Brian Sumers of Skift covers preparations for United to re-up its credit card deal with Chase.
United and Chase renewed their credit card agreement two years ago and there’s already talk of the next extension, which suggests that they made a 5 year deal which historically was standard although we’re seeing more 7 and even 10 year deals in the co-brand space.
The financial analyst most bullish on credit card revenue for airlines, Joe DeNardi from Stifel, now believes that United’s bargaining position may have slipped as a result of Chase’s success with its own products and American Express’ investments in its Platinum card in the broader competitive space. That’s a turnaround from DeNardi’s earlier position on United.
While DeNardi in earlier notes mentioned that the Chase Sapphire Reserve and competing products like the American Express Platinum card had been taking “taking wallet share and spend” from airline-branded cards, he was not always so pessimistic at United’s chances for a lucrative deal.
In a September note, he suggested United might renegotiate its deal with Chase in time to boost next year’s profits.
DeNardi heard me speak to a group of airline and credit card executives in May making this case. It undermines his argument that frequent flyer programs should be spun off from airlines, that they’re more valuable than the airlines themselves, because that rests on a proposition of continued revenue growth while I argue revenue for frequent flyer programs will shrink in the future as interchange falls.
Meanwhile the era of better than 50% margins for frequent flyer programs is coming to an end. To attract and retain customers they must spend more on redemptions. Customers can’t continue to accumulate miles without being able to redeem those miles in the manner they expect (saver awards) and especially in light of creative destruction from banks.
Frequent flyer progrmas face more competition than ever before. The same banks they partner with on co-brand credit cards issue their own products, including cards whose points transfer to miles (and to more than one program) and they’re spending more than ever before to market these products and on redemptions and benefits.
These programs don’t exist in a vaccuum, they compete for the attention and wallet share of consmers. While frequent flyer programs have been devaluing — increasing the mileage cost of awards, reducing availability — banks have been doubling down to attract consumers.
And that’s having an impact, as we first saw when American filed an 8-K with the SEC in April indicating they were behind expectations in credit card signups and United announced they were behind in signups as well (which is why they started pitching credit cards onboard).
The airline co-brand business is still valuable. It’s worth billions of dollars a year to American, Delta, and United. But we’re now asking the question about whether it’s peaked, and indeed in the future revenue and frequent flyer program margins face challenges. Both are more likely to fall than to grow in the future.