United Airlines seeks a big revenue bump from its next credit card contract with J.P. Morgan Chase, but is the bank ready to pay major money for a contract extension?

Maybe not, according to an investment analyst who follows airline credit card deals closely. In a research note written after J.P. Morgan Chase announced third quarter earnings October 12, Stifel’s Joseph W. DeNardi suggested United may not be as vital to the bank as several years ago. DeNardi didn’t say an extended deal won’t get done — airline contracts are still vital for banks because customers relish redeeming points and miles — but noted United’s bargaining position may have slipped.

His comments come amid changing trends in the credit card industry. Once, Chase’s high-end customers loved carrying cards with an airline’s brand on them. Some still do, but many have switched to Chase-branded products, including the popular Chase Sapphire Reserve, which debuted a little more than a year ago with a 100,000-point sign-up bonus, and lots of perks, including access to some airport lounges. Sapphire Reserve cardholders can redeem points for many airlines and hotel chains, rather than with a single provider.

About a year after it temporarily ran out of its special metal cards — a surprisingly successful gimmick — because demand for the Sapphire Reserve was so high, J.P. Morgan Chase executives recently told analysts the product remains popular. And this should probably worry United’s team, DeNardi said.

“Chase’s bullish commentary regarding better retention on its Sapphire Reserve card doesn’t help United’s leverage,” he said. “We see this as an incremental negative in the near-term.”

United lags its Competitors

While DeNardi in earlier notes mentioned that the Chase Sapphire Reserve and competing products like the American Express Platinum card had been taking “taking wallet share and spend” from airline-branded cards, he was not always so pessimistic at United’s chances for a lucrative deal.

In a September note, he suggested United might renegotiate its deal with Chase in time to boost next year’s profits. United last announced an extended Chase contract roughly two years ago, saying its “multi-year” deal would increase revenue by about $200 million in the last six months of 2015.

But DeNardi said United’s deal is considerably less rich than two contracts American Airlines signed with Citibank and Barclays in July 2016, when current United president Scott Kirby worked at American. At American, executives said the two new deals would create $800 million in revenue in 2018.

On United’s most recent earnings call, in July, Kirby said United is “underperforming” its peers, American and Delta Air Lines, with its credit card deal, and said it should have “upside in the future.” Still, he said, “I’m not sure when we’re going to be able to have the kind of tailwinds that American and Delta have had.”

In his September note, DeNardi said a new “market-rate” deal for United could be worth $600 million in earnings before interest and taxes.

“We view it as likely that United can renegotiate given President Scott Kirby’s familiarity with the American deal, Chase’s desire to keep United happy, and the successful track record of airlines renegotiating early,” DeNardi said September 20.

Despite recent trends, Chase probably still must keep United happy. Many Chase customers carry United-branded cards, and would not be pleased if the portfolio switched to another bank. And though the Sapphire Reserve card is not branded with an airline’s name, many customers convert points into United MileagePlus miles.

Bank Bullish on Chase Reserve

As for J.P. Morgan Chase, its executives are sounding increasingly positive about the Sapphire Reserve’s future.

While it’s always been popular among customers, the card has been costly for the bank, because savvy consumers can wring more in benefits than they pay in fees. Last year, Chase said costs related to it likely reduced fourth-quarter profits by $200-$300 million.

But Chase introduced the card to attract and retain new customers, who might spend a lifetime of earnings with the bank. And on the front, J.P. Morgan Chase CFO Marianne Lake said told analysts Oct. 12, the card is working.

“The Sapphire Reserve Card spending engagement is very strong, and we’re very pleased with it,” she said.

Overall, she said, the bank’s credit card spending increased 13 percent, year-over-year, though she did not specify the Sapphire Reserve card’s contribution. She did, however, say, the increase was “in part due to the number of new products we’ve had.”

Chase introduced the card in August 2016, so customers who applied for it only for the sign-up bonus presumably have started dropping it, just before paying another $450 annual fee. But Lake said customer attrition has not been a major problem.

“We’re kind of at the early stages,” she said. “So far [it’s] very encouraging [and] better than our expectations. But [it’s] a little early to sort of draw some conclusions on it.”

Photo Credit: New cards like the Chase Sapphire Reserve, which do not carry an airline's logo, make airline partnerships slightly less valuable to banks. But banks still need airlines. J.P. Morgan Chase