Airlines are dependent on banks to buy award miles with exclusive credit card deals but at least one relationship (Chase and United Airlines) is struggling. Could this be the moment that airlines reverse course?
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United Claims Chase Isn’t Issuing Enough United Cards
Over the last couple of months, United has been increasingly bold in their frustration with JP Morgan Chase, the exclusive credit card vendor and, technically, their largest customer. Scott Kirby has called improving their agreement with Chase United’s “single biggest margin-growth opportunity.”
But United is not happy with Chase’s performance in issuing new cards. Chase Ultimate Rewards products (Sapphire Reserve, Preferred, Ink, Freedom, etc.) offer the bank’s own proprietary currency and compete with potential and current United card customers. They offer better benefits and their ability to transfer to United amongst other travel partners.
Ultimate Rewards points can be transferred to nine airlines (including United) and three hotel chains at a 1:1 ratio.
How Airline Cards Work
Airline credit cards drive irrational loyalty as they offer aspirational rewards and greater affinity toward the carrier. That’s attractive to banks like Chase, Citi, American Express, Barclays and Bank of America. Banks make money in a few different ways from credit card customers primarily with credit card processing fees and interest.
Banks like Chase take a gamble that if they offer a big carrot, like 50,000 United points after spending $2,000 in 90 days, that consumers will get the card. The spending requirement is to ensure the bank has generated some revenue from the cardholder (in addition to an annual fee) and the time limit is to push that cardholder to make the card their primary payment method. They know that very few consumers change their cards often, so finding a way to be top-of-wallet could pay tremendous dividends for the bank over a long period.
Banks commit to purchase billions worth of airline miles at reduced prices (estimated to be between 1.0-1.4¢/point) over the life of their deal incrementally as customers incur them by spending on co-branded cards or as new cards are issued.
If Chase signs up 10,000 new customers who qualify for the sign-up bonus this month at 50,000 points, Chase would need to buy 500 million United points at a cost of (just taking the low end) 1.0¢/point for a total of $5 million. That may be in addition to their existing customer base who earned 5 billion United points last month for which Chase would have paid United Airlines $50 million.
Airlines Can’t Afford to Jeopardize Their Banking Relationships, Especially American
Every new customer that Chase signs-up triggers four positive events for United.
- First, the bank will likely buy a bulk of miles associated with the new account as a one-time bonus to United.
- Second, the carrier now has a new rolling income source in that new customer.
- Third, they have a more engaged customer who is more likely to fly United to earn more miles.
- Fourth, while United incurs issued miles as a liability on their balance sheet, the true incremental cost of redeeming those miles for the carrier is a fraction of their balance sheet liability and sales price.
However, if United Airlines were to damage their relationship with Chase it could be detrimental for the carrier. Currently, banking relationships contribute dramatically to the bottom line. United made $292 million in the first quarter of 2019 but a sizable portion of which is likely to have derived from the relationship with Chase.
Delta just signed a new landmark deal with American Express for exclusivity that will guarantee $7bn through the end of their 12-year contract and keep in mind that the revenue could grow from there if Delta cardholders charge more on their cards than anticipated.
American, who only profited in Q1 from their banking relationships with Citi, Barclays (and small relationships elsewhere), would have lost money on flying. Without that relationship or with a bad banking deal, they would have lost money.
Will This Be Enough to Cause Carriers to Reverse Diminishing The Value of Their Points?
Airlines rely so heavily on their banking deals for profitability and financing their operations that it seems they will have to consider their options. Large banks that carry co-brand deals also have their own currency and premium card products, Citi with Thank You Points, Chase Ultimate Rewards, American Express Membership Rewards, even Barclays has the arrival card which may be more lucrative than their American Aviator cards.
It’s only inevitable that airlines will have to become more competitive with their offerings and that customers simply will not engage with airlines that devalue their programs and points with impunity. United and Chase have considered adding premium benefits to its card offering but the real differentiator would be a return to value in the MileagePlus program for redeemable miles.
I’m fully convinced this is the only segment of the airline business model that could affect real change in management. However, applications for new cards and spending on current cards for other carriers would have to drop dramatically to send the point home.
Consumers have voted with their dollars by spending on Chase’s other products that give them more flexibility than just United MileagePlus miles. This has caught the attention of United, though they don’t seem to connect the constant devaluations (and soon the elimination of their award chart altogether) with customers choosing better cards rather than earning only with United.
What do you think? Will the airlines change their approach because of the banks? Have you moved your own spending from a co-branded card to a flexible currency?
United has screwed themselves (as well as the DL and AA) with rolling back loyalty benefits. This November when it comes time to pay the annual fee on my UA card, I won’t. Not enough of an incentive to stay loyal to a carrier that does a horrendous job at rewarding loyalty. It’s just that simple. UA had a golden opportunity to stick out in the industry and NOT move to dynamic pricing but they chose to be like all the others and this will cost them. In the end, UA has no one to blame but themselves. Chase can’t help their awful loyalty program.
As a 1K Premier Mileage Plus flyer on UAL, if United would get serious and dramatically improve it’s service + customer satisfaction, its shared JP Morgan Chase / Chase VISA customers would be grabbing up the United-exclusive mileage rewards and not opt for other airlines. Do no blame the bank for “not selling enough.” United owns this revenue decline concern. Fix it.
I already downgraded my United Explorer card to some kind of other card with Chase. It’s still United branded, but has no annual fee and travel points come as cash back rather than UA points. I did this because I can’t stand UA and only fly them as a last resort now, but didn’t want the lifespan of the card impact my average lifespan of my accounts on my credit report. Now it’s just a dud card, however (not that it was much more than that previously).
United has such a poor product, if you are going to have your dollars translate to points, I can’t see why you would ever waste the effort on them.
I’m glad to read that consumers are voting with their feet. The “Big 3″ are shooting themselves in the foot (or is it the landing gear?) with their constant devaluations in a made race toward the bottom. You know what they say…”if you can’t stand the heat (of competition from better products), stay out of the kitchen (credit card business).”
If United wants me to use my United card instead of my sapphire rewards card, they need to make it worth my while. This is on them.
Can’t agree more… It wasn’t so long ago that 130,000 miles would score you a business class RT to Asia. More importantly, seats were actually available for the taking.
They hold the power to sell more credit cards and it would cost them next to nothing. They could turn it on like a faucet this very moment.
I have the United Club card so I can use the United Clubs. Why would I use it to charge anything? Amex Plat is 5x for travel.
Erica Johnson, Chase Executive Office, Chase-United Loyalty, Customer Relations
1-888-214-7712 x 6548050
My wife and I used to collect both United and American miles, using our Chase (MileagePlus) and Citi (AAdvantage) credit cards, respectively. No more… we have switched to accumulating Ultimate Reward points, using Chase’s own credit cards. The airlines have over the years devalued the miles. Worse still, (premium, international) award tickets are scarce indeed. We have a lot of American and United miles sitting in our frequent flyer accounts rotting away.
We have been flying to and from Europe on the likes of Norwegian, TAP and La Compagnie instead.
Unfortunately, you may try the competition and determine you like it better than UA or AA and that’s another consequence of their actions, once you try the rest you may not come back even if they do fix it.
I would sign up for a United Club Card today, but 5/24.
Yes, United should tell Chase to cancel the 5/24 rule.
The answer is simple and Kirby knows this look where he came from, in order for a travel card to be successful and desirable there has to be an underlying value to it. And United has little to no value in which anyone reasonable person would invest time and money on. Hell their product sucks, they keep devaluing their currency ( Miles ) and then they blame their issuing banks. Maybe some coffee here could help them. American is a disaster exactly where Kirby came from.
Example I have Amex Plt, Chase Sapphire ( which I love) and have had a Alaska CC for 20 years, why the value, I am also a mm on AS, I get a free companion ticket once a year which we always use, and Alaska respects and values their FF.
I see zero value to having an airline credit card.
Cash rewards is the only way to go.
The miles you get today are worthless in 18 months
I understand the value of cash back cards, but I am not so sure about the latter.
Yes, I can see how it might feel like they will be worthless, because of devalueuation, but to me, it seems they are less prone to that than hotel points and consequently co-brand hotel cards. I think there is value in not having all your eggs in one basket, which IMO is why Chase points or Amex points are more poplar. I can transfer Amex points, for example, to Delta, Choice, Marriott, or Hilton, when I find awards that are good deals/value for your points, and use cash when I don’t.
If your taking about miles expiring. That’s what shopping portals are for.
If you have a UA branded card, your miles don’t expire as long as you have the card.
I’m one who is quite happy with my Chase cards. From the original Signature one which we don’t use, to my spouse’s Explorer card, to my Presidential Plus Club Card, we have no complaints at all.
My home airport has broad flight offerings for UA, Delta, Southwest, and Alaska. The latter two’s card offerings are meager.
I’ve been flying since the early 80s, and my stars aligned with United, its partners, and the routes they’ve acquired from Pan Am and Continental.
I read the complaints here and elsewhere, and I wonder if they are flying the same United that we fly. My experiences have been great to excellent, with UA almost never disappointing me. Granted, I fly out of PDX, and most of my mileage is from International adventures. I do feel for those elite flyers who make it on segments and intra-US flying.
My one disappointment has been the devaluation. I can recall the latter days of PanAm when we were able to fly First Class to Greece for 80,000 miles each, and RTW for 150,000.
Let’s hope something good works out for everyone.
I just dropped Chase United Club and got Chase Sapphire Reserve mainly because, as of November, United will require we be flying Star Alliance the same day to get into the club. Priority Pass/CSR doesn’t care which airline I am flying. I fly to Asia monthly and often use combinations with Star Alliance and American, British, Qantas/Jetstar, JAL, Airasia, Laos, etc.
For $450/year, Chase Sapphire Reserve is exponentially better than Chase United Club.
I hold a few million points/miles in around 15 currencies, but tend to gather more based on value. For instance, I intentionally accrue Hyatt, Alaska, and Chase currencies. Other programs had numerous chances to get or keep my loyalty, but showed what they think of my loyalty by their actions. I would dearly love for loyalty to be valued again by the big boys, but I don’t really see this as likely.
What do you do when your mile sales for UR transfers are down, and your own cards aren’t generating as much as you’d like? You devalue, because you think your customers are idiots.
Customers are wising up. Transfers to Southwest and Hyatt are pretty damn good options (Hyatt is also expanding rapidly), and the devaluation will only help increase those (at UA’s expense). Something tells me transfers and redemptions skyrocketed when the devaluation was announced, and have now slowed to a crawl as the planes fill up. They have to get creative and find some way to provide actual value, not just whine and spin and hope the behemoth that is Chase will budge.
So it’s interesting to imagine. Are we steps away from an airline purely run by a CC company and only filling seats with point users? It seems like it’s not unimaginable.
Kyle, great article. Well written.
The other balancing act all the carriers are dealing with is the expectations of business flyers who are paying the expensive fares and expect priority for upgrades and other benefits over the points and miles crew. Hostility exists between those to spend on cards vs those who spend on air fares.
This places the carriers in a difficult position, but few of the business flyers or their corporate travel departments realize that, as you rightly say, the credit card companies are their largest customer.
Yeah, United, just blame it on Chase……maybe if you’d offer more points for spending, you’d retain your Chase MPlus Explorer customers instead of your GREEDY one-man SCOTT KIRBY calling all the shots. Gotta love it when an airline tells a bank how to run their business.
I hope United, American and, for that matter, all the other major airlines out there are smart enough to pay attention to the chorus of uniformly negative reactions expressed on this forum. Making money through credit cards may be a side business for them, but, with an increasingly inferior loyalty program, they stand to lose passengers in their main-line operation. I am perfectly happy to fly the likes of Norwegian, TAP and La Compagnie instead.
Tangential to the article – but I am entirely convinced that a person’s opinion of United is closely tied to what their home airport is. I fly 30+ round trips on United a year out of DEN, and they are fine/great. I’m Platinum, fly in economy, and I rarely have bad experiences. Usually my bad experiences (weather, mechanical, etc.) are handled well and the special Mileage Plus phone line / app is excellent at helping.
I’d be interested for those complaining where they fly out of. Or if you have been flying for 30+ years (I’m only 34) and are taking more of a long-term eye towards where United used to be vs. where they are now??
Yep. LAX/SFO/BUR for me and all great. I stick to PMUA hubs still. Always try to avoid IAH and EWR…
SFO. I have had elite status with UA since 1991. My home airports were ORD, LAX and SFO, so UA was always the obvious (and best!) choice. I am now a Lifetime 1K on UA. I used to be one of UA’s biggest fanboys. But, I don’t fly UA anymore. Why? It’s pretty damn obvious. I fly Delta almost exclusively now. Yeah, I could easily be Lifetime GS on UA right now, but nah, I really couldn’t be arsed. Flying DL now is pleasant and stress-free from beginning to end. Flying UA now is just too stressful.
Hope they change the United valuations!!
It’s going to take some significant negative reactions in consumer behavior to get the airlines to reverse course but there is reason for hope.
The problem United and others face is perhaps well illustrated by a r event booking I made. I needed to fly my kids out to their grandparents for “cousins camp” and had originally been planning to just non-rev. However the night before loads did not look good. But United had seats available on my preferred flight for only 12.5k miles and $80 each.
Done. I have the United card so you might think I would have used it to earn miles on the spend and get a free checked bag.
Nope. I used my CSR to pay for the flight and the next day used my Hilton Aspire card to cover the bag fees which will be reimbursed as a flight credit. So I still didn’t pay for bags but And I got 3x points vs 2x.
A proper loyalty program would ensure that my marginal spend goes to them not away from them.