In recent years, credit card companies have realized that in the perennial competition to acquire and retain customers, they need desirable rewards partners. While many card issuers have their own rewards points or cash-back programs, many consumers want to earn currency from a particular brand.
Airlines are usually near the top of the list in terms of desirability. They serve huge numbers of customers. Moreover, airline tickets are expensive enough that plenty of people want to earn points for free flights.
Airlines have used their resulting leverage to get significantly better deals upon renewing their co-branded credit card agreements in the past couple of years. United Continental (NYSE:UAL) is just the latest to take advantage of this auspicious situation.
United Continental gets its payday
On Wednesday, United Continental announced that it has extended its co-branded credit card agreement with Visa and JPMorgan Chase to issue a variety of United MileagePlus rewards cards.
The press release announcing the deal didn't include any financial terms. However, in a related SEC filing, United revealed that its operating revenue for the second half of 2015 will increase by about $200 million as a result of the new agreement.
Looking for clues
Based on that single piece of information, it's impossible to pin down the annualized benefit to United of the new agreement with any certainty. At the maximum -- annualizing the $200 million benefit United will reap in the next 3.5 months -- United could be in line for nearly $700 million in incremental annual revenue going forward. However, the true annual benefit could be a good deal smaller.
In July, Southwest Airlines (NYSE:LUV) -- which is about half United's size -- extended its co-branded card agreement for the Chase Rapid Rewards card. At the time, Southwest told investors that the new agreement would boost its revenue by $400 million in the second half of 2015.
However, the annualized benefit of Southwest Airlines' new agreement going forward is actually around $500 million. That's because the updated agreement triggered an accounting change that has no cash impact but causes Southwest to immediately recognize about $150 million of revenue.
Delta Air Lines -- which is similar to United in size -- has also renewed its co-branded card agreement (with American Express) in the past year. In a December investor presentation, the company stated that the early renewal would increase a $2 billion revenue stream from the sale of SkyMiles by 15% in 2015, and by 20% (or roughly $400 million per year) over the term of the new contract.
Estimating the annualized benefit
Based on these two competitors' credit card deals, it seems likely that United's annualized benefit going forward will be at least $400 million. Considering that Southwest, a significantly smaller airline, won a $500 million annual improvement to its credit card terms, it's even plausible that United's annualized benefit will be close to the "maximum" scenario of $700 million.
That said, it's worth keeping in mind that each airline's reported improvement is based on its own prior credit card deal. So it could be that Southwest's original credit card deal was much less favorable, allowing it to make bigger gains when renegotiating the terms this year.
Whatever the exact number, United's annual revenue benefit will be important both because airlines have struggled to hold revenue flat in the face of falling oil prices this year and because this incremental revenue is essentially "free." This credit card windfall should help United Continental as it tries to catch up to the airline industry leaders in terms of profitability.
Adam Levine-Weinberg owns shares of United Continental Holdings, and is long January 2017 $40 calls on Delta Air Lines, The Motley Fool owns and recommends Visa. The Motley Fool recommends American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.