Amex pays Delta $1 billion for agreement?

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Mogul of Pineapples
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Amex pays Delta $1 billion for agreement?

Postby Mogul of Pineapples » Thu Dec 11, 2008 6:26 pm

I found this surprising.

Delta Airlines (which now includes Northwest) is getting a billion dollar extra from it's Amex partnership which was just renewed. The report says Delta receives an "immediate" one billion dollar payment.

I don't understand how the Amex/Delta partnership could be that lucrative for Amex to pay that. Keep in mind that amount is in addition to the $15 billion Delta gets over the term of the agreement which is 7 years long. I would think it would be the other way around and Delta would be the one begging because of all the business travelers Amex would throw their way.

It sounds to me like American Express got the crappy end of this deal. I always though these types of credit card partnerships with airlines and merchants operated differently, where each party would get a cut of the profits and the credit card companies wouldn't have to pay tons of money just to get the rights to issue their cards.

Here is the article if you're interested:
Deal with American Express gives Delta $1-billion boost | Freep.com | Detroit Free Press
Disclosure: I am a moderator/paid staff of this site, which does have advertising relationships with some credit cards that are discussed and linked to. Regardless, anything I say is my honest opinion.

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Postby Kino » Fri Dec 12, 2008 12:20 am

7 year agreement? Lol the airlines are always on the verge of bankruptcy. Why pay that much and make an agreement that long when you don't even know if they will still be around by the time it's over!!!!

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Postby fffresh » Fri Dec 12, 2008 3:38 pm

I would have to concur this amount appears excessive. It makes one wonder what American Express is paying out for their partnership with Costco. Amex not only issues the Costco credit card but also is the only card issuer that can be used at their stores. If a Delta partnership is costing them $15 b. over the period of 7 years one can only speculate on what the Costco partnership would cost.

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Postby The Fuzz » Fri Dec 12, 2008 4:26 pm

Here is an inside view for you.... The Delta American Express products make up 10% of the overall revenue for American Express as of my most recent information. This is info that is not current as of the launch of the Delta Reserve card. 10% of our revenue is more profitable than the Costco agreement, so it is worth it for AMEX to keep the partnership alive now that they have an opportunity to make it even better for themselves.

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Postby Mogul of Pineapples » Fri Dec 12, 2008 11:15 pm

That still seems like quite a bit to pay. If my numbers are right, Amex's revenue is around 30 billion a year. Figure 10% of that (from the Delta Airlines credit cards) is 3 billion a year. This agreement appears to be costing Amex roughly $2 billion a year. That means they are paying $2 billion for $3 billion in revenue. Then you consider that's only revenue and not earnings, I still don't understand how this deal is a real winner for Amex.

About the Costco agreement, do you know how much that is costing Amex by any chance? I wonder if any of these agreements are "free" as in they just do a profit split on revenue from the cards instead of charging American Express a chunk upfront. That seems like the logical, most fair way they should be done.
Disclosure: I am a moderator/paid staff of this site, which does have advertising relationships with some credit cards that are discussed and linked to. Regardless, anything I say is my honest opinion.

Current Cards:
American Express: Blue Cash, Simply Cash Bank of America: WorldPoints Platinum Plus Chase: Amazon, British Airways, Cash Plus Rewards, Freedom, Ink Cash Citi: Thank You Premier, Dividend Platinum Select Discover: More
Primary Everyday Card: American Express Blue Cash
Primary Travel Card: Chase Sapphire Preferred

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fffresh
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Postby fffresh » Sun Dec 14, 2008 4:19 pm

Another point to be made is that the revenue Delta would be receiving would be mostly profit, while the revenue American Express would be receiving would be a liability in the form of credit underwriting. If the revenue were cut in half, Delta would almost certainly be generating a higher percentage of profit from it.

I see no possible way Amex's 1/3 revenue share could be equal to, or more profitable than, Delta's 2/3 share of the revenue.

One may further argue that if the deal were to be terminated, there are no other companies that would be in a position to offer Delta an arrangement that lucrative.

AnthonyBarone
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Postby AnthonyBarone » Mon Dec 29, 2008 9:33 am

You know Discover hasn't got any partner cards for anything out there.

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The Fuzz
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Postby The Fuzz » Mon Dec 29, 2008 5:49 pm

AnthonyBarone wrote:You know Discover hasn't got any partner cards for anything out there.



That's because nobody wants to partner with Discover. ;)

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Mogul of Pineapples
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Postby Mogul of Pineapples » Tue Dec 30, 2008 11:21 pm

The Fuzz wrote:That's because nobody wants to partner with Discover. ;)


I'm sure that will begin to change once the economy turns around. Now that Discover is accepted at nearly all the same places as Amex they will become a lucrative (more affordable) alternative for retailers, airlines, and others to partner up with for credit cards. Being new to that niche they will probably give the other company a generous deal.

I'm guessing though we will see a Discover airlines card first before a store card. One of the smaller airlines would jump at the offer if it would give them an infusion of cash, because we all know the airlines are always in need of loans.
Disclosure: I am a moderator/paid staff of this site, which does have advertising relationships with some credit cards that are discussed and linked to. Regardless, anything I say is my honest opinion.

Current Cards:
American Express: Blue Cash, Simply Cash Bank of America: WorldPoints Platinum Plus Chase: Amazon, British Airways, Cash Plus Rewards, Freedom, Ink Cash Citi: Thank You Premier, Dividend Platinum Select Discover: More
Primary Everyday Card: American Express Blue Cash
Primary Travel Card: Chase Sapphire Preferred



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