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United Airlines Plays Hardball With Expedia and JPMorgan Chase

Brian Sumers
United Airlines Plays Hardball With Expedia and JPMorgan Chase

United Airlines has had relationships with JPMorgan Chase and Expedia Group for years, but on Wednesday the airline’s executives suggested both companies may need to improve their offers to maintain the carrier’s business.

Simply put, it’s not 2009 anymore. Then, with airlines facing higher fuel costs and a recession, they would take cash anywhere they could find it, often by accepting mediocre deals with credit card issuers and online travel agencies.

After consolidation, and with a healthier economy, U.S. carriers are strong now. They consistently make money. In the first quarter, even as it wrestled with operational challenges, including the Boeing 737 Max grounding, United reported net income of $292 million, roughly double compared to last year.

Now, it can be more aggressive with its partners. On the credit card side, executives have been negotiating with JPMorgan Chase on a new contract, asking for terms as generous as Delta Air Lines received earlier this month from American Express. The United relationship is important to Chase, and eventually, the airline likely will get its own rich deal.

Expedia is another matter.

In February, United said it has been unable to reach a new agreement with the online travel agency, and on Wednesday executives confirmed they plan to pull their flights from the group’s consumer sites by Sept. 30. United executives said Expedia no longer provides enough value, given its cost.

“This is time to change,” said Andrew Nocella, United’s chief commercial officer, on the airline’s first quarter conference call. “Companies need to evolve and innovate, and we here at United changed a lot. We have invested in our own website and our app and continue to develop much more cost-effective and transparent and optimal sales abilities to distribute our content.”

As with Chase, United could be trying to force better terms from Expedia. But this could also be real, with United ready to have a closer relationship with customers.

Chase Negotiations

Almost since he joined United as president in August 2016, Scott Kirby has been working to reach a new deal with Chase with more favorable economics.

United’s current agreement puts it at a considerable disadvantage to its peers, said Joseph DeNardi, an analyst with Stifel who follows loyalty closely. United’s previous management team had announced the agreement in 2015, and while the airline has not said how long it lasts, DeNardi said he expects it goes through 2021.

“That was, to be polite, a really bad deal for United,” DeNardi said.

After Delta announced on April 2 it had extended with American Express for 11 years, United’s negotiations took on new urgency. By 2023, Delta could make $7 billion, and Kirby wants similar economics for United. He called it the airline’s “single biggest margin growth opportunity.”

“The co-brand component of our program underperformed relative to our peers, and this disparity only widened after recent announcements,” Kirby told analysts on Wednesday. “We’re negotiating with Chase opportunities for improved economics for our card partnership to ensure that our deal delivers industry-competitive value.”

Kirby acknowledged United carries fewer passengers than Delta, but said the two airlines have roughly the same revenue. He also stressed United has hubs in the largest U.S. business centers, including New York, Chicago and San Francisco, where prospective credit card holders may have more money.

“There’s no question that we have the best set of markets and the best potential for cards for total spend,” Kirby said. “They are the premier markets for the premium card demand.”

Kirby appears confident he’ll reach an extension deal. But in a note, DeNardi said he expects United will engage in a request for proposals process, if only to pressure on Chase. United, he said, could solicit proposals from Wells Fargo or Bank of America.

When Kirby was president of American, DeNardi noted, the airline shopped its card business. Eventually, it split it between Citibank and Barclays, both of which had already done business with the company. (Citibank with American and Barclays with merger partner US Airways.)

“We would be shocked if United doesn’t go through the RFP process with its card portfolio this time around,” DeNardi said, adding that “certain current United executives believe this was a very lucrative strategy by American.”

Expedia Saga

With Expedia, Kirby may also be posturing. In 2014, when he led American, Kirby pulled the airline’s fares off of Orbitz during a contractual dispute. The fares returned.

But this time might be different.

Nocella, who worked with Kirby at American and US Airways, said airlines no longer need sites like Expedia as they once did.

“Expedia has historically been a very good in selling our lowest fares but quite obviously, we think we can sell our lowest fares just as well,” he said. “We look forward to having a direct relationship with our customers going forward, and that’s really where we are with Expedia.”

Kirby told analysts losing Expedia’s distribution won’t be a material hit to United’s 2019 earnings. The airline is still predicting it will earn between $10 and $12 per share for the full-year, assuming the Expedia relationship ends on Sept. 30.

For Expedia, the exposure likely is also minor, Jake Fuller, an analyst with Guggenheim, wrote in a recent report.

He said he Expedia likely sells about 8.5 million domestic United tickets per year, for about $2.8 billion in bookings. He said Expedia makes $10.56 in revenue per ticket, so he guessed Expedia could lose about $90 million per year, or about 0.8 percent of total global revenue.

Of course, that’s only if United follows through with its threat to leave.

“The big question is whether United intends to walk away from Expedia following the contract expiration, or whether it is simply playing hardball in search of better terms,” Fuller said. “Ultimately we do not know the answer.”

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