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Airline loyalty programs continue to drive competition for co-branded card pacts

Recentdeals involving airline frequent flyer program credit cards offer a reminder ofthe perceived level of competition among issuers for co-brand and private-labelprograms.

AmericanAirlines announced July12 that it struck a new dual-issuer arrangement with Citigroup Inc. and BarclaysDelaware Holdings LLC that permits both institutions to offer AAdvantage-brandedcards. Days later, Synchrony Financialannounced it entereda new partnership with the Hong Kong-focused Cathay Pacific Airways to launch aco-branded card.

The newAmerican agreement offers resolution to an unusual situation that emerged in theaftermath of the airline's December 2013 merger with US Airways. The AAdvantagecard has long served as a crown jewel — or "killer app" as one executiveonce put it — of Citi'scard business. But Barclays, as the incumbent issuer of cards in partnership withthe US Airways Dividend Miles program, had been permitted to manage AAdvantage-brandedproducts held by existing customers.

Whenthe Dividend Miles program merged into AAdvantage on March 31, 2015, Barclays discontinuedthe origination of new credit card accounts under the partnership. It was, however,permitted to maintain existing accounts under the AAdvantage brand through the renewaldate of the original US Airways partnership agreement. Barclays, according to a2015 prospectus supplement for its credit card master trust, said it planned torenegotiate the terms of the co-branded arrangement at the time the agreement wasdue to renew.

"Ifrenewal of the [US Airways] co-branded agreement does not take place, it could affectthe performance of the issuing entity's receivables related to the co-branded relationship,including repayment patterns and cardholder usage of the credit card accounts,"the master trust cautioned. Receivables associated with the US Airways program inthe master trust portfolio totaled $862.1 million as of March 31, according to aMay filing.

The dual-issuerarrangement will permit Barclays to market and issue new accounts beginning in January2017 while it retains its existing accounts linked to the AAdvantage program. Thebank will offer its cards in airports and, on an exclusive basis, during flights.Citi, meanwhile, can continue offering its co-branded card through multiple exclusivechannels that include digital, mobile, direct mail and American's airport lounges.

Americandescribed the arrangement as the first of its kind in the U.S. airline industry.And, as executives outlined it during a July 22 conference call, the company expectsto derive incremental pretax income as a result of the deal's terms to the tuneof $200 million in the second half of this year, $550 million in 2017 and $800 millionin 2018.

CitiCFO John Gerspach said during a July 15 callthat the company was "very pleased" to renew the partnership and to maintainthe associated "high-quality, growing portfolio at attractive returns."But he cautioned that the renewal is likely to lower Citi's pretax earnings by $50million per quarter through the end of 2017 and at a "somewhat" higherlevel in 2018 and beyond as a result of higher associated expenses. He downplayedthe loss of exclusivity for the "travel day type of acquisitions" underthe new structure, saying that those offers were "not a particular strengthof ours anyway."

Cardsissued under the AAdvantage program accounted for approximately 25.7% of the $47.69billion of the total receivables in the CitibankCredit Card Master Trust I portfolio as of Dec. 27, 2015, accordingto a May filing.

In additionto the forthcoming addition of the AAdvantage card, Barclays currently offers ahandful of travel-related card products in partnership with the likes of websites,timeshare operators, cruise lines and airlines. It has begun offering a JetBlueAirways co-branded card after winning the partnership away from American Express.Barclays acquiredexisting receivables associated with the former co-branded product from AmericanExpress in March.

offers Asia Miles-brandedcards in partnership with Cathay Pacific, but only to residents and/or citizensof Hong Kong and Macau.

SynchronyCEO Margaret Keane credited her company's partnership experience and capabilitiesfor winning the relationship, and she added during a July 22 that the company keeps its targetedreturns in mind when pursuing new co-brand deals.

"Welike the space, but we're going to be cautious around it," said Executive VicePresident and CFO Brian Doubles. "You're probably not going to see us go afterthe really big marquee deals. But … [where] we can go in and … demonstrate our capabilitiesand win on that basis and still earn an attractive return we're going to go afterthose deals."