American Express 2004 Annual Report Download - page 30

Travel Related Services
TRS generates revenue from a variety of sources
including global payments, such as charge and credit
cards, travel services and stored value products,
including Travelers Cheques. Charge and credit cards
generate revenue for the Company primarily in three
different ways:
©Discount revenue, the Company’s largest single
revenue source, which represents fees charged to
merchants when cardmembers use their cards to
purchase goods and services on our network,
©Finance charge revenue, which is earned on
outstanding balances related to the cardmember
lending portfolio, and
©Card fees, which are earned for annual member-
ship, and other commissions and fees such as for-
eign exchange conversion fees and card-related
fees and assessments.
In addition to operating costs associated with these
activities, other major expense categories are expenses
related to marketing and reward programs that add
new cardmembers, promote cardmember loyalty and
spending and provisions for anticipated cardmember
credit and fraud losses.
TRS’ travel businesses provide travel services and earn
transaction-based fees and other revenue from custom-
ers and travel suppliers. TRS’ stored value products,
including Travelers Cheques, earn investment income
as prepaid cash is invested prior to encashment of the
Travelers Cheque or use of other stored value products.
For 2004, TRS reported record net income of $2.9 bil-
lion, an increase of 17 percent from a year ago.
TRS reported total revenues of $21.6 billion for 2004,
a 12 percent increase from 2003, primarily due to
record cardmember spending, increased cards-in-force
and higher travel sales. Discount revenue of $10.2 bil-
lion grew 17 percent compared to a year ago, primarily
as a result of an 18 percent increase in billed business
partially offset by a lower discount rate. The average
discount rate in 2004 was 2.56% compared to 2.59% in
2003 primarily reflecting changes in the mix of spend-
ing between various merchant segments due to the
cumulative impact of stronger than average growth in
the lower rate retail and other “everyday spend” mer-
chant categories (e.g., supermarkets, discounters, etc.).
Based on the Company’s business strategy, changes in
the mix of business, volume-related pricing discounts
and selective repricing initiatives will probably con-
tinue to result in some erosion of the average discount
rate over time. Other commissions and fees increased
17 percent to $2.2 billion in 2004 as a result of volume-
driven increases in foreign exchange conversion fees,
card-related assessments and network partner-related
fees. Travel commissions and fees of $1.8 billion rose
19 percent in 2004 primarily due to 25 percent growth
in travel sales, reflecting the acquisition of Rosenbluth
International (Rosenbluth) in late 2003 and improve-
ment within the travel industry.
Expenses at TRS totaled $17.5 billion for 2004, an
increase of 12 percent over 2003, primarily due to
increased marketing, promotion, rewards and card-
member services and human resources expenses. TRS
incurred increased rewards costs, reflecting a higher
redemption rate, strong volume growth and greater
cardmember loyalty program participation. Marketing
costs rose due to continued focus on business-building
initiatives and the launch of a new global brand adver-
tising campaign. Growth in human resources expenses
reflected severance-related restructuring costs, merit
increases, higher employee benefits, greater man-
agement incentive costs, including the impact of an
additional incremental year of higher stock-based
compensation expenses, and the impact of the
October 2003 Rosenbluth acquisition.
American Express Financial Advisors
AEFA earns management and distribution fees on
mutual funds, wrap products, assets managed for insti-
tutions and separate accounts. AEFA’s insurance and
annuity products generate revenue through premiums
and other charges collected from policyholders and
contractholders and through investment income
earned on owned assets supporting these products.
AEFA incurs various operating costs, principally provi-
sion for losses and benefits for annuities, investment
certificates and insurance products.
AEFA reported 2004 income before accounting change
of $806 million, an 18 percent increase from a year ago.
Net income for 2004 rose 10 percent to $735 million.
AEFA’s revenues of $7.0 billion grew 15 percent in 2004
primarily due to larger investment management and
service fees, greater distribution fees, higher net invest-
ment income, greater property-casualty insurance pre-
miums and higher other revenues. The acquisition of
Threadneedle Asset Management Holdings LTD
(Threadneedle) on September 30, 2003 contributed
approximately 5 percent to the revenue growth.
Expenses at AEFA for 2004 totaled $5.9 billion, a 13
percent increase from 2003, primarily due to the
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Financial Review