Improving the Company's Competitive Position
Earlier, I referred to three major initiatives: strengthening our business models, lowering our risk profile, and investing in key growth opportunities. Let me now explain how these initiatives are improving our competitive position for the future.
Strengthening Business Models
Our efforts to improve margins are not focused on fixing weakness. Instead, they are focused on strengthening the performance of our businesses and providing greater flexibility so that we are less dependent on a robust economic environment to deliver earnings growth. To this end, we have made significant progress in a number of key areas:
WE HAVE EXPANDED THE DIVERSITY OF OUR CARD-SPENDING BASE. While the traditional travel and entertainment category remains an important driver of revenue, we have significantly increased the use of our cards for everyday spending at such places as gas stations, supermarkets, retailers, as well as for telecommunications. During periods of economic weakness, consumers tend to maintain their level of spending in these industries, even while cutting back on travel and entertainment. Our increased presence in these sectors enables us to produce more stable charge volume.
Over the past ten years, we also have significantly expanded the roster of merchants who accept our card products. In 1990, 65 percent of our billings came from the travel and entertainment sectors and 35 percent from retail and other sectors. Today that proportion is essentially reversed; everyday spending now accounts for about 60 percent of the business billed on American Express Cards.
Our progress in this area continued during 2001 with the signings of several key merchants outside the travel and entertainment industries, including Pathmark Supermarkets, REI (sporting goods), PayPal (online payment service) and Qwest Communications International Inc. in the United States. Internationally, our signings included Singapore Telecom and Arrow Pharmaceuticals in France.
In our commercial card business, we are also making a shift to reduce our reliance on travel and entertainment spending with the expansion of our Corporate Purchasing Card program for large and middle market companies.
As is the case with consumer spending, companies tend to continue purchasing everyday goods and services (such as office and industrial supplies, computer equipment and software) during tough economic times, while tightening their belts on discretionary business travel and entertainment expenses.
WE HAVE DIVERSIFIED OUR PRODUCT PORTFOLIO AND GROWN OUR CARD LENDING BUSINESS. Since late 1994, when we set our sights on aggressively expanding our credit card business, our lending balance growth has been among the top tier of issuers. Today, about 19 percent of our U.S. card billings come from our lending products, as compared with just 4 percent in 1995. This change in product mix has shifted our overall card revenue base and helped to make it less volatile. Revenues from our charge card products are derived from current spending and are more sensitive to short-term economic swings. Lending products, on the other hand, produce revenues as customers build up loan balances and pay them down over time. When credit exposure is managed prudently, the interest revenue from these products tends to be a less volatile source of earnings.
At year-end 2001, our worldwide lending balances on a managed basis were more than $36 billion, up 14 percent from 2000. With $32 billion of receivables in the United States, our growth rate continued to exceed that of most of our competitors.
Much of this growth has been due to the breadth of our lending products - such as our popular Blue from American ExpressSM - and to the value we provide our cardmembers. We have also increased the number of charge cardmembers who are taking advantage of our "lending on charge" options such as Sign & Travel®, when they occasionally choose to revolve.
WE HAVE ACCELERATED OUR REENGINEERING INITIATIVES THROUGHOUT THE COMPANY. The reengineering actions we took during 2001 enabled us to deliver more than $1 billion in gross realized benefits during the year.
The benefits generated by these initiatives serve not only to support earnings but also to establish the foundation for sustainable, long-term growth. Thus, while a portion of the savings from reengineering has gone into improving our operating margins, we are also investing some of these savings in growth opportunities. These include investments in new products, customer acquisition and more efficient technology platforms that will help employees do their jobs and service our customers more effectively.
Reengineering has been an integral part of the way we conduct business for many years now. Our experience has shown that - to achieve sustainable improvements - reengineering must extend beyond cost cutting. It must also include initiatives that increase revenues, improve infrastructure and enhance processes. Over the past several years, we have implemented hundreds of such initiatives.
For instance, on the revenue side, our U.S. customer service representatives have, for some time, had success in cross-selling appropriate products and services to cardmembers who call into our service centers. During 2001, we reengineered this process to increase the productivity of our representatives, resulting in an overall sales increase of 60 percent.
We continue to harness the power of the Internet to reduce costs, improve processes and enhance customer service across our businesses. Internally, processes such as employee benefits enrollment, expense management and business travel reservations are now being handled online. Externally, we continue to support and deliver a vast array of online tools to help all of our customers effectively manage their relationships with American Express. In fact, we now handle more U.S. card customer service transactions on the Internet than we do by phone, mail or in person.
An example of this is American Express @ Work®, our desktop portal that helps our business customers manage their Corporate Card and Corporate Purchasing Card programs online. Just two years after its launch in the United States, American Express @ Work now handles more than half of all our commercial card maintenance transactions. About 85 percent of all management reports are now delivered electronically. In 2001, we expanded American Express @ Work internationally, and it is now offered to companies in 20 countries. With Internet usage more than tripling among our clients, this transformation has improved customer satisfaction while simultaneously reducing expenses.
Elsewhere, we are using the Internet to enhance merchant transactions with American Express. New online services introduced in 2001 have streamlined billings and provided merchants with a greater ability to access and update their accounts over the Internet. Our online services are faster and less expensive - both for merchants and for American Express.
The Internet also is a powerful and cost-effective tool for acquiring new customers. During 2001, 16 percent of all new cardmembers in the United States were acquired online.
WE HAVE ENHANCED OUR REWARDS PROGRAMS AND FORMED NEW PARTNERSHIPS WITH LEADING-EDGE COMPANIES. Our industry-leading Membership Rewards® loyalty program continues to be a strong driver of cardmember retention and profitability. While it is already the largest program of its kind, with more than 9 million participants worldwide, we still have a significant opportunity to grow our base.
While focusing on increasing the number of cardmembers enrolled in Membership Rewards, we have also worked to reduce the costs associated with the program. For example, we have enabled cardmembers to handle many program-related activities, such as point redemption, online. We have also expanded rewards opportunities beyond travel to the retail and online sectors. More than 700 partners now participate in our program worldwide. The broader range of redemption choices has improved customer satisfaction and lowered our overall rewards costs.
Our rewards program is just one example of how we partner with other companies to improve the value that we offer to our customers. Other examples include our partnerships with Delta Air Lines and Costco. The cobrand cards we offer with these partners have added millions of highly profitable cardmembers to our base over the past several years. We are also seeing strong results from our partnership with British Airways, which led to the 2001 launch of three new cobrand credit cards for British Airways UK Executive Club members.
Partnerships also play a role in our efforts to expand the network of merchants who accept the Card. Working with JCB Co., Ltd., the largest card issuer and merchant acquirer in Japan, allowed us to expand significantly American Express' merchant coverage in that country. Our relationship with JCB also provides for reciprocal card acceptance, merchant acquisition and merchant processing in Japan, as well as in Australia, Canada, India, Mexico and New Zealand.
The importance of partnerships to American Express extends to Corporate Travel as well. Early in 2002, we partnered with China International Travel Services in announcing the first Sino-U.S. corporate travel joint venture in the People's Republic of China. We also announced a Corporate Travel joint venture in Italy - UVET American Express Corporate Travel. At its launch in January 2002, the company was the largest corporate travel agency in Italy.
In our retail financial services business, a new partnership with Costco offers our auto and homeowners insurance to Costco members in 22 U.S. states.
For many years, partnerships have been at the heart of our oldest business, the Travelers Cheque Group. In 2001, as a result of our agreement with Citicorp Services, Inc. to convert their distributors to American Express, we achieved the largest new seller signing in the history of our Travelers Cheque business. Further expanding our potential sales volume are our agreements with HSBC, which began selling our products globally in early 2002, U.S. Bancorp, Australia Post and Rabobank in the Netherlands. And, with the recent addition of JTB and Nippon Travel Agency, Japan's top five travel agents now sell American Express® Travelers Cheques.
WE HAVE TRANSFORMED AND STRENGTHENED OUR CORPORATE TRAVEL BUSINESS. We have substantially improved the economics of our Corporate Travel business. As in other areas of the company, we moved many of our business processes and customer servicing online. The percentage of Corporate Travel reservations processed online in 2001 increased fivefold. This shift lowered our costs while providing clients faster, better service.
We also transformed the economics of this business by making a fundamental change in the source of our revenue. Traditionally, we earned our fees from commissions paid by suppliers such as airlines or hotels. Starting in the mid 1990s, however, the airlines sharply reduced their commission rates. In response, we redesigned the business and now rely on customers to pay transaction fees for our travel services, rather than having our revenue based on commissions from suppliers. In 2001, 70 percent of our travel revenues came from customer fees and only 30 percent from suppliers. A few years ago the mix was just the opposite.
These changes enabled us to manage successfully through one of the toughest years in recent history for travel, while operating the business profitably. We also took advantage of the downturn in travel to step up our sales efforts. We finished the year with an impressive list of new travel clients, including Aventis in the United States, Jaguar Cars Limited and Land Rover UK in the United Kingdom, Ford in Latin America, Philips in Taiwan and PepsiCo Europe and Xerox in Europe. Worldwide, we now handle corporate travel for more than 50,000 companies.
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