Ah, airport lounges! The land of luxurious relaxation, free snacks, and a refuge from the chaos of terminals. Credit card companies have cleverly used lounge access as a magnet to attract users. Who can resist the allure of complimentary entry into these lavish havens? Naturally, more and more flyers are flocking to lounges, creating a boom in credit card sales. Some banks have even set up kiosks outside lounges to sell their cards. But is this grand plan working out as expected? Let's explore the journey from premiumization to commoditization of airport lounges and the challenges it poses.

Your Oasis in the Chaos

Airport lounges are perfect places to relax before a flight or during long layovers, offering comfortable seating, free Wi-Fi and a limited but complimentary buffet spread. Who can resist arriving early to enjoy a leisurely meal?

Access to lounges can be obtained through various means, such as high-end airline tickets, credit or debit cards, airline business class or frequent flyer programs, lounge membership cards, vouchers, or by simply walking in and paying the charges.

Banks entice new customers with attractive offers of complimentary lounge access, covering the cost themselves or through card issuers like Visa or Mastercard. The number of visits and nominal fees vary based on card variants. Lounges serve as a compelling incentive for customers to sign up for their services.

Reality of Lounges

Traditionally, lounges were reserved for high-end travellers in tailored suits. However, the lines between classes have blurred, and lounges have become a luxurious treat for passengers of all types. Unfortunately, this has led to overcrowding, excessive noise, and a loss of privacy and serenity—the very essence of a lounge. The growth in lounge usage can be attributed to rising airport traffic, increased awareness about lounges and of course, the benefits offered by banks.

Bank’s Reaction to this Costly Affair

As lounge usage increased, credit card companies found themselves in a financial predicament. The initial expenditure of 0.10% of the total product cost on lounges spiked to 0.25%, making lounge access the single largest feature cost for banks.

Increasing lounge usage by customers with lifetime free cards is driving up costs. This becomes even more frustrating for banks when these users solely utilize the card for lounge access without making any purchases. Additionally, banks are witnessing a shift in consumer behaviour, with their most profitable customers, known as 'revolvers,' opting to pay off their card balances in full rather than carrying them over month-to-month. As a result, banks are losing out on the high interest rates they charge on revolving balances, which typically range from 40-42% per year. This impact on profitability is prompting banks to reassess how they provide lounge benefits.

To bring back the card’s high point of premiumization at lounges and deal with increasing costs, banks have started limiting lounge access and may shift to card’s spend-based lounge access. Major credit card issuers have already made changes to their lounge policies:

• HDFC Bank increased its free lounge access to 50, but later scaled it back to 18 for non-premium cardholders.
• SBI discontinued complimentary domestic airport lounge benefits on Cashback SBI Card from 1 May 2023 onwards.
• Axis Bank reduced airport lounge access for its credit cardholders from 1 June 2023 onwards and limited the complimentary access to domestic terminals only.

Reducing lounge access for non-premium cards may result in a temporary dip in credit card sales. However, in the long run, premium card sales are likely to perform well due to the continued demand for lounge access.

A Light of Hope or a Point to Fear for the Lounge Providers?

Dreamfolks Services Limited, India's dominant airport service aggregator platform, holds 95% market share in card-based lounge access. It’s average revenue from lounge fees for FY 2019-2020 to FY 2021-2022 stood at 98.6% of total revenue. Hence, any shift in credit card companies offering fewer lounge benefits could impact Dreamfolks.

However, during an earnings call in May 2023, Liberatha Kallat (Chairman and Managing Director of Dreamfolks) shared some encouraging news. She highlighted that the number of passengers availing lounge access and engaging with their services has been experiencing robust growth - approx. 131% YOY. In FY 2022-23, the passenger count accessing airport lounges reached an impressive 8.15 million, compared to 3.5 million in the previous year. This upward trajectory reflects the overall growth of the travel industry.

Moreover, the credit card penetration in India remains relatively low but is expected to skyrocket in the coming decades – estimated increase in credit card users is 33 times. This indicates a promising future for the utilization of lounges, especially considering that customers can still enjoy additional benefits if they exceed the prescribed spending limits set by their banks.

Hence, growing credit card penetration coupled with increasing trend of lounge usage may present an opportunity for Dreamfolks even though banks set limits.

Further, to combat overcrowding and provide a tailored experience, airports are considering different zones within lounges - quieter zones with gourmet food for those willing to pay and informal space for customers with complimentary access. Additional lounges could be created to accommodate the growing number of lounge users, ensuring there's something for everyone.

Story from the Globe

Delta Air Lines is facing long lines and overcrowding at its Sky Clubs in the USA. To address this issue, they have implemented several measures, such as restricting memberships to elite members, increasing the price of membership, increasing the guest access fees and prohibiting access for members traveling on basic economy fares. Despite these efforts, the crowding issue persists as the number of eligible American Express Card holders continue to increase and consequently enjoy the card benefit of lounge access.

Bottom Line

The journey from premiumization to commoditization of airport lounges has brought both challenges and opportunities. While banks are re-evaluating their benefits and tightening access, lounge providers are investing in expanding lounge networks to meet demand. While these changes aim to make lounges great again and address the issue of overcrowding, they also intend to weed out freeloaders from the card base. So, brace yourself for the changing tides of airport lounges.