Co-Brand Implications for Airlines & Credit Card Issuers

The TD Cowen Insight

Where Airlines Meet Consumer Finance

Airline co-brand credit cards have become increasingly more important to the airlines, which appear to have more leverage than the card issuers. The economics to the airlines from these programs are also typically based on revenue sharing, which is in their favor.

Airline Loyalty and Co-Branded Credit Card Programs Undervalued

We believe airline loyalty and co-brand credit card programs are undervalued in the market. One U.S. airline has disclosed that their co-branded card contributed U$6.8B in 2023 revenue; and the company management believes this can grow to U$10B by 2030. We expect to see other airlines making earnings contributions from co-branded credit cards available during investor days later in the year.

Co-Branded Credit Cards Offer Upside for Airlines and Card Issuers

Airlines

For airlines, choosing card issuers that do not have other competing travel products offers an advantage where the potential contribution to revenue into 2026 could be meaningful. The economics of co-brand programs for airlines is not significantly impacted by the level of credit loss or overall profitability of the program. We believe this could increase earnings volatility in a downturn. On the other spectrum, there is an advantage given to loss sharing arrangements with partners that are mostly based on actual program profitability.

Credit Card Issuers

For card issuers, the royalty fees they pay to the airlines have been growing at low double digits over time. Renewals potentially add significant acceleration to the growth rate. This significantly outpaces the overall credit card industry. The royalty fees paid by card issuers to airlines have been increasing consistently at low double digits over the years in aggregate, outgrowing the overall credit card industry. Going forward, we believe this will continue to be the case for this type of partnership, where the airlines have the negotiating power.

As such, upside to the airlines could come from the ability to extract more concessions from the issuers at each renewal. This could be significant for the airlines if their co-brand portfolios have desirable traits such as large size, fast growth, top-of-wallet status.

A Unique Perspective on Airline Co-Branded Cards

This report is a collaboration between TD Cowen's airline, consumer finance and payment research teams. It is a product of highly curated data on credit card solicitation, mail volume from major airline co-brand programs in the U.S., as well as our scrutiny of each airline's disclosure around its credit card program. We also demonstrate how important these programs are to the airlines by looking at factors such as loyalty revenue and cash remuneration to the airlines (where available). We further filter this data into digestible and objective criteria to rank the success of these co-brand programs. We believe no one on the Street has attempted to do this.

What To Watch

Potential renewals and increased focus of airlines on major airline co-brand programs will indicate to us whether the negotiating power will remain in the airlines' favor or shift more towards the card issuers. They will also give investors a sense into how the airlines are thinking about and planning to further build consumer loyalty. Meanwhile, continued product refreshes and hiking of annual fees should indicate airlines and issuers' confidence in the growing stickiness of airline cards. We also look forward to how the Payment Card Interchange Fee Settlement could play out, and how that could impact rewards of these programs.

Consumers who are members of the airline loyalty programs and hold the airline's credit card are the most loyal customers. They generally go out of their way to keep flying on the airline and tend to purchase premium economy or business class tickets. Airlines reward loyalty based on dollars spent on the airline as well as miles flown.

For card issuers, we favor co-brand/private label issuers that share economics with partners based on portfolio profitability rather than portfolio top line. For issuers the highest degree of EPS volatility in tough times comes from sharing with partners based on the program's top line. This is in contrast with the economics of sharing with partners based on actual profitability.