Citi Is Exclusive AAdvantage Issuer, but Barclays Stays On Board

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Citi and Barclaycard US will both have a seat at the table after American Airlines and US Airways combine their frequent flier programs and affinity credit cards, but the issuers will have somewhat different roles.

The arrangement preserves Citi's position as the combined airline's exclusive issuer of frequent flier cards, and allows Barclaycard to maintain its existing accounts using American's AAdvantage program branding.

Following the planned integration of the AAdvantage and US Airways Dividend Miles frequent flier loyalty programs by mid-2015, Citi will exclusively issue new credit card accounts in support of the combined American frequent flier program, John Gerspach, the chief financial officer of New York-based Citi, said during a Jan. 16 investor call to discuss fourth quarter 2013 earnings.

Until then, it's business as usual. Barclaycard will continue its affinity card program under the US Airways brand, says Dennis Nealon, managing director of co-brand partnerships at Wilmington, Del.-based Barclaycard.

"We have a unique opportunity before the brands merge for us to go out there and continue to acquire new card members for the US Airways Dividend Miles program," Nealon says. "We continue to be the exclusive providers of a card that gives US Airways-specific benefits when you fly US Airways."

"Our goal over the period between merger and frequent flier program integration is absolutely to maximize the number of new cardholders that we can bring in," he adds.

Prior to the closing of the airlines' merger in December 2013, Barclaycard and US Airways, as well as Citi and American Airlines, each held exclusive rights to issue affinity cards tied to the airlines' respective frequent flier programs. That's the norm for U.S. airlines, and when two airlines that have relationships with different affinity card issuers merge, only one typically prevails, says Dan McKone, an industry consultant who serves as a managing director and partner at L.E.K. Consulting.

"When you're undergoing a merger, it's one of the most tremendously operationally-complex things that an airline can do. It's something where you want to minimize any unnecessary risk because there are a bunch of things that have been integrated," he says. "From a relationships standpoint on the card, it would be simpler to consolidate with one and in prior mergers, that's what you've seen."

The AAdvantage program is the oldest and largest frequent flier program in the U.S. It has 69 million members and issued 167 billion miles in 2011, according to regulatory filings. It stands to grow to 101 million members, not accounting for overlap between the two current programs, according to the airline's estimates.

Citi's relationship with American Airlines began in 1987 and its continuation after American emerged from bankruptcy last year doesn't come as a surprise, says McKone. The airline's decisions to not extinguish its contract with Citi during bankruptcy, and later, granting the bank exclusive rights to include membership to its airport lounges with Citi's top-tier AAdvantage credit card were strong indicators that Citi and American would retain their partnership.

"Citi got pretty aggressive back in the spring to say that they're going to use this opportunity in the merger to negotiate a strong partnership with the new American going forward," he says.

What was less clear was where the merger would leave Barclaycard, which began issuing US Airways-branded cards in 2006. Barclaycard has more than 30 co-branded card products across a number of consumer segments, including six airlines.

"Airlines are a real plum asset for a bank. Airline co-brands are great performers, so we all work hard to win these and to retain these and to maximize shareholder value," says Nealon.

But recently, some of Barclaycard's airline affinity programs have hit some turbulence, resulting in various outcomes for both the issuer and its card holders.

Barclaycard lost AirTran's frequent flier card program to JPMorgan Chase last year. Chase, which also issues the Southwest Airlines frequent flier card, currently maintains separately-branded frequent flier cards for the two airlines while Southwest continues to integrate operations following its May 2011 acquisition of AirTran. This month, Alliance Data Systems replaced Barclaycard as the issuer of Virgin America's frequent flier card.

In the case of AirTran, Chase launched its own frequent flier card with the airline in October 2012 and acquired Barclaycard's legacy AirTran portfolio in April 2013, adding those accounts to its existing base of cardholders. At the conclusion of Barclaycard's Virgin America program, the issuer converted existing accounts to its private-label travel rewards product, called the Arrival card — leading to speculation that existing US Airways accounts would also get replaced by the Arrival product.

"We are not planning to rebrand any US Airways card member to Arrival," Nealon says. "They will become American AAdvantage card members and they will have all the benefits that come along with that."

In 2008, Barclaycard's contract with US Airways was extended to March 2017. After US Airways merged with American Airlines, Nealon says Barclaycard's contract was extended again. Nealon declined to provide details about the duration of the most recent extension, but says American's contracts with the two card issuers expire at the same time.

"We've entered a dual-issuance scenario. The contracts have been synced up and we will both be issuing for the new American Airlines until they expire," he says.

A Citi spokesperson declined to confirm or deny the timing of the two issuers' contracts, and declined to comment on the length of its contract with the airline. An American Airlines spokesperson also declined to comment.

While Barclaycard's American Airlines program will be limited to servicing its existing US Airways card accounts after the Dividend Miles brand is phased out in 2015, simply gaining the ability to use the American Airlines branding for its card portfolio alongside Citi is a win for the issuer, Nealon says.

"When somebody is a cobrand issuer, you have rights to certain marks. We were able to win the ability to use those marks for our existing portfolio, which we view to be a real value-add," he says. "While the new account acquisition stream may cease, the ability to really drive greater value and greater engagement is right there in front of us and it's a huge opportunity that we're looking forward to taking advantage of."

The arrangement also puts Barclaycard on the opposite end of a similar scenario that played out between Barclaycard and Bank of America following US Airways' merger with America West in 2005.

In the months leading up to the two airlines combining, Barclaycard (which at the time operated under the brand Juniper Bank) reached an agreement to replace Bank of America as the issuer of America West's affinity card. Meanwhile, BofA also had a contract to issue US Airways-branded cards that ran until December 2008.

In conjunction with the America West/US Airways merger, the airline exercised an early opt-out provision in its contract with Bank of America that set up a two-year period when both BofA and Barclaycard issued US Airways-branded cards.

"There was about a two to three year bake-off between card issuers; a competition between card issuers that ultimately had Barclays be the surviving card," explains Robert Mann, an airline industry analyst and consultant who has previously served in executive roles at American Airlines, Pan Am and Trans World Airlines.

During that time, BofA filed a lawsuit against US Airways, alleging the airline violated the exclusivity terms of their contract. The lawsuit was settled in May 2007. Barclaycard purchased the majority of BofA's US Airways-branded card portfolio in August 2008, clearing the way for it to become the airline's exclusive card issuer.

As US Airways evolves to become part of the new American Airlines, it remains to be seen how the airline's arrangement with the two issuers will play out, and whether Barclaycard's program will continue to resonate with consumers.

"It's hard for me to believe that Barclays would have the horsepower to compete with Citi in a competition of that sort, just on card-base and deep pockets," Mann says. "Not to mention, AAdvantage will be the surviving frequent flier program and I suspect that the long-term relationship with Citi is quite likely to be the survivor."

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