Is United an Airline or a Credit Card Program?

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.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. Any comments on the change in finance reporting impact that miles have. That airlines now have to take a reserve against the miles issued and as such have a strong incentive to have miles spent (so they can recognize the revenue from them)?

  2. Given the cash hoard that American had when they went into bankruptcy I am not so sure they will be as dependent on a credit card relationship as United and Delta were. I would be surprised to see Citibank pony up a billion dollars for a stack of miles…they would need to come up with a “four browser trick” to get rid of them 🙂

  3. Yeah, it seems like CC aren’t as important to Citi as they are to Chase. It seems like citi is moving towards more support and innovate products, but they’re a long way off from Chase and even AMEX, so it seems like they’d probably not go crazy on the bidding for a combined airline, but they might not have to with their main competitor being Barclays, who seem to value the CC business less than they (citi) do.

  4. I’m going to be shocked if Citi loses its AA contract. Barclays in the USA just isn’t big enough to play in thar league.

  5. @iahphx – I think you’re right. Barclay’s isn’t big enough, and they are the issuer for several airlines’ cards. Citi is bigger & more well known, and AA would be the ONLY airline-branded card they offer.

    OTOH, as Gary points out, we don’t know what the contracts say, and if Citi does loose AA, they’ll have a bit of a problem. They’ll have no airline-branded card anymore & TY points can’t be transferred anywhere but Hilton, so their big partner would be Hilton, unless they get grab another airline from one of the other banks.

  6. And how much does a CC issuer make from the program? I have a hard time seeing how Chase makes significant money from Ink (or even Sapphire).

  7. Here’s the thing I’ve always wondered: Can (and do) the partners force the airline to make more free seats available? If I was running the program at any of the big card issuers, I’d be worried sick about tightening capacity, rising load factors and the perception (rightly or wrongly, since the airlines never say what % of the time customers try and fail to get their first choice free seat at the 25k – most popular – level or any seat at all) that free seats are harder to get. I’d want to be able to order my airline partner to make more free seats available on popular routes, since if the perception of low/no availability continues/grows, nobody will want to earn miles with the cards anymore.

  8. @Zing: All religions are to some extent marketing enterprises. That’s why they have missionaries. It’s nothing specific to Islam.

    Personally, I think airline/points-based credit cards are a good thing. In theory, the issuer is giving an unsold perishable commodity (an airline seat) to the customer for using the issuer’s card to make purchases the customer would make anyways. Yes, there are those who game the system by getting multiple cards just for the signup bonuses, but that’s part of any business model I assume.

  9. Good point. Maybe time for a reminder to everyone to get both the Barclays and Citi cards if you haven’t already, as one will certainly disappear. I got a Chase Continental MC for the same reason, and then closed the account before the program transitioned to United. I don’t churn cards but I don’t see any reason not to pass up a signup bonus for a card that will soon disappear. The only question is whether to wait for the next “Grand Slam” – but that could be too far away.

  10. I understand that it may fit into a broad definition, but reducing Christ’s Great Commission to a “marketing” pitch seems like a low blow.

  11. Incredibly well written piece. Shows your depth of understanding of the airline business. However I don’t understand why United doesn’t allow earning PQMs with their CCs. US Air and Delta allow it.

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