How Amex avoided a repeat of Costco to keep Delta on board

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If American Express is going to soar in the future, it plans to do so firmly attached to the new 11-year contract it has signed with Delta Airlines.

Calling it an "unprecedented" agreement and "one of the most valuable portfolios in the industry," American Express CEO Stephen J. Squeri said the deal through 2030 with Delta will allow both companies to grow in the key areas of serving high-level business customers, expanding global reach and advancing digital experiences for customers.

Co-brand cards with Delta deliver 8% of billings and 20% of lending in Amex's overall current business, Squeri said Thursday during Amex's first-quarter earnings call.
Considering the stakes of its airlines partnership, Amex sought to avoid the type of last-minute consternation it suffered during the Costco Warehouse contract negotiation more than three years ago. Whereas Amex lost the Costco account to Citi, it delivered the new Delta contract with four years left on the previous contract.

"At the end of last year we started talking about the benefits of an early renewal," Squeri said. "Given the potential we both saw, we wanted to think and act for the long term and avoid the short-term distractions and disruptions that could come regarding the next stage of our partnership."

For starters, Amex will see an estimated $200 million headwind over the balance of 2019 from the new contract with Delta, said Jeffrey Campbell, Amex's chief financial officer.

"We have had tremendous growth over the years with Delta," Campbell said, noting both companies have consistently posted growth numbers stemming from its previous contract signed in 2014.

The Delta contract represents a segment of the Amex business model that has been "faster growing than the company average" for many years, Campbell said.

The companies intend to "invest side by side" and continue to leverage the assets both have in terms of advancing technology and providing significant rewards for cardholders regarding lounge access and other travel perks, Squeri said.

Amex said first-quarter revenue rose 7% to $10.4 billion from a year earlier. The increase was "broad-based and reflected higher card member spending, loan volumes and fee income," it said.

Net income for the three months dipped 5% to $1.5 million. Amex cited more spending on customer engagement, some higher net-lending write-offs and operating expenses related to a resolved merchant litigation case.

Total revenues net of interest expense were $5.6 billion for the global consumer services group, up 9% from $5.1 billion a year ago.

Amex completed other partnerships during the quarter, including Air Canada and Marriott International's rebranding of the Starwood Preferred Guest card portfolio, of which American Express is a co-brand, to Marriott Bonvoy. Amex has partnered with the Starwood brand for more than 20 years.

Amex officials did not elaborate about a possible domestic market in China, instead choosing to indicate they remain pleased that China gave the company preapproval late last year to provide transaction settlement services in the country. Amex has been reluctant to claim victory over other card brands in seeking a piece of that massive market. The political climate between the U.S. and China has made any business in that country an uncertainty for now.

Amex execs did not directly address potential competition from the new Apple Card issued through Goldman Sachs, though Squeri shared his thoughts on the overall Amex rewards and value-add programs.

"We look at the totality of the value proposition, not just the membership rewards, but the investments we would make in lounge benefits … restaurant credits or airline credits … so as we look at it, we determine what our customers would value," Squeri said. "Right now, we like the value propositions we have."

Though many credit cards can match or surpass the rewards the new Apple Card offers, there is no doubt that the launch of the virtual card in the Apple Pay wallet and accompanying metal card signals a different type of competition for Amex and others. It means Apple has potentially figured out a way to establish its card at the top of its own mobile wallet. It also offers an accompanying Apple Cash feature, that operates like a debit card.

Amex has no plans to add a debit product to its portfolio, though Squeri did say the company continues to look at opportunities in digital platform expansion — a technology that may call for a debit component attached to other customer accounts in the future.

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