This is a bit of a long question, but it boils down to why in the world are these airline and bank relationships so close? Why does it seem like co-branded credit cards are the tail that wags the dog in the frequent flyer universe?
Chris B. said,
[H]ow does an airline decide which financial company they should form an alliance? If US and AA do merge, I’m curious which bank (Citi or Barclays) would win the relationship, how they would be involved in financing the merge, how the relationship affects both companies, and how it may effect the credit card offers.
There is much chatter regarding the relationship between AMEX and Delta, and how much Delta receives from their co-branded credit card fees, miles, and services, and whether it is enough income to warrant the new Medallion Qualification Dollars requirement, or if AMEX just “asked” to be in on the deal.
Also, the relationship between Chase and United Airlines seems to be locked solid, to the point where Chase has exclusive rights to all things United (such as credit card and lounge agreements). With the Chase Sapphire Preferred giving the same or more UA miles than UA’s co-branded cards, I wonder how much sway Chase holds over United, at least for these transactions. …
When United went into bankruptcy, the issuer of their co-branded credit card provided debtor-in-possession financing. When they exited bankruptcy, they were there with exit financing. And they pre-purchased half a billion dollars worth of miles to provide extra liquidity. American Express did this last for Delta as well. And an airline like Alaska might make or lose $10 – $20 million in a year, while it sells over $100 million in miles to Bank of America.
Co-branded credit cards are a big, lucrative business. Which is why it was jokingly said that United flew through bankruptcy to support the underlying credit card business.
Ultimately that’s because frequent flyer programs are the single most successful marketing innovation in history (although arguably some aspects of Christianity or IIslam might have them beat). And credit cards take the romanticism of travel, a huge customer base as well, and extend that into everyday life.
When America West acquired US Airways it did so with assistance from what was then Juniper Bank, and Juniper (since acquired by Barclays) got the credit card concession — beating out Bank of America which had issued the US Airways card previously.
Now, I do not know whether Citibank or Barclays or some other entity would get the concession if American and US Airways merged — largely because I don’t know what those banks’ contracts with the respective airlines say in the event of change of control during the length of the contract.
I do know that it’s usually more valuable to an incumbent bank to issue cards than a new bank, since that incumbent already has a huge base of cardmembers. So while frequent flyer programs will bid out the relationship to banks initially, and continue to play them off each other in some cases, we don’t frequently see many changes n the co-branded relationships — without a merger, or outside of those programs that play with more than one credit card company at a time (such as Hilton which has Citibank and American Express cards in the U.S.).
And it’s not just the banks but Visa and Mastercard that get involved in the details of a rewards card, ironing out the benefits (and concomitant costs) of those cards Complicated though lucrative financial relationships, all.
Airlines have recognized in recent years that credit card customers are important and valuable to their bottom line. It’s why you can earn part way towards elite status (and in some cases all the way, and especially so with hotel programs) just by holding or putting spend on a credit card. And it’s why Delta — when wanting to ensure minimum value from its customers when rewarding them with elite status — has decided that one can either spend a certain amount on airline tickets or be engaged to a certain degree with spending on its co-branded credit card. It just makes financial sense.
And it’s the sway of these card issuers that simultaneously puts pressure on award availability (too many miles chasing too few seats) but helps to ensure that the programs remain valuable over time (not wanting to kill the golden goose). A delicate balance indeed.