling."

Corporate spending may not see the same resurgence, but it also never fully went away.

"As far as corporate card spending, and that business is near and dear to all of us, it drives only about 9% of our overall billings and 60% of that is T&E," Squeri added. "There are companies that are still traveling and the T&E piece of corporate spending is across multiple disciplines, as it's across lodging, restaurants, car rentals and air as well."

In the fourth quarter, nontravel spending rose 2% over the previous year, while travel and entertainment spending dropped 74%.

Amex is not planning on corporate spending rising significantly in 2021 as large companies are likely to remain cautious, even if the pandemic starts to subside significantly. "That 9% of billings does not equate to nine percent revenue or profitability, so we believe what we gain from a consumer and small-business perspective will more than make up for any shortfall that will occur in our corporate card business," Squeri said.

In global commercial services, Amex reported total revenue of $2.7 billion, down 20% from $3.4 billion a year earlier, with the primary factor being a decline in cardholder spending.

A decrease in cardholder spending and a decline in the average discount rate also affected the global merchant and network services category, with a net income of $208 million, versus $474 million a year earlier.

Because of the nature of its premium cards and its brand as a necessity for travel expense and rewards, the New York-based company pushed through the past year, in part, by carrying a 2019 strategy forward of refreshing some of its products and rewards levels.

It's likely to do more of the same in the coming year, with the company pushing some marketing buttons to make it happen. Amex could top the $4 billion it spent on marketing last year when moving forward into a 2021 that is hopefully recovering from the pandemic, said Jeffrey Campbell, its chief financial officer.

"We invested $1 billion in the fourth quarter on marketing, ramping up our investments in new card acquisitions and we continued to invest in value injection," Campbell said. "Our focus in 2021 is on rebuilding growth momentum and maximizing our investments to do so."

Part of that "value injection" includes accommodating a shift in spending for online services or recurring billing for things like entertainment services, Squeri noted.

"The really interesting point here is that for the first time, 17% of our platinum cardholders put wireless [services] on the card and 10% put streaming on the card," Squeri said. "Value injection helps us steer people where we want them to go, and provide real value to them and we did that. It has helped us from a retention perspective."

American Express has acknowledged in the past that the economic downturn from the pandemic has been far beyond anything it had prepared for heading into 2020. The difference in the new year is that Amex knows a lot more about how its customers have navigated the pandemic themselves, Squeri said, but the basic cautions and uncertainty persist.

Though open banking is in its infancy in the U.S., Amex late last year expanded open banking-based payments services on its Pay with Bank transfer platform in Europe, where it has been allowed to add e-payments from bank accounts to its credit card offerings. Amex was looking at the process as a way to boost relationships with consumers and merchants in Europe, as well as enter a debit card and even credit card market it has not been strong in compared to competitors.

As expected, the Amex executives did not mention or speculate on reported scrutiny from the Office of the Comptroller of Currency office. Earlier this month, The Wall Street Journal reported the OCC was reviewing claims that Amex employees misled small-business owners when signing them up for cards.

The OCC, which is not commenting on the matter, would be investigating whether the alleged Amex practices tie in with what happened to customers' personal information when Amex lost the Costco card business to Citigroup nearly five years ago.