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When the first airlines launched loyalty programs almost 40 years ago, they intended to do what you would expect — to keep customers from defecting to the competition. But over the past two decades, many programs have become independent business segments that generate massive cash for the corporate parent through agreements with banks that market co-branded credit cards.

United Airlines, after its merger with Continental Airlines, may not have seen the trend coming as clearly as other U.S. carriers. Just before Scott Kirby, then president of American Airlines, negotiated one of most lucrative credit card contracts ever, with Barclays and Citibank in 2016, United signed a long-term agreement with J.P. Morgan Chase. Airlines and banks never release terms, but within a few years United admitted it had fallen behind on credit card revenue. Joseph DeNardi, an analyst with Stifel, called the old deal “a well-below market contract,” and when Kirby became United’s president in 2016, he complained about it.

Now, three months before Kirby becomes CEO, United is poised to catch up — but not fully. In a deal that surprised some analysts and industry watchers, United said Friday it agreed to a contract extension with Chase with better economics. In a filing with the U.S. Securities and Exchange Commission, United said the new deal, which expires in 2029, will increase cash flow by about $400 million this year.

United will earn the extra money from three sources, according to the filing. First, United will grow revenue as the two companies work to grow the “portfolio,” or the number of customers who apply for co-branded credit cards. Second, United will continue to participate in Chase’s Ultimate Rewards program, allowing Chase customers to convert points from the company’s popular Freedom, Sapphire, and Sapphire Reserve cards into United MileagePlus miles. And third, the two companies agreed on new “commercial terms,” which the filing did not define.

Spokeswomen for United and Chase declined to comment further on the nature of the agreement.

Not the Best Terms

United never said when the last deal was to expire, but the 2015 agreement was believed to last for about a decade. While United wanted better terms sooner, it wasn’t clear Chase would renegotiate so early.

In a research note, Joseph DeNardi said he expected United might wait until it could exert more leverage so it could earn a sweeter deal. “Given CEO Kirby’s success … at American and United’s success in improving core airline earnings, we thought Kirby would…. ‘get nasty’ with Chase, so we’re surprised by this announcement,” DeNardi wrote.

Hunter Keay, an analyst with Wolfe Research, also said he expected United and Chase would wait, noting he had sensed “bit of bad blood between the two companies and a limited sense of urgency” before Friday’s announcement. He said Chase had seemed more interested in growing its proprietary portfolio, including the Chase Sapphire Reserve, than hawking the co-branded United cards.

“We’ve been pretty adamant in our view that United and Chase would not get a deal done,” he said. “Regardless — we guessed wrong on this one.”

Kirby, who became United’s president in 2016, is known as one of the airline industry’s shrewdest negotiators, so he probably did the best with what he had. But even with the new deal, United likely still lags peer airlines, Keay and DeNardi said.

In earlier comments, United had said its subpar credit card deal represented a 1.5 to 2-point gap in overall profit margin compared to other large U.S airlines, and DeNardi said it’s unlikely United closed that chasm.

“Bottom line, this deal is far worse than what we thought United would be able to get and far less than what is needed to close the gap with Delta/American,” he said. “We caveat this by noting that disclosures and transparency continue to make a truly apples-to-apples comparison a challenge.”

Executives at United may be thrilled by the deal, but United downplayed the announcement, sending a press release with few details on a Friday afternoon. When Delta signed an 11-year extension with American Express, also expiring in 2029, the airline bragged about the economics, saying it expected to roughly double its credit card revenue, from $3.4 billion in 2018 to nearly $7 billion by 2023.

While it’s unlikely United matched Delta this time, Keay said the agreement “bodes well for a more substantive deal later this decade.”As for this deal he said, “though this deal isn’t earth shattering, it’s a positive for United,” he said.

Win-Win?

In business press releases, the term “win-win” gets used more than it should. But under current market conditions, most credit card deals are beneficial for both sides, which is why there’s so much money at stake.

For airlines, benefits are obvious. Most carriers create their own currencies, which they can produce for little cost and devalue when they want. They can sell that currency to banks, often between 1 and 1.5 cents per mile. (The exact price banks pay for miles is top secret, and varies by agreement.)

Carriers treat miles as a liability, and they have a cost. But most airlines assess strict capacity controls, at least for the cheapest awards, so airlines don’t give away many of their most coveted seats. Most carriers only make a free ticket easy to obtain if they calculate they can’t sell the seat for cash. Essentially, the card agreements allow them to make serious revenue from spoiled inventory.

Banks pay a fortune for miles because they’re an excellent incentive to promote credit card spending. Travel is aspirational, and many consumers like to spend money on an airline-branded credit card, so in the future they can redeem for a trip they might not have been able to take. Customers also appreciate perks like free checked bags, or lounge access, and are often willing to pay higher annual fees for a card with an airline element.

Still, a potential problem is market saturation. Given the scope of credit card marketing, many customers who want airline-branded credit cards already have one. If United wants to increase its applications, it may need to offer better perks.

In his note, Keay said he expected Chase and United to introduce new products, including possibly a new card card that allows customers to earn elite frequent flyer status through card spending.

Photo Credit: United Airlines has struck a new deal with JP Morgan Chase. Through at least 2029, many Chase customers can earn United MileagePlus miles they can use toward perks like upgrades to the business class cabin pictured here. United Airlines