Frequent flyer program revenue – and in particular the sale of miles to banks – is the biggest driver of US airline profitability. However United’s MileagePlus is stagnating. Their revenue growth can be accounting for entirely by points transfers from Chase Ultimate Rewards. As Chase Sapphire Reserve gained popularity that meant more points earned which could be transferred to United.
United re-upped its credit card co-brand deal with Chase in September 2015, extending out to 2025. However the airline has been talking up how their deal with Chase lags what other airlines – American and Delta – have.
The airline’s President Scott Kirby was intimately involved in negotiating a deal as President of American with Citibank and Barclays, and knows AAdvantage has a sweeter proposition. However American was in a unique position with two banks each with installed cardmember bases motivated to maintain their business, and in my view willing to overpay in order to do so.
For two years United has been having conversations with Chase. They re-launched the card product changed benefits and started pitching the card to customers inflight.
To United’s leadership, though, the problem is their deal with Chase — and has nothing to do with making the program worth less to members indeed United’s President believes the airline’s presence in a market dictates card acceptance rather than the value proposition of the program itself.
However the Wall Street Journal reports that the airline has zeroed in on something that frequent flyers have long known:
- Banks have gotten increasingly competitive in their card offerings. It makes little sense for most customers to spend on an airline card. Get the card for benefits like free checked bags and earlier boarding, but you can earn more valuable rewards faster with bank currencies whose points transfer to miles.
- Even if you want to earn United miles you can earn more United miles for the same spending with a Chase Ultimate Rewards card (plus have the flexibility to spend points directly for travel or transfer to a different airline or hotel program).
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Unsurprisingly when there are better card products out there, the United card suffers. And when there are better cards even for people who like United miles, the United card suffers even more. The same situation prevails with American Express and Delta of course yet reports are that Delta’s card portfolio continues to prosper.
According to the Journal,
- United card applications slowed after the introduction of Sapphire Reserve. In fairness, the airline has been upbeat about card acquisitions lately, and the Sapphire Reserve product took a lot of air out of the room for other cards too. (And it, too, has since been surpassed.)
- United has complained that Chase “was offering a more generous sign-up bonus for Sapphire Reserve than the United cards” however that hasn’t consistently been true the past couple of years and doesn’t speak to what’s actually troubling the United portfolio.
- The airline wants Chase to “pay it more for miles” despite having 6 more years to run on its deal. They want more for their existing business, while I believe the focus should be improving the value proposition of MileagePlus or the card.
- However Chase “insists the cards aren’t direct competitors and believes the airline should be doing more to earn traveler loyalty.” They are direct competitors for acquiring United miles (although perhaps Sapphire Preferred is more on point here given each card’s price point) however the answer certainly lies in improving the United value proposition, not gutting Sapphire Reserve’s — because Sapphire Reserve itself faces competition from other premium card products, some of which are better still.
United can’t stop competition from banks. The airlines in many ways pushed banks to become so competitive, building their own programs. As the airline industry consolidated and the price of co-brand deals rose for the banks, the banks saw a need to build their own business independently. United is squeezing Chase further, which only furthers this dynamic.
The airline is faced with a dilemma. Chase’s products are better, but United still gets a piece through mileage transfers. MileagePlus is the number one Chase transfer partner by volume, by far, and these transfers have driven the program’s growth.
The existence of these transfers reduces the need for even more lucrative co-brand card product spend. But it’s not clear United would get that spend in any case as it eliminates award charts and raises redemption costs for the program’s best awards.
Delta Airlines prospers while remaining a Membership Rewards transfer partner. American isn’t a transfer partner with any bank currency, a result of Citi’s unwillingness to pay the cost the airline demanded. However the Journal reports that conversation is being revisited as a way to improve Citi’s ThankYou program and drive more revenue to American’s bottom line.