American Express prepared for a downturn — but not like this

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In planning for an economic downturn, American Express last year studied a few different scenarios on which it could continue to generate revenue and adjust expenses accordingly.

But none of those scenarios forecast a 95% drop in travel and entertainment spending on Amex cards. And that was just one of the blows delivered by the economic paralysis the coronavirus would inflict globally.

After two strong months to start 2020, Amex, like most other businesses, saw its revenue and merchant network crash during stay-at-home mandates and mounting unemployment in the U.S. and Europe. Amex reported first-quarter net income of $367 million, compared with $1.6 billion a year earlier.

"We're now in a different world," Stephen Squeri, the chairman and CEO of American Express, said during Friday's earnings call. In light of the dramatic impact on business, Squeri said the company intends to move forward in preparing for the post-pandemic opportunities.

With the coronavirus paralyzing business across the globe, Amex is continuing to stress that small-business owners are accepting the cards and younger consumers find value in Amex rewards. If these two audiences stand by Amex, it will keep the revenue ship steady.

Next month, Amex will continue planned refreshes on a number of its card products, Squeri said. "We'll see enhancements to cards, not air or hotel related, to provide more utility to the cards in general."

Amex will concentrate on value propositions that reflect the current environment, which may mean providing points toward Uber benefits, future travel or Wi-Fi services.

"Our ability to add other values and credits in a couple of months will serve us well," Squeri said. "We want to continue to maintain the price value that we strive to have with these cards."

In addition, Amex's focus on corporate B2B payments is helping the company offset the current and inevitable long-term decline in travel and entertainment spending, said Squeri, who noted that airlines are predicting the possibility of a three-year downturn in travel because of the pandemic.

Still, it will be important for Amex to monitor how domestic and international travel will rebound in the coming year. Some markets, like China, have started air travel again, but it is far more likely that domestic travel in the U.S. will rebound more quickly than cross-border travel.

"All places in the U.S. have been hit" by travel stoppage, said Jeffrey Campbell, Amex's chief financial officer. "It is remarkably similar globally."

The card company will cut $3 billion from its budgetary plan, much of it in operating costs, taking out expenses not needed at this time to support customers, as well as halting new hires, Campbell added.

For the time being, Amex will monitor expenses while taking the approach that it does not want to diminish or damage its digital or sales channels.

"The volume declines were dramatic in March," Campbell said.

Travel and entertainment volume, which was roughly 30% of proprietary volume in 2019 for Amex, is down almost 95%, Campbell said. Some online commerce and grocery spend have been stronger and helped offset those losses. Still, proprietary volume growth was down 45%, though this shift has stabilized in April.

"It is remarkable how much the world has changed in the last two months alone," Campbell said. "At the end of the first quarter, 70% of our outstanding loan balances were with U.S. consumers, 10% were with international consumers and the remaining 20% were with small businesses, almost all in the U.S."

When spending volumes "move dramatically," so do the balances, Campbell said. With only one month of spend decline, the charged receivables were down 21% compared with the prior year and down $13 billion below the prior quarter, he added.

This particular economic crisis presents a troubling aspect that did not occur in other slowdowns throughout American history. Most small businesses had to completely shut down, Campbell noted, making it difficult to predict what will happen once the virus pandemic has subsided.

First-quarter consolidated total revenue, net of interest expense, was $10.3 billion, down 1% from $10.4 billion a year earlier. The quarter reflected softness in spending volumes beginning in the last few days of February that significantly accelerated in March as a result of COVID-19 impacts. The overall revenue figures were partially offset by strong overall performance in January and February.

Global merchant and network services delivered first-quarter net income of $417 million, compared with $571 million a year earlier. Total revenue, net of interest expense, was $1.4 billion, down 10% from $1.5 billion a year earlier. The decrease indicated how far card member spending dropped once coronavirus took over the economic landscape.

In the short term, Amex is focusing on taking care of its employees. Squeri noted that the company has had no layoffs of its 64,000 employees since the crisis took hold and forced work-at-home arrangements, and that it was paying salaries without using paid leave benefits.

Consumer and small-business cardholders have been offered various short- and long-term financial assistance programs, and the card brand has added new services and rewards to card products and programs.

In addition, Amex launched Stand for Small in the U.S., a program in which more than 40 companies have come together to back small businesses through various offers, complimentary services and corporate assistance programs to help manage the crisis.

"For our merchants, we have extended the amount of time they have to respond to card member disputes, and we increased contactless transaction thresholds to reduce physical contact at the point of sale in 28 countries," Squeri said.

"Our intent is to come out of this very strong, as we did in 2009 and after the internet bubble" in the 1990s, Squeri said.

The uncertainty will not clear up until it is known when and how strongly spending will rebound as the global economy recovers, and how long widespread unemployment and small-business shutdowns last beyond the pandemic, Squeri said.

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