J.P. Morgan, United Renegotiating Card Partnership

United Continental Holdings Inc. is in discussions with J.P. Morgan Chase & Co. to renegotiate terms of their co-branded card partnership, a move some analysts fear could suppress revenue at the bank.

United executives said on their earnings call last week that they are focusing on terms of the partnership with J.P. Morgan as one way to try to increase profitability. With the airline facing competition from low-cost carriers as well as higher costs in certain areas, Chief Executive Oscar Munoz said United dug itself "in a hole from a competitive perspective" and that it was working on getting out of that.

On the same call, United President J. Scott Kirby said the airline is "working on" a renegotiation with J.P. Morgan that he believes "will get to, ultimately, a much better result." He added: "it is a great partnership, but it is a disadvantage for us as we sit here today compared with our competitors."

J.P. Morgan and United announced in 2015 that they extended their partnership. The companies didn't say how long that extension would last, though the bank says its co-brand agreements generally range from three to 10 years. J.P. Morgan has been issuing United credit cards for 30 years.

United is one of J.P. Morgan's biggest co-brand card relationships. As a result, reworking agreement terms could impact the bank's card business and growth there.

On J.P. Morgan's recent earnings call, executives talked about rewards costs declining in the second half of 2017 and 2018. Falling rewards costs, the executives said, would boost results.

That happened in the third quarter when J.P. Morgan's net revenue rate for its card services, including non-co-brand cards like Sapphire Reserve, increased from the prior quarter. It mostly declined over the past year largely due to more generous rewards the bank was paying out to some cardholders.

J.P. Morgan finance chief Marianne Lake said on the bank's call that the net revenue rate, which came in at just shy of 11% in the third quarter, is expected to reach about 11.3% in the first half of 2018. It last peaked at about 12.8% in 2013's first quarter.

Reworking terms with one of its largest partners could reverse the improvements, said Charles Peabody, managing director at Compass Point Research & Trading LLC. Although the two companies only recently extended the deal, contracts can allow a partner to renegotiate terms if they put it at a competitive disadvantage, Mr. Peabody added.

J.P. Morgan typically provides a mix of three incentives to its co-brand partners. Reworking some of those could involve the bank giving up revenue or adding to costs.

Competition among big banks for travel co-brand cards has intensified in recent years. Banks are attracted to these deals because frequent travelers are often affluent consumers with good credit scores. Plus, there have been fewer of these contracts to go after because of airline consolidation. Other large categories in the co-brand sector include hotels and retail stores.

One downside, though, is that co-brand cards have become less appealing to some consumers who are opting to use premium credit cards, like J.P. Morgan's Sapphire Reserve or the Platinum card from American Express Co. That is because those cards often offer as much and in some cases more in rewards than airline or hotel co-branded cards.

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com

(END) Dow Jones Newswires

October 22, 2017 17:41 ET (21:41 GMT)