An AmEx-Delta Cobrand Deal Carries Acquiring, Debit Implications

An extended cobranded credit card pact between Delta Air Lines Inc. and American Express Co., announced on Tuesday, also has merchant-acquiring and debit card implications, and it provides further evidence of how airlines in a weak economy can raise cash from their issuing and acquiring partners. AmEx, issuer of Atlanta-based Delta's SkyMiles card for more than a decade, will pay Delta $1 billion upfront through SkyMiles purchases under the multiyear extension. Delta, which in late October bought Minnesota-based Northwest Airlines Inc. to become the world's largest airline, also expects to receive another $1 billion from AmEx through 2010 through what it calls in a press release “contract improvements.” The upshot for Delta is more liquidity at a time when airlines are trying to fill seats in a down economy and pay for expensive jet fuel. For AmEx, the immediate benefits were less obvious, though the agreement boosts a valuable program that a spokesperson says accounts for 5% of the No. 3 card network's worldwide billed business. That works out to approximately $32 billion based on $647.3 billion in charge volume last year. “I expect it's going to be very advantageous to American Express,” says Gwenn Bézard, research director at Boston-based Aite Group LLC. Besides more opportunities for AmEx's travel business and Membership Rewards loyalty program, the release also makes a vague reference to more merchant-acquiring opportunities for AmEx in the Midwest. Northwest has hubs in Minneapolis and Detroit. The AmEx spokesperson declined to give specifics about that aspect. AmEx stands to gain one huge benefit in 2009 as a result of the pact, and at the expense of Minneapolis-based U.S. Bancorp, issuer of Northwest's WorldPerks cobranded credit card. Late next year, Delta will merge the WorldPerks and SkyMiles programs, and WorldPerks cardholders who want a credit card will get AmEx plastic. “American Express has displaced U.S. Bank here by being willing to take on a lot of risk,” says Bézard. “American Express is using this as an opportunity to expand in a market that is highly competitive.” The companies did not reveal the number of cardholders in the Delta and Northwest cobranded programs. U.S. Bank, however, is not coming up empty-handed. A leading merchant acquirer for airlines, it already was processing for Delta and Northwest and will keep the business of the combined carrier. “We've been fortunate to enjoy pretty long and significant relations for both the predecessor airlines,” Cliff Cook, chief marketing officer for retail payments solutions at U.S. Bank, tells Digital Transactions News. In addition, U.S. Bank will offer “an expanded debit card program” with Delta, according to the release. The bank first issued Visa-branded debit cards for Northwest in 2005 and currently offers a gold card with an annual fee of $55 that gives one mile for every dollar charged and a standard card with a $20 fee that gives one mile for every $2 charged. Cook would not reveal details of the expanded program before an expected official announcement soon. The volatile airline business presents risks for carriers' cobranded card issuers, whose cardholders are especially vulnerable to the ups and downs of the economy and create liabilities as they accrue miles, and merchant acquirers, which hold reserves to protect against flights paid for but not yet taken. Frontier Airlines Holdings Inc. last spring claimed higher reserves demanded by processor First Data Corp. forced it to file for bankruptcy protection (Digital Transactions News, April 8), though the two later came to terms. In November, merchant acquirer Chase Paymentech, the main processor for UAL Corp.'s United Airlines, suspended until January 2010 a requirement that United post more reserves beyond the normal $25 million if the value of its cash and cash equivalents fell below $2.5 billion. In exchange, United gave Chase Paymentech a security interest in aircraft valued at at least $800 million. The amended agreement also collateralized United's obligations under its cobranded marketing agreement with Chase Paymentech's parent company, JPMorgan Chase & Co., issuer of the United Mileage Plus card. A Chase Paymentech spokesperson declined comment.