Chase and United have extended their co-brand credit card deal to 2029. The previous deal was set to expire in 2025. United says the new deal will deliver $400 million more revenue this year.
Much of United’s explanation why made no sense. This new deal isn’t likely to lead to a lot of “portfolio growth” (more cardmembers). They already were introducing new cards, new benefits, and have been running aggressive acquisition bonuses. However 5 words in United’s SEC filing seem to give away the plot: “Participating in Chase Ultimate Rewards.”
The Company currently estimates that the new commercial terms, anticipated portfolio growth and participation in Chase Ultimate Rewards will increase the annual cash contribution to the Company by approximately $400 million in 2020 from the combined impact of the Agreement and the amendment to the agreement with Visa.
I questioned why ‘new commercial terms’ would cause Chase and Visa to spend $400 million a year more for something they are already getting today. They had United locked in to 2025, and would have been the frontrunner to retain the business anyway.
I was skeptical that the $400 million figure made any sense. On the other hand United put it in an 8-K and is going to be held to it. So how to square the circle? There’s one thing I wrote that may be wrong, and realizing that would seem to tie everything together.
- United’s filing attributed some of the revenue growth to “participation in Chase Ultimate Rewards”
- I said that growth in Ultimate Rewards transfers couldn’t drive this much more revenue to United. And that much is correct.
if we’re looking for where United’s claimed $400 million revenue growth is coming from we have to ask “what’s different” in this deal compared to the previous one, where United was a transfer partner already.
There’s almost no way that this new deal could be increasing points transfers from Ultimate Rewards and therefore netting additional revenue.
- However I didn’t consider the possibility of United pulling out of Ultimate Rewards without a new, more expensive deal.
United Airlines President Scott Kirby has expressed his unhappiness with Ultimate Rewards. Customers could earn more miles faster using Chase’s own cards like Sapphire Reserve, and transfer those miles to United. That draws customers away from the United co-brand credit cards which are more lucrative for United.
If we assume that Ultimate Rewards transfers weren’t in the earlier contract, and that transfers were in effect voluntary, then we can also assume that United would have (at least threatened to) pull out of Ultimate Rewards. That would explain what Chase had to gain by agreeing to a new, more expensive contract now even though the existing agreement extended to 2025.
I concluded, “There’s either more going on here than has been disclosed in the United Airlines 8-K or the $400 million United is claiming is fuzzy math.” The ‘more going on here’ would be Chase Ultimate Rewards, which was specifically called out as as revenue growth driver in the release. It would make sense for Chase and Visa to kick in more money to keep United as an Ultimate Rewards transfer partner.
- Losing United transfers would have been a big blow to Chase’s Sapphire Reserve, Preferred, and Ink Business Preferred portfolios.
- United is the primary airline transfer partner they have.
- While I believe United needs these transfers – it’s been a primary source of revenue growth for the MileagePlus program – Kirby may have been able to hold these transfers hostage to get a deal.
Kirby has been very public that United’s card deal wasn’t as lucrative as American’s or Delta’s. Chase could afford to pay more, and it makes sense they would have done so to protect their premium branded cards portfolio (and get Visa to kick in).
One of the things I do here is work through ideas. I even change my mind. United’s $400 million claim does make sense if we assume Ultimate Rewards was a leverage point that United had in their negotiations with Chase.
Is there still fuzzy math here? Perhaps. Chase pays more for Ultimate Rewards transfers, Visa agrees to pay more. Then United makes some aggressive assumptions about cardmember acquisitions based on a new relationship with additional marketing spend commitment to round up to $400 million. But the order of magnitude certainly can make sense to have paid once you factor in retaining Chase to United mileage transfers.