United CEO Says Credit Card Profits Are Overblown—But They’re Why Kirby Says He Grew The Airline

United Airlines CEO Scott Kirby says people exaggerate how much money airlines make from credit cards because they forget that award travel costs money. He also tells other airline CEOs to cancel flights they defend as “strategic” — including flights they say help sell credit cards. That’s a convenient argument when you’re trying to pressure American Airlines out of Chicago O’Hare, one of the country’s most important credit card spend markets. It’s also a strange argument coming from the executive who explained United’s own network growth as a way to acquire more card customers. Kirby made the comments in a Cheeky Pint interview with John Collison and Ben Thompson. John Collison’s interview with Scott Kirby and Ben Thompson His advice to a new airline CEO is to start with the route network. When someone explains that a money-losing flight is strategic, he says: If you hear the word strategic flying, you don’t need to know what hub it is, you don’t need to know what route it is, you should cancel it. Kirby’s own buildup at O’Hare – blocked by the FAA – was strategic flying meant to shift O’Hare’s gate allocation away from American. Asked what excuses people offer, Kirby specifically includes corporate customers and credit cards: “If we’re not big in this city, then we just won’t get the credit card—” That leads into his argument that people overstate the card business: They can see the amount of revenue that we get, and they say, “Oh, almost all your net profit is coming from credit cards.” Well, yeah, but there’s a cost. We carry over 50,000 people a day. 50,000 people today will fly free on United Airlines by using their credit card miles. Nobody counts the cost. He adds, “All that we disclose is the revenue.” That’s actually not true. And when airlines borrowed against their frequent flyer programs during the pandemic, investors got a much closer look at the businesses that were supposed to repay them. I covered generating about $2.3 billion for a 44% margin in 2019. United’s financing presentation reported redemption payments and operating expenses. Its income statement even has a line called “Revenue, net of redemptions.” There may people who treat MileagePlus revenue as profit, while an award passenger can displace someone who would’ve paid cash. Revenue recognized from award redemption may not get the internal costs right. But “nobody counts the cost” isn’t true, and United does disclose those costs. Kirby used to make the network argument himself. In October 2017, he explained that rebuilding United’s hubs and improving connections would help sell credit cards. By giving someone in a smaller city a more useful schedule they’re more likely to fly United, join MileagePlus, and get the card. Without that network the card isn’t attractive. He made the point again in January 2018 arguing that growing in a market would bring more card signups and more money from Chase. I criticized him then for treating the relationship as too automatic. Customers can choose bank points or cash back, and the value of the miles matters. But an airline’s relevance to a customer’s travel matters for its ability to sell that customer a credit card. Earlier this year, I wrote about Doug Parker’s explanation for how airlines assign credit card revenue to routes. He described allocating the money based on where customers redeem their miles. However, A flight to Hawaii should get paid for seats occupied by passengers redeeming miles. But suppose a Chicago customer gets an American Airlines card because American offers the flights they need for work all year. They put their household spending on that card, then redeem the miles for Hawaii. The Hawaii flight delivers the award. The Chicago schedule acquired the cardholder and generated the spending. If you assign all the bank revenue to the redemption, you make Hawaii look better and Chicago look worse. It’s those Chicago flights that caused the spending along with the possibility of redeeming those points to places those Chicago passengers want to go (like Hawaii). Cut Chicago flying and that customer switches their business travel, and eventually their card spending, to United. But you’re cutting Chicago flights that looked artificially worse (because they didn’t get the Chicago card revenue attributed) and the traveler still may have miles for awhile and may still redeem their balance on Hawaii flights. Kirby now estimates in this interview that American will lose roughly $1.5 billion in Chicago this year. I’ve written repeatedly about the selective accounting behind his Chicago loss claims. A fully allocated loss including corporate overhead isn’t the amount American would save by leaving the market. American’s Chief Financial Officer Devon May explained in March that Chicago covers direct operating costs, aircraft ownership and hub-specific expenses. The loss appears after allocating overhead. Shrinking Chicago doesn’t make those corporate costs disappear, they just get reassigned to the remaining hubs. (A plane could make more money elsewhere so there’s still an opportunity cost decision.) Then there’s the card business American would give up by becoming less useful to customers in Chicago, along with connecting traffic and corporate business elsewhere in its network. American already made itself less relevant in New York and Los Angeles, though they have an opportunity to rebuild in Los Angeles as gates come back online after construction in the next couple of years. Ironically, Kirby’s own Starlink strategy depends on looking beyond the revenue from the immediate transaction which is exactly what he’s criticizing here. United is making Starlink free for MileagePlus members. The wifi creates a reason to enroll, gives United a customer it can market to, and creates a prospect for Chase cards. Looking only at wifi access revenue would miss the business United is trying to build. And Kirby describes using Starlink to get passengers to try United (a loss leader!), then keeping them through the rest of the airline’s product and technology. He explicitly includes the card: We’re going to get customers to switch their loyalty to United. Get our credit card, switch their loyalty to United. Ultimately credit cards aren’t just generating significant revenue for major U.S. airlines, they’re also high margin revenue for the airlines as well. Kirby seems to want to downplay that because he doesn’t want his competitors chasing that revenue by… competing against United. Delta, for instance, has said that a major reason it is building up flying in Austin is because of the potential as a market for its American Express card already. And American has ambitions to grow its Citi relationship to $10 billion. Topics on this page