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?
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?