Last week Chase and United announced an extension of their agreement so that Chase will continue to be the issuer of United co-brand credit cards.
United filed an 8-K form with the SEC related to this deal. The specifics of the agreement don’t get released (I’ve only seen one full agreement between an airline and a card company and excerpts of others), but the order of magnitude effect of the transaction is noted here.
The Company currently estimates that its second half 2015 operating revenues under generally accepted accounting principles will increase by approximately $200 million from the combined impact of the Agreement, the amendments to the agreements with Visa, JPMorgan and Paymentech LLC, and updated assumptions for accounting purposes.
There’s some disagreement on exactly what a $200 million increase in revenue — with just three months left in the year — means exactly.
Since the language references ‘second half’ revenues, Crain’s Chicago Business thinks that implies United is doing $400 million per year better than before. Of course we’re already about halfway through the second half!
The interesting thing to me, though, is that some of this operating revenue comes from “updated assumptions for accounting purposes.” In other words, it does not mean Chase is paying $200 million more than before in the second half of 2015.
When credit card companies pay an airline, part of the revenue is for the miles their cardmembers earn and part is for current benefits attached to the cards like waived checked bag fees. As I’ve explained,
Take the free checked baggage benefit that many airline cards come with. Credit card companies offer this because checked bag fees really get under travelers’ skins, so having an ‘out’ from paying these fees does a great job at prompting credit card signups. Card companies, under their co-brand contracts, pay for the checked bag fee waiver. And airlines book that revenue in the current year rather than booking a deferred liability. So the airline has an incentive to overweight the value of the checked bag benefit, in order to benefit their bottom-line now.
Under the new deal United is clearly shifting some of the revenue from Chase into current operations and away from liabilities.
Nonetheless Chase is paying more to re-up their United deal, and this is a very big deal for United. United’s MileagePlus program is slightly larger than Delta SkyMiles, and we know that the Delta American Express deal is worth $2 billion a year. It’s just not quite as big as the 8-K filing may make it appear.